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TRIA AT TEN YEARS: THE FUTURE 

OF THE TERRORISM RISK 

INSURANCE PROGRAM 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INSURANCE, HOUSING AND 

COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

SEPTEMBER 11, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–155 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

FRANK C. GUINTA, New Hampshire 

BARNEY FRANK, Massachusetts, Ranking 

Member 

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 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

PATRICK T. MCHENRY, North Carolina 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT J. DOLD, Illinois 

STEVE STIVERS, Ohio 

LUIS V. GUTIERREZ, Illinois, Ranking 

Member 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 11, 2012 .......................................................................................... 1 

Appendix: 

September 11, 2012 .......................................................................................... 45 

WITNESSES 

TUESDAY, SEPTEMBER 11, 2012 

Bartlett, Hon. Steve, President and Chief Executive Officer, the Financial 

Services Roundtable ............................................................................................. 25 

Copeman, Darwin, President and Chief Executive Officer, Jewelers Mutual 

Insurance Company, on behalf of the National Association of Mutual Insurance Companies (NAMIC) ................................................................................... 27 

Hartwig, Robert P., Ph.D., CPCU, President and Economist, the Insurance 

Information Institute ........................................................................................... 4 

Jensen, Jon, President, Correll Insurance Group, on behalf of the Independent 

Insurance Agents & Brokers of America (IIABA) ............................................. 29 

John, David C., Senior Research Fellow, The Heritage Foundation ................... 6 

Lanza, Michael H., Executive Vice President and General Counsel, Selective 

Insurance Group, Inc., on behalf of the Property Casualty Insurers Association of America (PCI) ........................................................................................... 30 

Lewis, Christopher M., Senior Vice President and Chief Insurance Risk Officer, The Hartford Financial Services Group (The Hartford), on behalf of 

The Hartford and the American Insurance Association (AIA) ......................... 32 

Lundberg, Rolf, Jr., Senior Vice President, Congressional and Public Affairs, 

U.S. Chamber of Commerce, on behalf of the Coalition to Insure Against 

Terrorism (CIAT) ................................................................................................. 8 

Michel-Kerjan, Erwann O., Managing Director, Center for Risk Management 

and Decision Processes, The Wharton School of Business, University of 

Pennsylvania ........................................................................................................ 10 

Ochenkowski, Janice, Managing Director, Jones Lang LaSalle, on behalf of 

the Risk and Insurance Management Society, Inc. (RIMS) ............................. 11 

Ryan, Edward B., Senior Managing Director, Aon Benfield, on behalf of 

the Reinsurance Association of America (RAA) ................................................. 33 

St. Peter, Linda, 2012 Commercial Committee Vice Chair, the National Association of REALTORS® ....................................................................................... 13 

APPENDIX 

Prepared statements: 

King, Hon. Peter ............................................................................................... 46 

Bartlett, Hon. Steve ......................................................................................... 47 

Copeman, Darwin ............................................................................................. 53 

Hartwig, Robert P. ........................................................................................... 61 

Jensen, Jon ....................................................................................................... 78 

John, David C. .................................................................................................. 82 

Lanza, Michael H. ............................................................................................ 87 

Lewis, Christopher M. ...................................................................................... 92 

Lundberg, Rolf, Jr. ........................................................................................... 97 

Michel-Kerjan, Erwann O. ............................................................................... 104 

Ochenkowski, Janice ........................................................................................ 116 

Ryan, Edward B. .............................................................................................. 127 

St. Peter, Linda ................................................................................................ 131 

(1) 

TRIA AT TEN YEARS: THE FUTURE 

OF THE TERRORISM RISK 

INSURANCE PROGRAM 

Tuesday, September 11, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INSURANCE, HOUSING

AND COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:01 a.m., in room 

2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding. 

Members present: Representatives Biggert, Hurt, Garrett, 

McHenry, Dold, Stivers; Cleaver and Sherman. 

Also present: Representatives Grimm; Maloney and Green. 

Chairwoman BIGGERT. This hearing of the Subcommittee on Insurance, Housing and Community Opportunity will come to order. 

We are having a ceremony today in the Rotunda and on the Capitol 

steps at 11 a.m., so we will have to adjourn for a while. 

Anyway, just keep that in mind, but good morning, everyone, and 

welcome to today’s hearing to examine the future of the Terrorism 

Risk Insurance Program. It is no coincidence that we are holding 

this hearing on the 11th anniversary of September 11th. The Terrorism Risk Insurance Act (TRIA) was established in direct response to the events of that tragic day in 2001, so it is appropriate 

to reflect on the simple fact that we, as a Nation, continue to grapple with the monumental consequences that 9/11 had on every 

facet of American life. 

Our goal today and always is to ensure that no act of terror or 

threat of violence can ever again interrupt the lives, prosperity, or 

liberty of the American people. For this subcommittee, this means 

talking a little bit about TRIA and how best to insure American 

commerce and families against an attack, which we pray will never 

happen again. 

That said, it is just one small part of a bigger conversation. 

Every day, American soldiers are fighting for our freedoms, while 

firefighters and emergency personnel here at home put their lives 

on the line for our safety, just as their colleagues did on 9/11. 

So before we get into the policy details on matters of terrorism 

risk insurance, I would just like to take a moment to honor those 

we lost on 9/11 and offer a simple ‘‘thank you’’ to the people still 

fighting for our way of life. 

2 

While we examine ways to facilitate investment and job growth 

in America, let us never forget the heroes who sacrificed everything 

to give us an America worth investing in. That is something to remember. 

With that, I would like to announce that after the ranking member and I deliver opening statements, we will hear from our first 

panel of witnesses. We will then recess the hearing at 10:30 so that 

Members can attend the 9/11 Congressional Remembrance Ceremony. At 11:45, we will resume this hearing. 

As we all know, in the aftermath of September 11th, our country 

was resilient. Even our financial services sector—particularly the 

insurance industry—performed well. The record reflects that insurance firms, including those directly affected by the attacks, expedited claims processing and paid and absorbed the loss of $40 billion in today’s dollars. 

The American people, businesses, and our economy emerged from 

this disaster but also asked Congress to step in to fill a temporary 

void in the market that threatened our economy. A new and unique 

insurance risk, terrorism, had emerged. 

For the private sector, this new risk was unpredictable, uninsurable, and excluded from commercial policies. To prevent further 

economic toil, Congress stepped in, enacting the Terrorism Risk Insurance Act in 2002, which stabilized the marketplace. 

TRIA temporarily created a form of reinsurance, a public-private 

partnership to make available terrorism risk insurance until the 

private sector could model and price for this new risk. To give the 

private sector more time Congress has reauthorized TRIA twice. 

These congressional interventions were the right thing to do and 

I supported them. 

However, today, well in advance of the Terrorism Risk Insurance 

Program’s December 2014 expiration, our subcommittee begins an 

important examination of the program, its impact over the last decade, and its future. This hearing will assess conditions in the insurance market and the private sector’s capacity to offer reinsurance 

and insurance coverage without a Federal backstop for losses resulting from international and domestic terrorism. 

This hearing also will explore options for encouraging greater 

private sector participation in the market for terrorism risk insurance. I hope that this will be the first of many hearings that our 

subcommittee will hold on TRIA. It is critical to our families, workers, businesses, and economy that Congress develops a long-term 

solution to risk—terrorism risk insurance. 

With that, let me just welcome our witnesses and thank you for 

participating in today’s discussion, and we look forward to your testimony. 

And I will now recognize the ranking member pro tem today, 

Mrs. Maloney from New York. 

Mrs. MALONEY. Thank you very much. I am not even on this subcommittee. I just came by because I thought it was important, so 

I am sitting here as the ranking member for the moment. 

But I want to congratulate my colleague for calling this important hearing and assembling such a well-informed panel. We both 

had terrific conventions and it is very appropriate that our first 

3 

hearing is on such a critically important issue for the future of our 

country. 

As one who lived through 9/11, and lost 500 constituents on that 

day, I know full well how united and determined our country was. 

I have never seen this Congress more determined and united and 

I have never seen the public and private sector, the financial industry bounce back so quickly. We opened up our markets within a 

week. 

It was an incredible example of American determination, will, 

and leadership, how we responded as a Nation to that terrible attack that killed 3,000 innocent Americans who did nothing more 

than what we are doing today. They woke up, went to work, sat 

at their desks, and were murdered. It was such a horrific crime 

that to this day, whenever I meet anyone internationally, or nationally, the first thing they tell me upon finding out I am from 

New York is what they were doing, how they heard about this tragic attack on us. 

This country responded in a multitude of ways to combat terrorism. We totally reorganized our government, our intelligence operations. But truly, the most important thing for our economy, in 

my opinion, was the enactment of the antiterrorism risk insurance. 

In terms of New York and other large cities, no business could 

get any insurance. There was a fear of terrorism. The economy 

could not move forward. 

I talked to businesses from New York who had to go to Lloyd’s 

of London. All building stopped in New York because there was no 

insurance. 

With bipartisan support in 2002, and then we reauthorized it 

again in 2007, this tremendously important bill was put into place 

and has been very successful and has been part of the American 

dream, the American success story, and the American recovery 

story. We remember the attack but too often we forget that the response, the rescue, and the recovery were among the most dramatic 

achievements in our country’s history. 

Since it is 9/11, I am going to share one story with you. I was 

at the site the next day. We assembled at a school next to the site. 

The workers were there, the mayor, the governor. 

The reports were that 25,000 people had died in the towers. That 

was their belief. And a decision was made that they would announce that only 6,000 had died because the number 25,000 was 

too much for the Nation to bear. 

So they announced 6,000; we all know the story. Because of the 

heroic efforts of volunteers—our police, our fire, our public sector, 

our private sector—it was the most incredibly successful rescue effort in the history of our country. All of these people were rescued 

and pushed out of the building and the number dropped every day 

instead of climbing every day. 

The rebuilding started and one of the most important building 

blocks was TRIA. I strongly support its reauthorization. TRIA has 

absolutely no cost to the taxpayer unless there is a terrorist attack. 

And if we have that terrible event, if it happens—and we certainly 

hope it doesn’t—TRIA saves the government money by structuring 

what would otherwise be hastily drafted emergency spending. 

4 

Of course, setting up a public-private partnership to provide insurance coverage is more cost-effective than throwing money at a 

disaster. This helps our insurance companies to measure and estimate their risk and it does not kick in until after $100 billion in 

cost. 

I believe that this is a very, very important program. It is part 

of the success of our economy, and our economic success is our people’s success. 

So I look forward to the new ideas and I look forward to the new 

insights. I want to thank you all for coming. There is a New York 

meeting and a remembrance that is coming up, so I cannot stay the 

whole time, but my staff is here. 

I am so thrilled that you called this hearing, Chairwoman 

Biggert. I think it is appropriate and sensitive that you called it 

on this incredibly important day as we remember, and we continue 

to build. 

So I thank everyone for being here and being part of the solution. 

I yield back and will place more into the record. Thank you. 

Chairwoman BIGGERT. Thank you, Mrs. Maloney. 

And with that, without objection, all Members’ opening statements will be made a part of the record, and we will have any of 

those when we come back if they wish. Without objection, it is so 

ordered. 

And now, I will introduce the panel of witnesses: Dr. Robert 

Hartwig, president, Insurance Information Institute; Mr. David C. 

John, senior research fellow, the Heritage Foundation; Mr. Rolf 

Lundberg, senior vice president, congressional and public affairs, 

U.S. Chamber of Commerce and the Coalition to Insure Against 

Terrorism; Dr. Erwann Michel-Kerjan, professor and managing director, Risk Management and Decision Processing Center, Wharton 

School of Business, University of Pennsylvania; Ms. Janice 

Ochenkowski, managing director, Jones Lang LaSalle, on behalf of 

the Risk and Insurance Management Society, Incorporated; and 

Ms. Linda St. Peter, operations manager, Prudential Connecticut 

Realty on behalf of the National Association of REALTORS®. 

Welcome to you all. Without objection, your written statements 

will be made a part of the record, and you will each be recognized 

for a 5-minute summary of your testimony. 

We will start with you, Dr. Hartwig. You are recognized for 5 

minutes. And please be sure your microphone is on. 

STATEMENT OF ROBERT P. HARTWIG, PH.D., CPCU, PRESIDENT AND ECONOMIST, THE INSURANCE INFORMATION INSTITUTE 

Mr. HARTWIG. Madam Chairwoman and members of the subcommittee, good morning. My name is Robert Hartwig and I am 

president and economist at the Insurance Information Institute, an 

international property/casualty insurance trade association based 

in New York. Our members account for nearly 70 percent of all 

property/casualty insurance premiums written in the United States 

and financed the overwhelming majority of losses on 9/11. 

The terrorist attacks of September 11, 2001, produced insured 

losses larger than any natural or man-made event in history. 

5 

Claims paid by insurers to their policyholders eventually totaled 

some $40 billion. 

The enormity of the loss combined with the possibility of future 

attacks led insurers and reinsurers to exclude coverage arising 

from virtually all commercial property insurance policies. The economic consequences of such exclusions were quick to manifest 

themselves. 

Major commercial property construction projects around the 

country, unable to secure coverage against the now very real risk 

of terrorist attack, were in jeopardy of being tabled, hurting job 

growth at a time of rapidly rising unemployment and recession. 

Banks threatened to choke off credit because their borrowers could 

not secure terrorism coverage. And even as exclusions proliferated, 

prices soared. 

It was not until 14 months later, when Congress approved the 

Terrorism Risk Insurance Act in November of 2002, that stability 

finally returned to the market and coverage for terrorism attacks 

resumed. Ten years later, the war on terror is far from over, but 

the Terrorism Risk Insurance Program, by all objective measures, 

is an unqualified success. The program not only succeeded in restoring stability to the country’s vital insurance markets but it continues to deliver substantive, direct benefits to businesses, workers, 

consumers, and the economy overall, all at no cost to the taxpayer. 

Today, the vast majority of businesses in the market purchase 

terrorism coverage. The coverage is affordable and billions of dollars of private sector capital have been attracted to the market. 

Given these statistics, it is tempting to conclude that in the 10 

years since TRIA was first implemented, insurance markets have 

fully adjusted to the post-9/11 environment, and insurers have concluded that terrorism is a fully insurable risk. The reality is quite 

different. 

The fact of the matter is that terrorism risk today is almost 

every bit as uninsurable as it was a decade ago. Recent major successes in the war on terror, including the killing of Osama bin 

Laden last year, do not alter this conclusion. This is because the 

current stability in the terrorism insurance market in the United 

States is due almost entirely to two factors: there has been no successful attack on U.S. soil since 2001; and the Terrorism Risk Insurance Program remains in place. 

As you can see from Table 1 in my testimony, there has been no 

shortage of attempted attacks on U.S. soil. Fortunately, none have 

been successful. But without question, TRIA and its successors are 

the principal reason for the continued stability in the market 

today. 

In 2004 and 2006, as program expirations loomed, terrorism exclusions reappeared in the marketplace. With the current program’s expiration now a little more than 2 years away, it is virtually certain that terrorism exclusions will reappear again in 

2013. 

Simply put, acts of terror violate basic fundamental principles associated with insurance. In short, it is impossible for an insurer to 

reliably ascertain the likelihood or frequency of attacks. Also, losses 

or severity are potential unbounded, even exceeding the claimsVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
6 

paying ability of some insurers, or in some cases, even of the entire 

insurance industry. 

Acts of terror are clearly also intentional in nature. As such, it 

can be difficult or impossible for an insurer to ascertain the premium to be charged and difficult to achieve the necessary spread 

of risk to avoid exposing an insurer to an unreasonable risk of insolvency. 

In terms of factors that could influence greater private sector 

participation in the terrorism insurance marketplace, the committee might consider several alternatives, including a long-term 

extension or permanence of the Terrorism Risk Insurance Program—experience abroad suggests that both of these are effective 

at creating a stable environment—and also may revisit some early 

pooling proposals that the industry did propose in the immediate 

aftermath of 9/11. 

So in the 11 years since the tragedy of the September 11th terrorist attack, much has been learned about the nature of terrorism 

risk and its insurability. There is no question that TRIA and its 

successors brought much-needed stability to the marketplace. In 

the decade since, private sector insurers and reinsurers in the Federal Government have successfully created a structure that offers 

lasting stability, providing tangible benefits for the American economy. 

The looming expiration of the Terrorism Risk Insurance Program 

at the end of 2014 brings to a head the question of whether terrorism risk is now or ever will be a risk that can be managed entirely within the private sector. The evidence, both from the United 

States and from similar programs abroad, is that market stability, 

in terms of both pricing and availability of terrorism coverage as 

well as the ability to maintain adequate and expanding levels of capacity over time, are contingent on the continued existence of the 

Terrorism Risk Insurance Program. 

Thank you very much for the opportunity to testify. I would be 

happy to answer your questions. 

[The prepared statement of Dr. Hartwig can be found on page 61 

of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

Mr. John, you are recognized for 5 minutes. 

STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, 

THE HERITAGE FOUNDATION 

Mr. JOHN. Thank you. Chairwoman Biggert and members of the 

subcommittee, I appreciate the opportunity to testify this morning. 

I am David John, a senior research fellow at The Heritage Foundation. 

The Terrorism Risk Insurance Act and its various successors 

served a very real purpose in the days after 9/11, when insurance 

companies and their customers feared the cost of providing coverage for acts of terrorism would be prohibitive. However, we have 

now reached the point where the private sector is increasingly capable of providing that coverage at appropriate prices without government support. 

In fact, the continued existence of TRIA may keep the industry 

from further progress. However, the industry will need time to 

7 

make the transition to a fully private terrorism insurance program 

and it is greatly to the subcommittee’s credit that you are starting 

this discussion now rather than waiting until 2014. 

Before TRIA and after 9/11 property and casualty insurers faced 

a serious dilemma. Many of their corporate policies issued before 

the 9/11 attacks insured against terrorism attacks in much the 

same way that they covered natural disasters and more conventional accidents. 

Then and now, insurance premiums on most types of loss were 

based on sophisticated estimates of the likelihood that a particular 

claim would have to be paid. Until 9/11, insurers and the rest of 

us never expected the scale of damage inflicted in those attacks. 

Thus, before 9/11, terrorism coverage often carried a very low price 

and was often included without much additional thought in more 

comprehensive coverage. 

Then, the world changed. Insurers and the rest of us discovered 

that these attacks were possible and could cause catastrophic damage. At the time, none of us had any firm idea whether the attacks 

were isolated incidents or not. As a result, insurers were unable to 

price terrorism coverage quickly and accurately and were unwilling 

to expose their companies to claims that could run into the tens of 

billions of dollars. 

Then TRIA came along and that changed the situation. But as 

we knew at the time, the wrong government response could prevent the market from taking necessary actions to return towards 

the private coverage of terrorism risks. Any program that essentially transferred the risk from companies to the government by 

promising that tax dollars would pay off most of the losses would 

only make it more difficult for private insurers to establish a real 

market price for terrorism coverage. 

While the problem in 2001 was real, it should have been temporary. By now, normal insurance industry processes should have 

been able to resolve it. The industry should have developed ways 

to price terrorism insurance properly, which included upper limits 

on corporate liability. And reinsurers should have found ways to involve sophisticated investors who, for a price, could face the type 

of losses that could occur. 

Recent industry data indicates that there has been a great deal 

of progress towards making insurance coverage more widely available and affordable. While coverage varies according to geographic 

area and industry, some industries show that over three-quarters 

of larger firms have purchased some form of terrorism coverage. In 

addition, the cost has been dropping. 

TRIA was never intended to be a permanent program. As the 

original bill stated, TRIA would provide temporary financial compensation to insured parties, contributing to the stabilization of the 

United States economy at the time of national crisis while the financial services industry developed systems, mechanisms, products, and programs necessary to create viable financial services 

market for the terrorism risk insurance. Returning this coverage to 

the private sector is an important goal because there is no reason 

why taxpayers should continue to have the ultimate financial responsibility for paying insurance losses on private property. 

8 

There is no need to extend TRIA substantially beyond its 2014 

expiration date. Some insurance industry people claim that coverage will revert to same types of problems as before TRIA, but 

this is not necessarily the case. 

Insurer cooperation, increasing the event trigger, removing coverage for acts of domestic terrorism, and various other changes 

could start the process of enabling the insurance industry to phase 

back to private coverage. That should be followed by a full phaseout of TRIA so that the entire program has ended no more than 

2 years after the current 2014 expiration date. 

If such additional time is necessary, Congress should also increasingly indicate, at the time of passage in 2013 or 2014, to the 

industry that further extensions should not come, otherwise the industry is going to assume that this is a permanent program and 

that they never need to take any additional steps. And the insurance industry should expect to offer coverage without any further 

taxpayer subsidies. 

As I say, Congress should neither extend or expand TRIA without a firm and short phase-out, and if Congress passes any longer 

extension than I have proposed, whomever is in the White House 

after January 20th should reject such legislation. It is time now to 

end the temporary program and go back to the private sector. 

Thank you. 

[The prepared statement of Mr. John can be found on page 82 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Mr. Lundberg, you are recognized for 5 minutes. 

STATEMENT OF ROLF LUNDBERG, JR., SENIOR VICE PRESIDENT, CONGRESSIONAL AND PUBLIC AFFAIRS, U.S. CHAMBER OF COMMERCE, ON BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM (CIAT) 

Mr. LUNDBERG. Thank you. 

Good morning, Chairwoman Biggert, and members of the subcommittee. I very much appreciate the opportunity to testify this 

morning regarding the key issue of terrorism risk insurance and its 

importance to the broad economy. My name is Rolf Lundberg and 

I am senior vice president for congressional and public affairs at 

the U.S. Chamber of Commerce. 

I am appearing today on behalf of the Coalition to Insure Against 

Terrorism, of which the U.S. Chamber is a founding member. CIAT 

is a broad coalition of commercial insurance consumers formed immediately after 9/11 to ensure that American businesses could obtain comprehensive and affordable terrorism insurance. 

The diverse CIAT membership represents commercial real estate, 

banking, energy, construction, hotel and hospitality, entertainment, 

manufacturing, transportation, and major league sports, as well as 

public sector buyers of insurance. CIAT is, therefore, the true consumer voice on terrorism risk insurance, as we are comprised of 

the principal policyholders of commercial property and casualty 

lines of insurance in this country. 

I am pleased today to offer the policyholder perspective on terrorism risk insurance, to highlight why the TRIA program continues to be vital to our broad economy. 

9 

As we saw in the months following the 9/11 attacks, the lack of 

terrorism risk insurance contributed to a paralysis of the broad 

economy, especially in construction, tourism, business travel, and 

real estate finance. Enactment of TRIA changed that by making 

terrorism risk coverage widely available to commercial policyholders and delivering it through a private insurance mechanism 

that keeps private industry’s skin in the game through the insurer 

deductible and co-share layers. It also protects taxpayers by providing for recoupment from the commercial policyholders of any 

Federal share paid out in the wake of a large-scale event. 

While private insurance capacity apparently has grown somewhat in the past decade, these years have also taught us that a 

continuing Federal role in this unique risk remains absolutely 

vital. 

The terrorism peril is simply too intrinsically linked to government policy and intelligence to be solely handled by the private sector alone. TRIA needs to be reauthorized. 

We therefore commend you, Chairwoman Biggert, and the subcommittee, for your leadership on this issue and for convening this 

important hearing. 

On the front of the U.S. Chamber building is a 26-foot tall banner that stretches across the building and it spells out one word: 

‘‘Jobs.’’ That banner has served as a reminder to us all of what our 

focus must be. 

The Chamber believes that stronger and faster economic growth 

is the best way to successfully put Americans back to work. We 

must not only affirmatively clear away impediments to job creation 

but we must avoid taking steps that would create more uncertainty 

and strangle businesses, stifling our economy’s ability to grow and 

also affect negatively job creation. 

America has strong demographics, abundant natural resources, 

the world’s most productive workers, and a long history of picking 

ourselves up when we are down. We should not inflict additional 

and unnecessary damage to our fragile economy and possibly extinguish the prospect of economic recovery and new jobs for Americans by failing to properly deal with TRIA. 

The terrorists who perpetrated that terrible attack on 9/11 

sought to paralyze us and our economy with fear, but the best of 

America shone through that day and in the weeks and months that 

followed. It is incumbent to remember the lessons of 9/11, and 

among those is the importance of maintaining safeguards to ensure 

that such catastrophic events do not cause lasting harm to our 

economy. As we saw in the months that followed 9/11, managing 

the risk of terrorism is one of those imperatives. 

In recognition of the critical post-9/11 situation, Congress and 

the Bush Administration worked together in 2002 to enact TRIA, 

which is a public-private risk-sharing mechanism to deal with terrorism risk that has served our Nation and its economy extraordinarily well for nearly 10 years. 

We have no interest in seeing a return to the standard terrorism 

exclusions that became the norm in the months following 9/11. We 

saw that during the two reauthorizations in 2005 and 2007, and we 

believe that we should not return to those kinds of exclusions in 

the upcoming renewals of terrorism policies. 

10 

Let me just briefly talk about current market conditions. Because 

of TRIA, today terrorism risk insurance, with one exception—nuclear and biological, chemical, and radiological—coverage is generally available for commercial policyholders. It would not be available were it not for TRIA. 

CIAT members have generally seen a decline in pricing for terrorism insurance, which we attribute not just to the normal ebb 

and flow of the insurance market but rather to the continued availability of the TRIA mechanism, which has worked extraordinarily 

well since its enactment. 

The TRIA program has worked well and we encourage the committee to examine it carefully and to extend it before its expiration. 

Thank you, Madam Chairwoman. 

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

97 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Dr. Michel-Kerjan, you are recognized for 5 minutes. 

STATEMENT OF ERWANN O. MICHEL-KERJAN, MANAGING DIRECTOR, CENTER FOR RISK MANAGEMENT AND DECISION 

PROCESSES, THE WHARTON SCHOOL OF BUSINESS, UNIVERSITY OF PENNSYLVANIA 

Mr. MICHEL-KERJAN. Thank you, Chairwoman Biggert. 

Let me open by saying that if our common goal is to make the 

Nation more financially resilient to future terrorist attacks and 

also to limit the spending of taxpayers’ money, then our debate 

should not be on whether to let TRIA expire. Rather, it should be 

on how we work together to make TRIA more effective. That is a 

very different question. 

As it was designed to do, TRIA makes a supply of coverage available and affordable. Terrorism insurance costs in the United States 

have been going down continuously and are among the least expensive in the world. In a recent study, I have also shown that insurers are willing to provide more capacity for terrorism than for other 

catastrophic risks because they collect all the premiums but are responsible for only the portion of losses. 

On the demand side, take-up rates among firms increased from 

just 20 to 27 percent in 2003 to 60 percent in—since 2006, a figure 

which, by the way, combined all type of terrorism coverage, not just 

TRIA, from what U.S. companies can get for the market. Still, this 

means that about 4 out of 10 large corporations don’t have coverage 

against terrorism today. 

Let’s remember that on 9/11, the coverage was virtually 100 percent, which allowed for a quick economic recovery of the country. 

I think we can do better on the take-up rate than where we are 

today. 

I will now turn to challenging the main argument that ending 

TRIA will limit the financial exposure of the government. I think, 

to put it simply, the logic is wrong. The world without TRIA will 

actually mean not less but more exposure for all of us as taxpayers. 

Let’s say we are in September 2016. TRIA expired in 2014; 15 

years have passed since 2001. Attention to terrorism has faded 

somewhat on the demand side. On the supply side, the only insurers that offer the coverage are at a very high price to account for 

11 

the cost of capital needed to underwrite extreme events. Many 

firms go unprotected 

Terrorists inflict a large-scale attack with massive economic 

losses. An injured firm called on Congress to rescue them. Not only 

is it an election year—again, my scenario is we are in 2016—but 

a trend toward increasing Federal disaster relief and corporate 

bailouts in the past 10 years has created new and fairly high expectation. I detail that aspect at more length in my written testimony and refer you to figure one on page seven, which is fairly 

striking. 

The cost of government relief in the wake of that new terrorist 

attack will likely be very expensive for taxpayers. That is why I 

think a better option moving forward is to redesign TRIA. 

Some of the concepts developed by other OECD countries may be 

relevant here. I discuss five of them in my written testimony. Let 

me briefly mention three here. 

Israel: Israel has 100 percent government coverage. In the U.K., 

there had been a public-private risk-sharing arrangement based on 

pooling with unlimited government debt issuance that the pool can 

draw from. So contrary to what is often mentioned, this is not a 

reinsurance program; this is an unlimited line of credit from the 

British government. Germany, the largest economy in Europe, also 

uses a public-private risk-sharing, again based on pooling, but with 

limited reinsurance from the government. 

I would like to note here that in both cases—in the U.K. and 

Germany—the government receives a premium to cover that coverage. It is not free. 

To summarize, this is not a question of TRIA or no TRIA. This 

is about strengthening the current program to make the Nation 

more resilient financially to future attacks, not less, and to do that 

by making the American taxpayers less exposed, not more. My colleagues at the Wharton Research Center and on the OEC board 

that I have been honored to chair over the past 6 years look forward to working with you and the President on how we do this. 

Before I stop here, and on a more personal note, I want to congratulate the subcommittee, and especially you, Congresswoman 

Biggert, for you leadership in supporting and renewing the National Flood Insurance Program that was signed by the President 

in early July. I trust you will be as successful in reforming TRIA. 

Thank you. 

[The prepared statement of Dr. Michel-Kerjan can be found on 

page 104 of the appendix.] 

Chairwoman BIGGERT. Thank you, Doctor. 

Ms. Ochenkowski, you are recognized for 5 minutes. 

STATEMENT OF JANICE OCHENKOWSKI, MANAGING DIRECTOR, JONES LANG LaSALLE, ON BEHALF OF THE RISK AND 

INSURANCE MANAGEMENT SOCIETY, INC. (RIMS) 

Ms. OCHENKOWSKI. Thank you, and good morning, Chairwoman 

Biggert, and members of the subcommittee. I am Janice 

Ochenkowski, the managing director responsible for global risk 

management at Jones Lang LaSalle, a real estate and financial 

services company headquartered in Chicago. 

12 

I am pleased to testify this morning on behalf of the Risk and 

Insurance Management Society, known as RIMS, and I thank the 

subcommittee for this important policy debate regarding the reauthorization of the Terrorism Risk Insurance Act, especially on this 

anniversary of 9/11. 

RIMS is a not-for-profit organization dedicated to advancing the 

practice of risk management for the benefit of our nearly 4,000 

members. Those members span all types of organizations and they 

include corporations, universities, hospitals, and public entities 

such as the City of San Francisco, the Miami-Dade School District, 

and Orange County, California. However, as diverse as RIMS members organizations are, they share the common characteristic of 

wanting the availability of terrorism insurance. 

At Jones Lang LaSalle, we purchase insurance for properties 

owned by our clients, which in the United States is just under 70 

million square feet of real estate with an aggregate insured value 

of just under $9 billion. All of them are commercial properties. 

They span various investment types, such as warehouses, but most 

are office buildings. 

Since the enactment of TRIA, although there are some limitations on specific high-risk locations, in general we are able to buy 

the coverage we need at a premium that can be absorbed by our 

tenants and our investors. TRIA has been a success. 

And if we consider the economic impact of the lack of terrorism 

insurance, we have to consider that the inability to acquire sufficient terrorism coverage could result in the inability to secure financing for new schools, factories, and construction projects. Without TRIA, many companies would not be able to comply with loan 

requirements and the buying and selling of real estate would be 

impacted, which also would affect the general economy. 

Public entities also face terrorism exposures. Public and private 

transportation, schools, hospitals, and special and sporting events 

all have terrorism coverage needs but they don’t have unlimited 

budgets to purchase it. 

Because there is no historical data, insuring the terrorism risk 

is not like other insurance. We are not able to predict frequency or 

severity of a potential terrorist event because the timing, the location, and the target can’t be identified in advance. Without some 

form of backup like TRIA, RIMS believes that insurance companies 

will review their portfolios of business and will refuse to insure 

risks in areas where the exposure is greatest. Large and small 

businesses as well as public entities would be affected by this. 

As we evaluate the success of TRIA, we should look back to congressional actions since 9/11. Following 9/11 and prior to the passage of TRIA in 2002, the required limits of terrorism insurance 

were not available. RIMS members had difficulty purchasing the 

insurance needed for their operations as well as to protect their 

employees through workers’ compensation programs. 

Passage of TRIA in 2002 was followed by a demonstrable increase in the number of insurers willing to write the coverage. In 

2006, prior to the passage of TRIPRA, 75 percent of RIMS’ members reported that terrorism coverage was conditioned upon the extension of TRIA; 76 percent of our members stated that their terVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
13 

rorism coverage limits would decrease and 82 percent felt that premium would increase if TRIA was not extended. 

However, in 2010 our members indicated that capacity and pricing was available. In July 2012, nearly 85 percent of our members 

wanted Congress to reauthorize TRIPRA and said that without another long-term extension, issues of affordability and availability 

will resurface. 

In our written testimony, we outline several policy principles for 

the subcommittee’s consideration. I will highlight three of them. 

First, a completely private market solution in the long term is 

probably not feasible because of the difficulty in predicting and 

pricing the risks. Insurers, as part of their corporate governance, 

need to be able to assess what business risks are and how they can 

be quantified and treated. 

Second, a public-private partnership provides the best alternative 

and the Federal Government will likely continue to be involved in 

a reinsurance capacity at some level, with that involvement decreasing over time. 

Third, the solution needs to address insurance coverage for nuclear, biological, chemical, and radiological events caused by terrorism. Our Federal Government has stated that potential acts of 

terrorism from these sources are likely, so including them in the 

solution is reasonable. 

That concludes our formal remarks, and RIMS appreciates the 

opportunity to testify and thanks the subcommittee for beginning 

this very important discussion. We stand ready to serve as a resource as you begin your work. 

Thank you. 

[The prepared statement of Ms. Ochenkowski can be found on 

page 116 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Ms. St. Peter, you are recognized for 5 minutes. 

STATEMENT OF LINDA ST. PETER, 2012 COMMERCIAL COMMITTEE VICE CHAIR, THE NATIONAL ASSOCIATION OF REALTORS® (NAR) 

Ms. ST. PETER. Good morning, Chairwoman Biggert, Ranking 

Member Gutierrez, and members of the subcommittee. On behalf 

of more than 1.1 million REALTORS®, I want to thank you for inviting me to testify about the future of the Terrorism Risk Insurance Program, an issue of great importance to commercial real estate. 

My name is Linda St. Peter and I am the 2012 vice chair of the 

NAR commercial committee. Currently, I am the operations manager for Prudential Connecticut Realty in Wallingford, Connecticut. 

I have specialized in commercial and investment real estate brokerage since 1988. 

I am pleased to testify on behalf of the National Association of 

REALTORS® and its commercial affiliates: the CCIM Institute; the 

Institute of Real Estate Management; REALTORS® Land Institute; and the Society of Industrial and Office REALTORS®. 

Although we have been safe at home since September 2001, we 

continue to fight the threat of terrorism. Given the existing global 

and economic realities, it is in the best interest of America’s ecoVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
14 

nomic security to ensure the maximum coverage for our commercial 

real estate industry. 

Immediately following the horrific 9/11 terrorist attacks, terrorism insurance coverage was virtually nonexistent for commercial 

property owners. Only when Congress enacted the Terrorism Risk 

Insurance Act in 2002 did coverage for terrorist attacks resume. 

The passage of TRIA made terrorism coverage available and, over 

time, more affordable. 

Today, there is a concern that the uncertain future of TRIA may 

cause insurance prices to fluctuate. Further, this uncertainty may 

prompt insurers to drop terrorism coverage if a reauthorization of 

the program is not in place by the end of 2014. 

This became evident in 2005 when private insurers became more 

reluctant to offer terrorism coverage due to uncertainty regarding 

the program’s extension. Ultimately, the uncertainty of insurance 

pricing impacts our net operating income and property values. The 

potential unavailability of this coverage at the end of 2014 will impact our financing agreements and potentially hurt the fragile commercial real estate market. 

Affordable and available terrorism insurance is a vital component of most commercial real estate transactions. It is estimated 

that 84 percent of outstanding commercial mortgage balances require terrorism insurance. Thus, if TRIA were to expire and insurers subsequently dropped terrorism coverage, these loans would be 

in technical default. 

While the commercial real estate finance market is starting to 

show signs of life, any disruption in the availability of terrorism insurance in this sector would have serious consequences on its fragile road to recovery. Currently, we are seeing improved access and 

lower premiums due in part to the continued improvement in an 

insurer’s ability to manage terrorism risk and to model the measurement of an insurer’s aggregate loss exposure. 

Despite improvements in the measurements, the frequency and 

severity of terrorism attacks cannot be reliably assessed by insurance companies. Insurers remain largely averse to exposing themselves to potentially catastrophic terrorism losses and continue to 

have limited availability to reinsurance. Thus, without the Federal 

program for potential insurance losses related to terrorism, we believe coverage availability could decline significantly. 

Furthermore, we believe an effective homeland security strategy 

is central to our Nation’s economic security. To protect our economic assets, we believe the time has come for Congress to enact 

a long-term solution for insuring against terrorism. Ideally, we 

would envision a structure that would finance all terrorism risks. 

In conclusion, affordable and accessible terrorism insurance is an 

integral part of the health of all commercial real estate markets. 

The TRIA program has been successful because it provides for the 

sharing of risk between government, private insurers, and policyholders. 

Ultimately, it is critical for the U.S. economy that commercial 

policyholders be able to obtain coverage for terrorism risk. Therefore, I strongly urge that TRIA be extended beyond its 2014 authorization. 

Thank you. 

15 

[The prepared statement of Ms. St. Peter can be found on page 

131 of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

As I previously announced, the subcommittee will recess and reconvene promptly at 11:45. At that time, any Members wishing to 

give opening statements may do so, and then following any Member statements, panel one witnesses should plan to participate in 

a question-and-answer period with Members, and then we will go 

to the second panel. 

The subcommittee stands in recess. 

[recess]. 

Chairwoman BIGGERT. This committee will reconvene, and we 

have an opening statement from Mr. Green from Texas. 

You are recognized for 5 minutes. 

Mr. GREEN. Thank you, Madam Chairwoman. 

I especially thank you for this hearing. I think that it is one that 

is quite timely and needed. 

Madam Chairwoman, having just left the 11th observance of the 

September 11th circumstance, the Congressional Remembrance 

Ceremony, I think it is appropriate for me to take just a moment 

and remind ourselves that we are the land of the free because we 

are the home of the brave—not an original quote, but one that is 

still a reminder to us that we should appreciate the many persons 

who make it possible for us to have all of these opportunities that 

we have in this great country, who make liberty and justice for all 

real, government of the people, by the people, for the people real, 

more than just an ideal. 

And I would just like to thank all of those first responders who 

rushed in on that day 11 years ago, and all of the persons who 

were not first responders but who stayed behind to help people, 

just ordinary citizens who found themselves in an extraordinary 

circumstance. I just want to be grateful. To live in the United 

States of America is really a blessing and I am grateful to those 

persons. 

And I am also grateful to those who are in distant places who 

risk their lives on a daily basis to protect the freedoms that we 

cherish. They mean something to me and I want them to know it. 

So for just this moment, I want to be grateful and thankful to our 

first responders and those who serve in our military, wherever they 

happen to be. 

Now, this hearing addresses TRIA and I will be quite candid 

with you, dear friends. My feelings on this topic are somewhat ambivalent; my thoughts are ambivalent because on one hand I—Mr. 

John, I appreciate what you said about developing a private market. I really do. 

But on the other hand, I have some degree of consternation as 

to what happens if we back off and the market doesn’t step forward? How does that impact an economy that is fragile now—I am 

not sure what the circumstance will be then, but I do have some 

concern. 

So hearing you today has been a benefit to me, and I will have 

some questions in just a moment, but this is not an easy question 

to answer. It really is not. I think that this requires that we be exVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
16 

ceedingly thoughtful because of the broad implications associated 

with our actions. This is not something to take lightly. 

A lot hinges on how this program will work, and ultimately the 

question seems to be ‘‘to backstop or not to backstop?’’ I am sure 

that there are other ways to express it, but will the Federal Government have a hand, whether hidden or openly available to be 

seen, have a hand in this program? 

Thus far, it seems to have functioned rather effectively. Perhaps 

some tweaking is necessary, but it is not a program that I am 

eager to abandon although, Mr. John—I hate to keep singling you 

out and mentioning your name—I think you make a good point 

about how will you ever know if there can be a private market if 

you don’t give the private market an opportunity to become the 

market—to accept its responsibility and do what it can to the extent that it will? 

So my feelings are ambivalent. I want to hear more about what 

you have to say, but I respect every one of you and the positions 

that you have outlined. 

Ms. St. Peter, what you said about the REALTORS® was important and I appreciate your positions, all of you, and I look forward 

to having you answer some questions. 

And I yield back the balance of the time, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

Are there any further opening statements? 

Then, we will proceed with the questions and Members will be 

recognized for questions for 5 minutes, and we will try and keep 

to that time. And I will yield myself 5 minutes. 

Obviously, I think what Mr. Green has just talked about is the 

crux of the problem right now or what is going to happen for the 

future, so I wanted to start with that. And obviously TRIA, and 

what you have all said, it was created on the assumption that it 

would be temporary until the private sector develops models to assess and price for terrorism risk. 

So part of the question is, why have the basic assumptions that 

the creation of TRIA changed from a temporary nature to show 

now something resembling a permanent government insurance program? And have government or private sector entities developed 

those models anticipated at the creation of TRIA? 

And so, could someone explain why the models haven’t been developed and described, if they can be developed and—whoever 

would like to start with that. 

Dr. Hartwig? 

Mr. HARTWIG. I could start with that. You talked about TRIA 

being a temporary solution 10 years ago, but unfortunately, the 

war on terror, as it turns out, is not temporary and it is going on 

today, and it is a constantly evolving threat. It morphs over time, 

the nature of the threat, from when at one time we were all haunted by the face of Osama bin Laden, okay? Now he is dead but we 

know that there are plenty of other problems even if you listen to 

the report—in my testimony, I quote the State Department’s most 

recent point on country risk—on country risk, and they talk about 

even al Qaeda and other entities as being an ongoing risk and 

threat to the United States. 

17 

It is also the case that the nature of terrorism risk is different 

in that we harden targets like the new World Trade Center, but 

then terrorists move to softer targets. If you look at the list of targets where there were attempted attacks in my testimony, it is 

only by the grace of God that we escaped some of those. And we 

might be having a very different hearing today. 

But, at the end of the day, we have a number of issues with respect to being able to model terrorism risk and I hinted at them. 

We have no sense of when or where or how these attacks might 

occur. 

This is very different from hurricanes. We know where they 

occur, we know roughly what they do, we know when they occur. 

We don’t know anything, really, about that with respect to terrorism. 

And it is also the case that the tactics are changed by terrorists 

over time. Whereas, we can design stronger buildings and we know 

that is ultimately going to reduce losses from hurricanes, we don’t 

know that about terrorist attacks because terrorists can change 

their strategies at any time. 

It is very much the situation that the war on terror is, in fact, 

a war. And war risk has always been excluded from all policies basically worldwide, and that is the situation we find ourselves in 

today. 

Chairwoman BIGGERT. Thank you. I know with hurricanes and 

tornadoes and everything, we know about the time, but we never 

know about the extent of them or how dangerous they are going 

to be, or whether it is going to be another Katrina, or whether 

Isaac doesn’t hit as hard. 

Mr. HARTWIG. Right. But we do have good models that tell us 

what range they are likely to fall in, and all insurers model these 

and make sure they have enough capital on hand to handle this. 

And unfortunately, we are not able to do that with terrorism. 

Chairwoman BIGGERT. We have had the flood insurance bill and, 

similar to the flood insurance, does the existence of TRIA preclude 

any meaningful development of the private sector terrorism insurance market? In the flood insurance bill, we are having a study but 

want to phase in or have some of the insurance companies take 

over the risk there when we have more of the actuarial tables. Is 

this similar, is that something that we could do with the terrorism 

factor? 

Mr. MICHEL-KERJAN. Let me say I think that is exactly what 

TRIA has done. When you look at how TRIA was designed originally to—but that program being temporary, I think being temporary gives you, Congress, and the White House the flexibility to 

renew the program as things change around the world or within 

the United States. I think that being a temporary program is not 

necessarily a bad thing if it is not to be renewed every 3 months, 

as we have seen with the—until you took the leadership on that. 

I think TRIA has evolved from heavily exposing the Federal Government and the American taxpayers at the beginning of TRIA to 

being less so today, and one route would be to continue that increased take-up rate of the private sector. The question is at what 

price, and that is really what this is about. 

18 

We talk a lot about capacity, what the private market can do. 

The question I would like to raise is, what would be the price of 

that coverage as we go up, and up, and up in terms of coverage? 

So I don’t think that being a temporary program is a bad thing in 

itself. 

We had the same discussion back in 2002 and 2003 about whether it should be capped at $100 billion. Is $100 billion a magic number? What about $90 billion? What about $150 billion? 

Chairwoman BIGGERT. If I may, then, reinsurance assumes some 

or all of the risk currently assumed by the Federal Government 

and the taxpayers? 

Mr. MICHEL-KERJAN. It is already happening, but maybe other 

companies would like to—already happening for the deductible that 

these insurance companies have today. 

Chairwoman BIGGERT. Is there a percentage of what is being 

done by reinsurance now? Do we know that? 

Mr. MICHEL-KERJAN. Mr. Hartwig— 

Chairwoman BIGGERT. Okay. 

Mr. HARTWIG. I don’t know that offhand. I believe there is a substantial share that is reinsured, and the share that is reinsured is 

a decision that each individual insurer makes based on many criteria according to how much exposure they have, and how concentrated that exposure is. But reinsurance plays an extremely important role in this, as it does in any major catastrophic or potentially catastrophic event. 

Chairwoman BIGGERT. Thank you. Maybe if you could get back 

with—if there is a percentage or numbers there. Thank you. 

Mr. Green, you are recognized for 5 minutes, 

Mr. GREEN. Thank you very much, Madam Chairwoman. 

So that the record will be very clear and I will gain some degree 

of clarity, if you are for simply extending TRIA as is would you 

kindly extend a hand into the air? I am sorry I have to do it this 

way. It probably will make it a lot faster. Just raise your hand if 

you are for extending it as is—TRIA—persons on the panel. 

Some of you are conferring. All right. 

All right, so Mr. Lundberg, is that correct? 

Mr. LUNDBERG. That is correct. 

Mr. GREEN. Anyone else? Okay. 

If you are for extending TRIA, but with some modifications, give 

me your yea or nay. Okay. So that is Ms. St. Peter and Ms. 

Ochenkowski. Okay. All right. So only two? 

Okay. Mr. Hartwig and Dr. Michel-Kerjan? Okay. All right. 

Now, if you are for eliminating TRIA and moving straight to the 

private market—I knew your hand would go up, Mr. John. Okay, 

Mr. John, you are there. Okay. 

So, did I cover everybody with those questions? Is everybody in 

one place or another now? 

Mr. Hartwig, you said—actually, your comments led me to conclude that you are concerned about risk assessment and the inability to engage in intelligent risk assessment causes you to conclude 

what, that we— 

Mr. HARTWIG. Right. The conclusion is that terrorism fundamentally is not fully insurable in the private sector because the risk 

19 

cannot be fully assessed either in terms of the likelihood of such 

events or the ultimate cost of such events. 

Mr. GREEN. And as a result, you would have a hybrid system— 

a system that has the Federal Government as well as the private 

market involved in the insurance process? 

Mr. HARTWIG. Right, that there is a role for the Federal Government there, and after a 7-year extension such as we have had, it 

is appropriate to take a look at that program and see where it 

might be tweaked in hopes of improving that program. But the experience here in the United States and abroad suggests that these 

programs work best when there is a sovereign or a— 

Mr. GREEN. That is a great segue into my next question. How are 

other industrialized countries managing this problem? Is anyone 

aware? 

Mr. HARTWIG. Probably a number of us may be—I will just take 

one shot and then maybe— 

Mr. GREEN. Okay. If you can do it quickly, I have a couple of 

questions— 

Mr. HARTWIG. In our testimony, I think these are documented on 

the part of some of us, but maybe the most commonly cited example is in the U.K., which established a pool, the Pool Reinsurance 

Company, literally known as Pool Re. It is a mutual insurance company. It was established in 1993 as a result of the IRA, so it has 

been in operation, very smoothly been operating for 20 years now. 

It has since been expanded to incorporate all sorts of terrorism 

risk. And that was actually the original model—something like that 

was put forth in the wake of 9/11 right here in Congress. 

Mr. GREEN. Mr. John, I have to give you an opportunity to offset, 

to the extent that you desire—how would you have the model work, 

please? 

Mr. JOHN. We have a model, basically, that was developed— 

Mr. GREEN. Could you get closer to your microphone or turn it 

on? I am not sure which. 

Mr. JOHN. Sorry. We have a model that was developed with negotiations with the Bush Administration as—after the 9/11 situation. The problem is that the model is flawed, and this is, unfortunately, true with most Federal insurance programs or reinsurance 

programs because it assumes that it will continue precisely as is 

until a set date when hypothetically it ends. And essentially what 

happens is that industry gets comfortable with it and their customers get comfortable with it because they know what the— 

Mr. GREEN. What would you have us do? I have about 40 seconds 

left. What would you have us do? 

Mr. JOHN. What I would have us do basically is phase it out, that 

essentially there were a series of measures that were ironically put 

forth in the 2011 Obama budget, which is not something I usually 

praise, that actually would set to gradually end the government involvement and we will see precisely how the industry develops and 

how they react to that. I expect they won’t be happy. I expect there 

will be a lot of catastrophic talk about the disaster that will overtake their customers and the like. I expect that— 

Mr. GREEN. How will this talk—a lot of things have to do with 

certainty in the minds of consumers as well as in the marketplace. 

20 

How will this uncertainty impact the economic order, is the question? 

Mr. JOHN. Oh, I think any change is going to have some impact 

on the economic order. However, if you give them a firm glide path 

to end the program and phase it out, they will deal with it. 

Mr. GREEN. My time is up. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

Mr. Hurt, you are recognized for 5 minutes. 

Mr. HURT. Thank you, Madam Chairwoman. Thank you for holding this hearing on this important subject at this auspicious time. 

It occurs to me it is proper to agree with Mr. Green and I know 

everyone on this dais agrees that obviously what we saw 11 years 

ago is something that we don’t want repeated and we certainly 

should always take the time to recognize those who made that ultimate sacrifice and who lost their lives in that terrible, tragic—on 

that occasion. 

I think as we just left from the Capitol steps and I think it was 

said more than once that we will not forget, I think this is—this 

hearing is a reminder of—that we will not forget in many ways. I 

don’t think we as Americans should live in fear and I think that 

we are committed to doing that, but I think also there are very real 

impacts of what happened on September 11th and how we go about 

doing our business. 

And so I appreciate each of the witnesses being here and helping 

us try to figure out as Members of Congress how to go forward in 

making sure that we protect ourselves and our property as best we 

can. 

I guess my first question would be for Mr. Lundberg. I would be 

interested to know from your perspective, if the program were to 

expire are you all able to—is the Chamber able to give us some 

idea of what the immediate impact or the short-term, long-term impact of just having—suddenly not having this insurance available 

would be? 

Mr. LUNDBERG. Sure. Congressman, I think we already have experience with what the impact might be as an expiration date approaches of the TRIA program. We saw it in 2005 and we saw it 

again in 2007 where insurers began to inform policyholders that 

their terrorism coverage would be withdrawn and that coverage 

would no longer be available after the expiration of the TRIA program. 

So TRIA really has been, in our view, kind of a silent pillar supporting the economy—the broad economy—and to pull it out from 

under the economy would be a grave mistake. And we just merely 

need to look back at our experience with two reauthorizations already to know how the market and how insurers react as that expiration date approaches. 

Mr. HURT. Great. 

Dr. Hartwig, I was wondering if you could elaborate a little bit 

on some of your testimony, and I apologize for missing your initial 

testimony, but I was wondering, are there figures that are widely 

accepted for what insurance companies paid out as a consequence 

of September 11th and what the government ultimately paid out as 

a consequence of September 11th for losses? 

21 

Mr. HARTWIG. The private insurance sector, including reinsurers, at the time paid $32.5 billion. In today’s dollars, that is exactly $40 

billion. 

Mr. HURT. Okay. 

Mr. HARTWIG. That is $40 billion in private insurance losses. 

The Federal Government obviously declared disaster areas and 

there was a lot of aid not just to the New York metropolitan area 

but other areas as well. That did total, I think, tens of billions of 

dollars, but in terms of direct aid to businesses, that money was— 

essentially the vast majority of it came from private insurers. The 

dollars that came to treat workers who were killed—sorry, who 

were injured or the families of those who were killed, that was all 

private sector dollars that came in there. 

And so it really was the case that the private insurance industry 

was the economic first responder at ground zero and helped literally—literally, when you go there today is rebuilding those towers. 

Mr. HURT. Mr. John, could you elaborate a little bit more on— 

I think in a perfect world, everybody would like to see the taxpayer 

not bear any burden for something that is a proper risk function 

in the private sector, but what stands between having a policy— 

having the private marketplace offer this insurance? You talked 

about his modeling that is not complete. Is it realistic to think that 

is something that is going to emerge? 

Mr. JOHN. Yes. I hear the stories of how every terrorism risk is 

different. But the fact is that every hurricane is somewhat different, also. If you look at the effect of Hurricane Katrina on the 

property prices—the property insurance prices all along the east 

coast in relatively low-lying areas you see that in the years—couple 

of years immediately succeeding that you see an adjustment where 

companies raised rates, they dropped risks, and things along that 

line. 

Yes, we can start to model this sort of thing but the fact is that 

the industry has no need to model it at this point. The industry has 

a situation that it is very comfortable with and it doesn’t need to 

do anything else. 

Mr. HURT. I think my time has expired. 

I thank you all. 

Chairwoman BIGGERT. Thank you. 

Mr. Stivers, you are recognized for 5 minutes. 

Mr. STIVERS. Thank you, Madam Chairwoman. I would like to 

thank you for calling this important hearing on this appropriate 

day to talk about terrorism risk insurance and the future of the 

program, even though we have a couple of years before we have to 

worry about expiration. 

Mr. Hartwig already discussed how the exposure to terrorism at 

9/11 was about $40 billion to the private marketplace. At what 

point would—if 9/11 had happened and TRIA had been in place as 

it exists today, at what point would TRIA have kicked in and how 

much would it have helped the private insurance market? 

Mr. HARTWIG. The overall—and subject to check, I believe the overall industry retention today is about $27 billion or so, so it is— 

the vast majority of attacks that would occur today would likely be 

covered in whole or at least the majority by the private sector. And 

22 

over time the industry’s retentions have been ratcheted up, I think 

precisely for that reason. 

Mr. STIVERS. So if 9/11 were to occur today, how much of that 

$40 billion would the private sector pay? 

Mr. HARTWIG. The private sector would wind up paying somewhere around 70 to 75 percent of that. 

Mr. STIVERS. Okay. 

Mr. HARTWIG. And then ultimately, of course, there are 

recoupment mechanisms in place so that the Federal Government 

does not wind up with any obligation. 

Mr. STIVERS. And the recoupment mechanism today is at 133 

percent, no 100 percent. Is that correct, or— 

Mr. HARTWIG. I am not quite sure at the moment. I would have 

to check. 

Mr. STIVERS. Okay. 

I will move on to the next question, again for Mr. Hartwig, and 

then I do want to move to Mr. John. 

One of the key points you brought up, Mr. Hartwig, was that the 

private sector in the reinsurance market doesn’t have the information they need to be able to price the risk. So, for example, unlike 

a hurricane, where there are many predictive models, all the information is public, many of the risks that are associated with terrorism are not public information and are hard to price because of 

that. Is that what you were saying earlier? 

Mr. HARTWIG. Absolutely. Much of the information insurers 

would need to actually price this risk, were it possible, is classified. 

We do not have any access to information at the NSA or the CIA 

or anyplace else like that so we don’t have any understanding other 

than what we can read and glean from the ordinary press and public sources about what the likelihood of an attack might be. 

This is very different, whereas such things as hurricanes and 

earthquakes and tornadoes are the subject of research constantly. 

We learn more and more about it every year. 

Mr. STIVERS. Great. Thank you. 

Mr. John, at the end of Mr. Hartwig’s testimony he called for a 

pooling proposal similar to what they do in Great Britain. It is not 

similar to what you would like to see, the whole program just expire. But is that better than the current TRIA program, the way 

you see it, or is there no good answer other than just letting it expire? 

Mr. JOHN. There is no great answer. Let’s put it that way. 

The pooling mechanism would probably be superior depending on 

what was done to limit the taxpayer risk. That is going to be the 

continued question here and the industry, as I say, is going to continue to press for just a continuation of what they have had in the 

past. 

Mr. STIVERS. And I do want to follow up with you, because I 

share your concern, Mr. John, and I think the empirical evidence 

shows that government does not price risk very well. In this subcommittee, we have tried to shore up the flood insurance program, 

which is one example of that. Fannie Mae and Freddie Mac are a 

second example of that. FHA’s pending financial crisis—I won’t call 

it a collapse—is a third example of that. And today, the only reason 

23 

TRIA hasn’t been a problem is there have been no claims under 

TRIA because we haven’t had a big incident to cause that. 

So I am concerned with the issues you bring up but I am intrigued, I will say, by Mr. Hartwig’s pooling mechanism because I 

do think that there needs to be some type of way to price this risk, 

and it might be an example that can do it with some reserves, and 

there would have to be some information-sharing with this mutual 

insurance company. But it is an intriguing proposal to me, I guess, 

I would like to say, and I wanted—since you were kind of the hardest-core witness on the panel, I figured I would ask you about it. 

Mr. JOHN. You have a couple of years, and that is one of the 

beauties about starting this process early. You can examine a wide 

variety of different situations and proposals and make a decision 

accordingly. 

Mr. STIVERS. Thank you. 

Does anybody else have any comments on the pooling proposal? 

I have 19 seconds left. 

Mr. MICHEL-KERJAN. I might say, I think it is important in the 

case of Pool Re that it is not just a pooling proposal. The pool has 

an open line of credit from the British government in case of something that happens. The pool today has 4.7 billion pounds of reserve, which is barely taxed by the British government. There are 

a lot of details to be looked at, and there are other countries with 

developing pools with and without intervention from the Federal 

Government as well. 

Mr. STIVERS. Thank you. I yield back the nonexistent balance of 

my time. 

Chairwoman BIGGERT. The gentleman yields back. 

The gentleman from California, Mr. Sherman, is recognized for 

5 minutes. 

Mr. SHERMAN. Thank you. 

First, a general comment about the whole idea of Federal involvement in disaster insurance: I remember, I think it was Midas 

Muffler that had the commercial, ‘‘You can pay me now or you can 

pay me later.’’ 

Disasters are going to happen, and when they happen, Ayn Rand 

is not going to be in control of the United States Congress and we 

are going to appropriate money for the uninsured losses of victims. 

This may not have been true in the 1800s; it may have not been 

true in ‘‘The Fountainhead.’’ But it is true in today’s America and 

it has been true since the great floods along the Mississippi radically changed the view of what the Federal Government should do 

in a disaster. 

Those who believe that if we spend zero money promoting disaster insurance now we can also have a zero special appropriation 

when a disaster hits had better get themselves time machines because that is the only way they are going to be able to live in the 

1800s. 

So it is in our interest to make sure that uninsured losses are 

as low as possible. 

Ms. St. Peter, the commercial real estate industry is in the midst 

of a really tough liquidity crisis, perhaps the worst since the Great 

Depression. How would the limited availability of affordable terVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
24 

rorism insurance impact the ability of commercial tenants and 

property owners to access credit? 

Ms. ST. PETER. Thank you, Congressman, for that question. 

As you mentioned, financing is still a challenge in our fragile 

market. And I don’t work in large towers, I work in what I will call 

‘‘Industrial Way’’ and ‘‘Main Street,’’ where manufacturers are looking to finance 10,000- or 20,000-square foot properties where 30, 

40, or 50 people are employed. What we are seeing now with the 

limited financing available, the ‘‘yes’’ may have a qualifier of about 

45 contingencies, which is sort of like a ‘‘no,’’ but it is a ‘‘yes, but.’’ 

If the terrorism insurance were not available that could be a dealbreaker. That could be a deal-breaker— 

Mr. SHERMAN. So you find that banks are not willing, lenders are 

not willing to loan to an industrial facility with 50 employees, not 

particularly in the news, not one of the places that al Qaeda 

dreams of hitting, that even then the lenders have on their list, ‘‘Do 

you have terrorism insurance?’’ 

Ms. ST. PETER. Yes, they do. And a host of a whole other contingencies as well. 

Mr. SHERMAN. Okay. 

Now, some of my colleagues have raised the concern over the 

Federal Government’s costs in this area. I just want to confirm 

with the panel: So far, TRIA has cost the taxpayers virtually nothing? Is that true, Ms. St. Peter? 

Ms. ST. PETER. Not a red cent, save, of course, the administrative 

fees. 

Mr. SHERMAN. Does everybody else on the panel generally agree? 

Mr. JOHN. I am just going to point out, it has never been used 

so the— 

Mr. SHERMAN. Yes. 

Mr. JOHN. —one of the ways of reducing costs is never to use— 

Mr. SHERMAN. Right. The most important thing we can do is prevent another terrorist attack, and that is the work of other committees in this Congress. 

Ms. OCHENKOWSKI. An additional comment to the question on 

lenders, with respect to my own company, Jones Lang LaSalle, as 

well as some of my colleagues in the risk management group, I do 

know that in addition to the comment about lending, we also have 

tenants who require that they have terrorism insurance before they 

move into certain property, and absent having evidence of terrorism insurance, they will choose to go to a different property. 

And in addition to tenants, there are also investors in commercial real estate who look for confidence in the ability to rebuild following an event, and if they can invest in a country that has—because investments are global, if they can invest in a country in 

which a concern about terrorism is not going to impact their investment, they may take their money out of America and put it into 

another area. 

Mr. SHERMAN. Thank you. 

I believe my time has expired. 

Chairwoman BIGGERT. Thank you. 

And this will conclude the questions and answers. The Chair 

notes that some Members may have additional questions for this 

panel, which they may wish to submit it writing. Without objection, 

25 

the hearing record will remain open for 30 days for Members to 

submit written questions to these witnesses and to place their responses in the record. 

I would like to thank you all so much for your testimony. You 

really gave us a lot of knowledge that we will be using in the future. So with that, this panel is dismissed, and we will bring up 

the second panel now. Thank you so much. 

We will resume with the second panel: the Honorable Steve Bartlett, president and chief executive officer, the Financial Services 

Roundtable; Mr. Darwin Copeman, president and chief executive 

officer, Jewelers Mutual Insurance Company, on behalf of the National Association of Mutual Insurance Companies; Mr. Jon A. Jensen, president, Correll Insurance Company, on behalf of the Independent Insurance Agents and Brokers of America; Mr. Michael H. 

Lanza, executive vice president and general counsel, Selective Insurance Group, Incorporated, on behalf of the Property Casualty 

Insurance Association of America; Christopher M. Lewis, senior 

vice president and chief insurance risk officer, The Hartford, on behalf of the American Insurance Association; and Mr. Edward B. 

Ryan, senior managing director, Aon Benfield, on behalf of the Reinsurance Association of America. 

I would like to welcome all of you here today. This is probably 

the easiest panel I have had in a long time as far as how to pronounce your names, so I thank you for that, and I thank you all 

for being here. 

And we will start with Mr. Bartlett. You are recognized for 5 

minutes. 

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE FINANCIAL 

SERVICES ROUNDTABLE 

Mr. BARTLETT. Thank you, Chairwoman Biggert, Congressman 

Green, Congressman Hurt, and other members of the subcommittee. 

Let me confess to you, I don’t relish my role today, and I suspect 

the other witnesses don’t either—the role to be the bearer of bad 

news. It had been my hope, and I think the hope of most of those 

in the industry that today we would be able to come to you and 

say there is no longer a need for TRIA, but in fact, there is an enhanced need for TRIA today moving forward. The nature, the severity, and the predictability, or lack of predictability, of a terrorist 

attack in fact ensures that a continued Federal backstop for insurance—paid for by the industry but a Federal backstop—continues 

to be essential. 

The threat of terrorist attacks is just as real today as it was 10 

years ago. There still exists that essential need—it is not an option—of a public-private partnership, a backstop, if you will, to protect against catastrophic losses arising from a terrorist attack. And 

let me stop at this point, and I will repeat this again and again. 

That backstop would be paid for, the cost would be borne by the 

private sector. Most of the costs would be—in the event of an attack would be borne up front by the private sector, and should 

there be a need for additional funds, you would be using the backstop. 

26 

TRIA sets in place a vehicle to recoup those losses. So the fundamental of TRIA is that it sets in place an ability to recoup the 

losses. Without the Terrorism Risk Insurance Act reauthorized, 

there would be no mechanism for recoupment. 

So in at least a considered opinion of the entire industry—lending, insurance, business, operations, real estate—TRIA should be 

renewed by this committee in this Congress sooner rather than 

lately. I don’t come to that conclusion lightly. I looked for other answers but did not find them. 

Roundtable member companies, as you know, consist of finance, 

lending, insurance, and investing in the economy, so we come at it 

from all places. There is no government money involved in TRIA 

except in the event of a catastrophic loss that cannot be contained 

within the private sector, which is quite large. And even then, 

there would be no government losses; all the government losses 

would be recouped. 

So the two parts: One is, what does TRIA mean for the economy 

ongoing in the absence of an event? TRIA is designed to mitigate 

the negative economic impact from stalled or stopped real estate 

development and activities of ongoing operations that did occur following 9/11 and then began to occur in the run-up to the reauthorization of TRIA subsequent to that. So in fact, after 9/11 we saw fairly quickly $15 billion in real estate-related transactions delayed or cancelled and 300,000 jobs lost, 

and it was getting bigger and faster and worse by the day. TRIA 

includes a make-available provision, which means that insurers 

must offer terrorism insurance to commercial clients. With that 

coverage available then banks looking to lend and investors looking 

to deploy their capital can do so while also protecting their investments from the threat of an attack. 

Without that Federal backstop, insurers’ limited ability to manage terrorism risk would become unstable and they would withdraw from the market. That is not supposition or hyperbole. That 

is exactly what would happen. 

Even in the case of operations that are currently in place with 

an existing loan would be as they did begin to shut down, because 

if you have a loan in place and you lose your insurance you are in 

default on the loan and really bad things start to happen in the 

market. 

Now, in the event of an attack—I am going to the other—so either no attack or in the event of an attack—in the event of an attack TRIA, at its heart, establishes a mechanism for the private 

sector to absorb most of the loss, and anything that the private sector does not absorb would be repaid to the government by a mechanism put in place by mutual assessment on all policyholders. 

Some would contend erroneously that TRIA exposes U.S. taxpayers to losses. The opposite is true. Without TRIA, taxpayers 

would be subject to those losses but they would be uncontained and 

there wouldn’t be a legal ability to recoup those losses. 

The initial losses—nothing triggers it until $100 million. The initial losses of each company pays their entire loss up to 20 percent 

of its direct written premium. In most cases, that is about $1 billion. And then losses above that 20 percent deductible would trigger a 15 percent copay or co-insurance. 

27 

So if government funds are used it would be a loan and TRIA 

provides for a recoupment of the loan. 

Thank you, Madam Chairwoman. 

[The prepared statement of Mr. Bartlett can be found on page 47 

of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

Mr. Copeman, you are recognized for 5 minutes. 

STATEMENT OF DARWIN COPEMAN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, JEWELERS MUTUAL INSURANCE COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. COPEMAN. Good afternoon, Chairwoman Biggert, and members of the subcommittee. Thank you for the opportunity to speak 

with you today. 

As mentioned earlier, my name is Darwin Copeman and I am 

president and chief executive officer of Jewelers Mutual Insurance 

Company, a small company licensed in all 50 States, and the only 

insurance company in the United States that specializes exclusively in protecting the jewelry industry. The majority of our policyholders are one-to three-location enterprises. Our company participates in the TRIA program and understands firsthand its importance. 

I serve on the board of directors of the National Association of 

Mutual Insurance Companies. NAMIC represents more than 1,400 

property and casualty insurance companies, including small farm 

mutuals, State and regional insurance carriers, and large national 

writers. NAMIC members write about one-third of the commercial 

business in the United States. 

The subcommittee has our appreciation for its attention to the 

Terrorism Risk Insurance Act and for discussing its vital role in 

helping protect our country and our economy as we continue to consider how best to handle the terrorist threat. 

It is our firm belief that the presence of the TRIA program has 

provided the stability and predictability needed to allow insurers to 

actively participate in the market for terrorism risk coverage. 

Without the TRIA program, coverage for terrorism will become 

very difficult to find and the result when the next terrorist attack 

occurs will be more, not less Federal exposure as the government 

will be under extreme pressure to pay for all losses. 

Before the events of September 11th, the abstract possibility of 

a major terrorist attack on the United States was known but largely dismissed and was included in most all-risk commercial policies. 

After the tragedy in 2001, every American’s understanding of the 

nature of terrorism risk forever changed. 

Insurers also realized this new risk threatened the solvency of 

their businesses. Accordingly, the terrorism coverage market greatly contracted, particularly in high-risk urban areas. This had a 

punishing effect on the U.S. economy. It was estimated at the time 

to have delayed and canceled $15.5 billion in real estate transactions and to have cost 300,000 construction workers their jobs. 

The significant lack of coverage prompted Congress to pass the 

Terrorism Risk Insurance Act in 2002 to create a viable market for 

terrorism coverage, which allowed lenders to provide the necessary 

28 

capital to resume building in high-risk areas. TRIA set a ceiling on 

potential insured losses and reduced the fear that a worst-case terrorist event could render an insurer insolvent. 

At the time it was thought that a truly private market for terrorism would develop after insurers had time to build capacity and 

study the risk. However, it soon became apparent that the program 

is indispensible to protect our national economic security. 

The nature of the terrorist threat presents significant complications for the insurance industry. The lack of relevant event data 

usually used in disaster modeling makes it impossible to meaningfully calculate the likelihood, the nature, or the extent of a potential event, particularly in an age of mass casualty terror. This 

makes adequate pricing and reserving virtually impossible. 

The interconnected nature of our local, national, and global systems complicates both underwriting terrorism risk and mitigating 

against it. The vulnerability of one organization is not simply dependent on its own security decisions but also on the choices and 

actions of other organizations and agents beyond its knowledge or 

control. 

For example, a company might spend a significant amount of 

money to secure a facility, while a neighboring company does not, 

and is then used as a staging area for an attack. 

The only truly effective mitigation tools, if there are any, reside 

within the government’s national security apparatus, and these are 

understandably kept secret. 

Finally and most importantly is the human element. In other 

words, terrorist events are not random events. The presence of 

human volition drastically reduces the value of preventative measures. A hurricane cannot study wind damage mitigation efforts and 

then think up new ways to get around them; but humans intent 

on committing acts of terrorism can and do find ways to circumvent 

security measures. 

Over the last 10 years, the private insurance industry has increased its capacity to handle risk from terrorism events. However, 

we must recognize that the marketplace, as it stands today, has developed with TRIA in place. We should not hastily conclude that 

because the private sector can handle a portion of the risk, it could 

handle all of it. In fact, we know that it can’t. 

Without a Federal program that provides a clearly defined cap on 

the potential risk to an insurer, the supply of terrorism risk insurance would be drastically curtailed, just as it was in the aftermath 

of 9/11, and in the end the government would bear the ultimate 

risk of uninsured losses. The presence of a well-managed partnership between the government and private insurers serves to ultimately reduce, not increase Federal liability for terrorism losses. 

In conclusion, in order to encourage private sector involvement in 

the terrorism insurance marketplace and thereby protect and promote our Nation’s finances, security, and economic strength, we 

must maintain a long-term Terrorism Risk Insurance Program. 

While there is room for debate about the proper scope of government involvement, there should be no question that the Federal 

Government should continue to collaborate with the private insurance industry to allow Americans to recover and rebuild if such an 

attack should ever occur. 

29 

As we move forward, NAMIC stands ready to work with Congress on this vital issue. Again, thank you for the opportunity to 

speak here today, and I look forward to answering any questions 

you may have. 

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

53 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Mr. Jensen, you are recognized for 5 minutes. 

STATEMENT OF JON JENSEN, PRESIDENT, CORRELL INSURANCE GROUP, ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA (IIABA) 

Mr. JENSEN. Good afternoon, Chairwoman Biggert, and members 

of the subcommittee. My name is Jon Jensen and I thank you for 

inviting me to testify today on behalf of the Independent Insurance 

Agents and Brokers of America, also known as the Big ‘‘I.’’ 

I began my insurance career over 35 years ago and now serve as 

president of Correll Insurance Group, a South Carolina-based insurance agency with 12 offices and 132 associates. Independent 

agents sell nearly 80 percent of all commercial lines policies in the 

country, which affords our membership a one-of-a-kind perspective 

to speak to the topic of terrorism insurance and businesses’ needs 

for such coverage. 

The first point I would like to make is that the need for terrorism insurance is not limited to simply urban areas. My agencies 

operate in primarily rural and suburban areas and I have many clients with a need for this coverage. 

For example, I have two colleges, a large public hospital system, 

and more than 300 emergency service organizations such as volunteer fire departments, municipal fire departments, rescue squads, 

and first responders who opt to purchase terrorism insurance. 

Serving the needs of these and other clients is a top priority for me, 

and the Terrorism Risk Insurance Program has helped ensure that 

they have their necessary coverage. 

With the scheduled expiration of the program quickly approaching at the end of 2014, I applaud the committee for holding this 

hearing now to examine the program and how it is serving businesses throughout the country. Even though the program expires 

on December 31, 2014, because of the forward-looking nature of insurance contracts, the real deadline for congressional action is December 2013. 

The enactment of TRIA in November of 2002 was a key element 

of our government’s response to the heinous acts of 9/11. The attacks quickly produced severe disruptions in the insurance marketplace and in our national economy. The underwriting and pricing 

of these unique exposures proved nearly impossible due to the inability of carriers to measure the likelihood and the magnitude of 

future terrorist attacks and many insurers were forced to stop providing terrorism coverage to commercial policyholders as a result. 

The inability of businesses to secure adequate terrorism coverage 

also had negative effects across broad sectors of the national economy, particularly in commercial real estate. The original enactment 

of TRIA, and its extension in 2005 and again in 2007, successfully 

30 

stabilized the insurance marketplace and helped eliminate the 

market disruptions that followed the September 11th attacks. 

In addition, Congress wisely structured the program so as to involve the private sector as much as possible and created a successful and limited public-private partnership for commercial property 

and casualty insurance that is operated at virtually no cost to taxpayers. Should the worst happen and a need for the backstop arise, 

TRIA also has numerous cost-sharing provisions that limit the exposure of the Federal Government and ensure skin in the game for 

the private sector. These include provisions such as a program trigger as well as deductibles, copays, and minimum loss retention 

amounts for the private sector. 

The bottom line is that many of the factors and marketplace realities that caused Congress to originally enact and reauthorize 

TRIA largely remain in place today. Despite the significant 

progress that has been made in protecting our country from terrorists, the threat of terrorism remains with us daily. 

Such risk can still not be assessed by traditional methods. In 

many instances, insurers simply do not have access to the data and 

information to perform proper underwriting as much of the information does not exist, is available only to governmental entities, 

and they fiercely guard it for understandable security and law enforcement reasons. 

We believe that it will be extremely difficult or even impossible 

in some instances for many businesses to obtain adequate and affordable terrorism insurance coverage if the program is allowed to 

expire with no public policy solution in its place. Although our Nation has thankfully been spared from further terrorist attacks in 

recent years, the threat of an attack is as great as ever and our 

country must take the steps necessary to protect itself and its economy from a similar future event. 

The Big ‘‘I’’ believes that the TRIA backstop has worked well and 

that some form of limited Federal involvement is still needed to 

maintain a stabilized and viable market for terrorism insurance. 

Again, we applaud the committee for its foresight to review TRIA 

now, and we look forward to working with you as Congress considers solutions to address the unique nature of the risk presented 

by terrorist attacks. 

[The prepared statement of Mr. Jensen can be found on page 78 

of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

Mr. Lanza, you are recognized for 5 minutes. 

STATEMENT OF MICHAEL H. LANZA, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, SELECTIVE INSURANCE 

GROUP, INC., ON BEHALF OF THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI) 

Mr. LANZA. Thank you. 

Good afternoon. I am Michael Lanza, executive vice president 

and general counsel of Selective Insurance Group. Selective is 

America’s 49th largest property/casualty insurance group. Today, I 

am testifying for the Property Casualty Insurers Association of 

America, our national trade association. PCI members write about 

40 percent of America’s home, auto, and business insurance. Today 

31 

marks the 11th anniversary of the terrorist event that killed thousands and created significant economic loss and disruption. 

With investment markets freezing, this committee responded 

swiftly to President Bush’s call and passed the Terrorism Risk Insurance Act, or TRIA, in just 2 months. The House approved TRIA 

in 2002 and renewed it in 2005 and 2007. All three votes passed 

by wide margins under different Majorities, reflecting TRIA’s bipartisan support. 

Since 9/11, terrorist attempts have continued. Fortunately, our 

national security apparatus detects and thwarts most of these. 

TRIA is part of our economic national security defense. It provides 

a low-cost, fiscally prudent economic safety net if, God forbid, another attack is successful. 

Absent TRIA’s extension, and as State law permits, insurers in 

2013 will begin to send notices excluding terrorism coverage or not 

renew policies on major underlying risks. 

PCI and Selective strongly believe in the private insurance market. We also believe the private market can cover fully insurable 

risks. 

TRIA protects American taxpayers in two important ways by intruding into the private insurance markets. First, by keeping the 

private sector largely responsible, it avoids the kind of Federal bailout that occurred after 9/11 when victim protection funds had to be 

established. Second, because terrorism, like crime or acts of war, is 

not fully insurable, TRIA creates a private market for terrorism insurance coverage. In short, it makes private capital ultimately responsible for all but the most catastrophic terrorist attack. 

To be fully insurable, a risk potential loss and loss severity must 

be predictable. With freely available information and experience, 

insurers can estimate roughly how many car accidents, house fires, 

or industrial accidents will occur and what their costs will be. Similarly, with free access to weather pattern science and over 100 

years of weather history, insurers can model storm paths and predict weather losses. 

We can’t do that for terrorism. The experience—notably what 

happened 11 years ago—is very limited. More importantly, the information needed to underwrite is not freely accessible. Properly, 

thin information is classified and in the hands of our government 

national security experts. 

National security is the Federal Government’s primary responsibility. That is why there is a myriad of agencies focused on anticipating and preventing terrorist acts and assessing their likelihood 

against major economic centers and other public and private symbols of our country. These agencies also track the pool of potential 

terrorists that fluctuates with changes in U.S. domestic and foreign 

policies. 

Insurers and their policyholders cannot and should not replicate 

these efforts. Companies such as Selective, which writes primarily 

in 22 States east of the Mississippi, certainly don’t have the necessary resources, and Selective’s small business clients, who pay an 

average of $10,000 for 3 commercial policies and elect to pay for 

TRIA coverage 86 percent of the time, certainly don’t either. 

32 

That is why we need TRIA. TRIA enables the private insurance 

market to provide terrorism coverage without having the information it does for other risks. 

By providing insurance for terrorist events TRIA also does three 

other things. First, TRIA permits business capital to remain unrestricted and available for economic investment before and after a 

terrorist event. Second, because State workers compensation laws 

mandate terrorist coverage, TRIA facilitates reinsurance and keeps 

worker comp rates lower. And third, TRIA protects taxpayers. According to CBO, TRIA’s net cost to taxpayers through 2017 is 

roughly zero. 

We would appreciate your support for the extension of TRIA. 

Thank you very much. 

[The prepared statement of Mr. Lanza can be found on page 87 

of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Mr. Lewis, you are recognized for 5 minutes. 

STATEMENT OF CHRISTOPHER M. LEWIS, SENIOR VICE PRESIDENT AND CHIEF INSURANCE RISK OFFICER, THE HARTFORD FINANCIAL SERVICES GROUP (THE HARTFORD), ON 

BEHALF OF THE HARTFORD AND THE AMERICAN INSURANCE ASSOCIATION (AIA) 

Mr. LEWIS. Thank you. 

Chairwoman Biggert, Congressman Green, and members of the 

subcommittee, thank you for the opportunity to appear before you 

today to discuss terrorism risk insurance. My name is Christopher 

Lewis and I am the chief insurance risk officer for The Hartford. 

In the interest of time, I would respectfully request that my written testimony be submitted into the official record, and I will just 

briefly highlight a couple of key points for the committee. 

First, over the past 11 years, the capabilities, tactics, preferred 

targets, weapons of choice, and even the main protagonists in the 

war on terrorism have dynamically changed and evolved. We are 

fortunate that the United States has not experienced another major 

attack on our soil and sincerely grateful for the tremendous efforts 

of our security forces to interdict and defend our country from 

these attacks. 

Unfortunately, what has not changed over the past decade is the 

fundamental fact that the risk of terrorism remains an uninsurable 

risk. Insurers still have no credible basis for quantifying the likelihood of a terrorist attack and a limited ability to understand the 

potential impacts of an attack if carried out using nuclear, biological, chemical, or radiological weapons. The private sector simply 

does not have the information to assess this risk. 

Further, the benefit of private sector mitigation is somewhat limited, as hardening security at one location only shifts terrorist selection of target or access point to a different location. And unfortunately, the capacity of the reinsurance through capital markets to 

finance the peril of terrorism remains de minimis. Why? Because 

reinsurers face the same insurability challenges that primary insurance companies face. 

Second, TRIA and its successors have worked and serve as a critical component of our national economic security. By helping to fiVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
33 

nance and limit private insurers’ exposure to the largest catastrophic terrorism events—events with projected losses greater 

than any historical commercial insurance loss on record for any 

peril—TRIA enables insurance companies to offer terrorism coverage to commercial policyholders. 

In the event of a future attack, private insurance payments will 

immediately flow to affected businesses that have purchased coverage and to their employees—payments that will provide stability 

and minimize economic disruptions not only to the people and businesses that suffer the attack directly, but to all Americans, keeping 

the wheels of commerce moving. 

Finally, TRIA is not a giveaway to insurers but an effective 

means of pooling terrorism risk over time. The program preserves 

significant industry skin in the game. Federal assistance occurs 

only in the case of an extremely large-scale terrorism loss. For a 

large, wide-area terrorist event, insurers would need to absorb an 

estimated $25 billion to $30 billion in insured losses before Federal 

payments are even triggered. 

And in the unlikely event that government funds are needed, 

they are ultimately recaptured and returned to the U.S. Treasury 

through a recoupment mechanism established in the legislation. As 

a result, any program costs are greatly mitigated. 

Bottom line, TRIA has brought stability to the private market for 

terrorism insurance and it is a critical component of our national 

economic security. The program has been a success. From a risk 

management perspective, letting the program expire is simply not 

a risk that our country should take. 

Thank you. 

[The prepared statement of Mr. Lewis can be found on page 92 

of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Lewis. 

And Mr. Ryan, you are recognized for 5 minutes. 

STATEMENT OF EDWARD B. RYAN, SENIOR MANAGING DIRECTOR, AON BENFIELD, ON BEHALF OF THE REINSURANCE ASSOCIATION OF AMERICA (RAA) 

Mr. RYAN. Thank you, Chairwoman Biggert, and members of the 

subcommittee. I am Edward Ryan, senior managing director at Aon 

Benfield, the world’s leading reinsurance intermediary and fullservice capital advisor with more than 80 offices in 50 countries 

around the world. I thank you for the opportunity to testify on behalf of the Reinsurance Association of America on the reinsurance 

perspective of this hearing entitled, ‘‘TRIA at Ten Years: The Future of the Terrorism Risk Insurance Program.’’ 

As we mark the 11th anniversary of the attacks on the United 

States, we remember all the victims of 9/11. Aon Benfield and the 

1,100 of us who worked in the World Trade Center continue to 

mourn the 176 colleagues and friends whom we lost that day. 

We know the commercial insurance market and know that reinsurance availability is a key component of our economy. We therefore urge Congress to act to extend the Terrorism Risk Insurance 

Act. 

Aon and the RAA supported the adoption of the Terrorism Risk 

Insurance Act in 2002, its reauthorization in 2005, and the 2007 

34 

Extension Act. The response to 9/11 by the insurance industry was 

to pay tens of billions of dollars in claims but also to exclude terrorism losses going forward. 

TRIA created an essential Federal backstop that enabled the primary insurance industry to provide terrorism insurance to our Nation’s businesses. The program has enhanced the private market 

for such coverage and has had a stabilizing influence on the economy. Under TRIA, the availability of terrorism risk insurance has 

increased. 

There is a role for private reinsurance under the program. In an 

event certified by the Secretary of the Treasury as a terrorist attack, TRIA provides reinsurance-like protection for primary commercial insurance loss. The program provides coverage for 85 percent of the eligible loss up to an industry loss of $100 billion. Coverage is subject to an individual company retention of 20 percent 

of the prior year’s direct earned premium on covered lines. 

These company retentions and the 15 percent copay above that 

mean that insurers retain a significant portion of the loss before 

TRIA funding is triggered. Private reinsurance provides the vehicle 

for insurers to manage that retained loss. 

Since 2001, insurers, modelers, and reinsurers have worked to 

develop a better understanding of terrorism risk. Companies have 

consulted military and intelligence experts and hired specialty risk 

modeling firms. Despite these efforts, terrorism risk poses great 

challenges as an insurable risk. 

The main hurdle in assessing and underwriting terrorism risk is 

that the frequency of loss is neither predictable nor random. Terrorists continually attempt to defeat loss prevention and mitigation 

strategies. In addition, the insurance industry does not have access 

to all the existing information about terrorism targets and potential attacks for obvious national security reasons. 

Despite these issues, reinsurers have but capital at risk to manage terrorism losses. Reinsurers offer coverage for foreign acts of 

terrorism—that is, acts committed by non-U.S. agents—in standalone terrorism contracts rather than in all-peril catastrophe contracts. The amount of such stand-alone terrorism treaty reinsurance capacity available in the private market is estimated to be between $6 billion and $8 billion, a figure largely unchanged in recent years. 

The bulk of the terrorism reinsurance currently comes via existing reinsurance programs. Coverage for personal illnesss, which is 

not subject to the program, coverage for workers compensation, as 

well as for acts of terrorism committed by U.S. agents is generally 

available in existing catastrophe programs. Insurers with exposures in rural or suburban areas have generally secured terrorism 

coverage within existing reinsurance programs with limitations on 

the size of subject risks or events. 

Regarding NBCR—nuclear, biological, chemical, and radiological 

exposures—there is little reinsurance appetite for this risk. When 

it is available, pricing for NBCR coverage comes at a significant 

premium and capacity is significantly less than that available for 

conventional terrorism. 

For the foreseeable future and based on current demand, there 

is adequate supply of reinsurance capacity for coverage around the 

35 

structure provided by the Federal program. However, were the program to terminate in 2014, we expect insurers to curtail the provision of terrorism insurance. 

U.S. businesses would be more exposed to the financial consequences from terrorist activities. To the extent that this additional risk forces businesses to seek insurance, insurers would offer 

meaningful but not unlimited insurance products. The private reinsurance marketplace would work productively with insurers to provide reinsurance coverage for terrorism but the capacity would be 

severely constricted. 

TRIA has served an important role to our Nation’s economy. As 

TRIA expires in 2014, we urge this committee and the Congress to 

reauthorize the program in 2013 to eliminate any uncertainty 

around reauthorization and to meet the needs of insurers and insureds whose contracts will expire throughout the year. We commit 

the full resources of the Aon Corporation as well as the Reinsurance Association of America to work with the committee to achieve 

this goal. 

Thank you. 

[The prepared statement of Mr. Ryan can be found on page 127 

of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Ryan. 

And I note that without objection, the written statements of all 

the witnesses will be made a part of the record. And we will now 

turn to the question-and-answer period. 

I will recognize Members for 5 minutes each to ask questions, 

and I will first yield 5 minutes to myself. 

Mr. Bartlett, on page four of your testimony you state that TRIA 

puts in place an orderly system to make sure that the private sector absorbs most if not all of the losses. If the private sector would 

already absorb such losses, why could it not be put in place an orderly system of its own and continue to absorb the losses absent 

a government backstop? 

Mr. BARTLETT. Terrorism risk is nearly impossible to model. You 

cannot predict frequency, location, or severity. It is an asymmetrical risk, so the upside from the premiums cannot begin to compensate for the potential downside of covering the losses. 

In addition to that, the core of TRIA is a make-available provision, so that all coverage would have to make that available. Without a make-available provision, what we found out when we didn’t 

have TRIA was the insurers would be forced to avoid the risk and 

they would limit their product offerings. They would limit the coverage. 

So TRIA ensures that coverage is offered. It makes sure that the 

private sector absorbs most of the initial losses. And if there are 

any additional losses, then the private sector is required to recoup 

the losses and repay the government. So it protects all three. 

Chairwoman BIGGERT. Thank you. 

And then, Mr. Copeman, you say on page three of your testimony—or in the context of discussing the actuarial data insurers 

need to underwrite and price for terrorism risk, you state that 

much of the relevant data that might be used by an insurance company is appropriately kept secret by the Federal Government for 

national security reasons. What kind of actuarial data that is inacVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
36 

cessible to insurance is—that they need to underwrite and price for 

terrorism risk? 

Mr. COPEMAN. Thank you. The primary information that would 

need to be available for our actuaries as well as those who develop 

the models is really the incidence or potential incidence of terrorism that may have occurred that we are not made aware of— 

those that have been stopped rather than those that actually occurred. 

So again, building a model requires a great deal of data points, 

and the only data point that we have, for all intents and purposes, 

to develop these models is really two: the Oklahoma City issue, 

which was a domestic violence level of terrorism; as well as the 

New York incident. With two data points, it is inadequate information for us to be able to model that kind of data—that information. 

Chairwoman BIGGERT. Okay. Thank you. 

Mr. Jensen, you mentioned that terrorism coverage will once 

again become extremely difficult or impossible for many businesses 

to obtain if the program is allowed to expire and no policy solution 

is in place. Beyond TRIA, what other kinds of policy solutions do 

you envision? 

Mr. JENSEN. Thank you, Madam Chairwoman. I am not sure 

what will be there. What we hear from our company partners, of 

course, is that coverage may be limited and very—a broad spectrum. It concerns us and it concerns me on behalf of my clients 

that without TRIA in place, they truly won’t have options available 

to them from the private insurance carriers. And our concern, of 

course, is to make sure that their insurance portfolio and the products that we provide them do provide them all the coverage that 

they need. 

Chairwoman BIGGERT. Okay. Thank you. 

Mr. Lanza, you state that absent its extension, insurance policies 

will begin in 2013 to exclude terrorism coverage, or to the extent 

permitted under State law not be renewed for major underlying 

risk. This is supposed to be a temporary program, but it appears 

that the industry is unanimously asking for a permanent extension 

of the program? 

Mr. LANZA. We are asking for an extension to match the risks 

of terrorism. 

Chairwoman BIGGERT. Okay. At what point could the private sector assume the risk? 

Mr. LANZA. I think that has been touched on. The issue is related 

to what information is available about what kind of risks are taking place against the country. In addition to that, you have a correlation issue, which is, for example, we can know that a hurricane 

in Florida is not correlated with an earthquake in California. In 

terrorist attacks, we have shown that they are correlated. In addition to that you have a concentration problem, which makes the severity or the amount of the loss very complicated to predict. 

Chairwoman BIGGERT. Thank you. 

My time has expired. 

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

minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

37 

I hope this question is not ideological, and if it is, I apologize. I 

am more interested in learning than ideology. 

Why couldn’t the private sector handle this program completely 

on its own? Why is it absolutely necessary? I am assuming that all 

six of you believe that it is necessary for the government to play 

the backstop role. But is it necessary? Is it absolutely essential? 

Can’t we do it without the government involvement? 

Mr. BARTLETT. Congressman, Steve Bartlett. I wish that it could 

be done without any government involvement at all. This program 

at least establishes it so there is no government money involved 

that would be recouped. But without a backstop it is unpredictable—the risks are unpredictable and they are uninsurable because 

they are so large. And the frequency and the location are totally 

unpredictable and the size is uninsurable. There is simply not 

enough money in the overall market to provide the—in the private 

market to provide the initial backstop, but it could be recouped 

over time and this law provides that it would be. 

Mr. CLEAVER. Mr. Lewis? 

Mr. LEWIS. Yes, thank you. I think it is also important to keep 

in mind what a private market solution could be. Given the insurability issues that we have mentioned with respect to terrorism insurance—we can’t predict the frequency, we don’t understand the 

severity, these are non-random acts, terrorists are out to inflict 

maximum damage by picking the soft points. As insurance companies in the private sector trying to just intermediate that risk for 

our policyholders, if we can’t price it and we can’t manage it like 

a traditional risk and we need to be there to make sure that we 

can meet the payment obligations of our clients when they have a 

claim we can’t put too much risk against our surplus. 

So the private market solution is really to start restricting coverage and reducing exposure so a private market solution in this 

context may be a non-insured coverage and more of it goes back to 

companies which have to self-insure or goes into residual markets. 

The best example of unregulated markets you can look at are the 

reinsurance markets and the capacity there, as we mentioned earlier, is de minimis. 

So I think a private market solution here, given the nature of 

terrorism, is really less of an insurance peril. TRIA actually gives 

you an orderly process for a Federal loss-sharing program with the 

private sector so that, in fact, there is a response mechanism already in place should, heaven forbid, we ever have a future terrorism event. 

Mr. COPEMAN. Congressman, if I could give an example, too, as 

the smallest company sitting at this table, we insure jewelry. And 

for anyone who has been to the diamond district in Lower Manhattan, 47th and 5th Avenue is one of the greatest concentrations of 

jewelers in the country. 

Given the TRIA program that is in place today, our exposure between the deductible and the co-participation is 16 percent of our 

policyholder surplus. That is $150 million of surplus; 16 percent of 

that would go away. 

The only way we can participate and provide our customers coverage in that location is because TRIA is in effect and we are able 

38 

to purchase private reinsurance as well as rely on the Federal Government to be the backstop. 

Mr. CLEAVER. Ideologically, the biggest discussion in Washington, no matter how it comes across, is really a discussion about 

the role of government. And you can’t answer that question. For me 

it is, when is the government intruding? 

What is the difference, then, between flood insurance and terrorism insurance, particularly as it relates to pricing? Everything 

that you said, Mr. Lewis, about TRIA is also true about floods. 

They are unpredictable; we don’t know the scope when they hit. 

You could say the exact same thing. 

Mr. LEWIS. Let me follow up. With respect to natural catastrophes—and it applies to floods, it applies to hurricanes and 

earthquakes—we actually have hundreds if not thousands of years 

of data to look at frequency and severity of these events. Now, they 

could be highly uncertain and it could be a challenge, but with respect to terrorism we have no basis, no understanding of frequency 

for a terrorist event. 

The second thing is that fortunately, floods happen largely in 

floodplains or just outside floodplains. The floods don’t actually 

seek out the weakest spot, like a terrorist would. These are actually non-random acts trying to find that soft spot and actors who 

really have a political agenda trying to strike at the soft belly of 

the country. 

So there is a difference, and I appreciate the challenges on the 

flood program and natural catastrophe, but we do draw the distinction with terrorism. 

Mr. CLEAVER. I was the mayor of Kansas City from 1991 to 1999. 

We had two 500-year floods. 

Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

The gentleman from Virginia, our vice chair, Mr. Hurt, is recognized for 5 minutes. 

Mr. HURT. Thank you, Madam Chairwoman. 

Mr. Bartlett, I had a couple of mechanical questions. We have 

talked a little bit about the fact that—and you have stated in your 

testimony that the losses would ultimately be paid back to the government. I guess the first question is, under the current TRIA program—and forgive me for not knowing this—there are no premiums that are paid up front into the program, like with flood insurance, are there? 

Mr. BARTLETT. There are premiums but they are paid as part of 

your regular commercial insurance, and they are used to pay the 

deductible that an insurance company would pay—the 20 percent 

deductible, which is a large number, and also the co-insurance. It 

is only in the event that you surpass that, then the government 

would pay the backstop, so it is included in the premium— 

Mr. HURT. How does the recoupment work and what are the circumstances in which it would not be paid back? 

Mr. BARTLETT. My understanding is that it would be paid back. 

As I understand it, the Secretary of the Treasury would certify it 

is a terrorist attack, certify that it meets the threshold, it is above 

the $100 million, and that the deductibles have been exceeded, and 

then would, as I understand it—at that time would have the preVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
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established authority to assess commercial policyholders universally until the government is repaid. That is my— 

Mr. HURT. It could take years—so $100 million—industry loss of 

$100 million, we just heard testimony that the—is the threshold, 

and then—and then my understanding is that above that, and we 

just heard testimony that the 9/11 attacks cost the insurance industry approximately $40 billion in current dollars—$100 million 

to $40 billion is—so it does get confusing to me real fast. 

$100 million is the trigger, so it is not—unless the total losses 

are $100 million. And then after that every company would pay 

their own policies up to 20 percent, or roughly $1 billion for a large 

company. And only after that would the government come in. 

So one would suppose, with a large attack, that private money 

would front the first—and this is rough justice—the first, say, $20 

billion or $30 billion, and only after that the government would 

step in as a backstop. Anything the government pays as the backstop would then be recouped by a tax on all policyholders. 

And it could take years? 

Mr. BARTLETT. It would be whatever the Secretary of the Treasury decided it would take, frankly. 

Mr. HURT. Okay. 

I was intrigued by Mr. Lewis’ testimony. I guess the first question I would ask is what do we know now that we didn’t know 10 

years ago when we enacted this program as a temporary program? 

What is it that we know now that we didn’t know then? I would 

imagine that we now know a whole lot more. 

Mr. LEWIS. Yes. It is a challenge, and I think you heard some 

of the sentiment earlier that we had hoped 10 years ago that we 

would know a lot more now that would enable a better management of the science, but the terrorists’ tactics and weapons continue to evolve. What we do know more now is when we look at 

some of the more conventional attack modes—truck bombs, car 

bombings, you see some of these overseas—the potential impact of 

those may help us model losses from a severity perspective. 

We have done a lot of work to try to manage aggregations. As 

you have seen, the industry, even though it has very high retention, so a ground-up loss is, per company, $100 billion-plus is a lot. 

And we bear that risk ourselves and we try to manage that. 

So we have been able to develop the tools to manage within the 

current retentions, but when you start getting to events larger— 

Mr. HURT. So how do you do that? 

Mr. LEWIS. What we basically do is we limit our exposure—the 

potential ground-up loss has to be no more than a certain amount 

of capital. I will go back to the comment to make sure we can’t put 

the rest of our policy— 

Mr. HURT. But what do you say to the insured in terms of how 

they manage risk? Because obviously you—I would think that an 

insurance company can require as a condition of a policy that the 

insured take certain actions to minimize losses. So, can it? 

Mr. LEWIS. That is a good question. When we are talking about 

our exposure, it is typically not one policy. At The Hartford, for example, we provide a lot of insurance to small businesses. So it is 

aggregations of policies. It is not limiting the amount of coverage 

40 

on any one policy; it is making sure you don’t write too many policies in one area. 

There has been a kind of a redistribution of policies in general, 

and in the industry we have reached a balance. If TRIA goes away, 

companies are going to be faced with the decision about how do we 

bring the overall exposure down, and that is the problem that you 

are hearing in terms of people dropping coverage. 

Mr. HURT. Last question really quickly—I have 5 seconds—I 

would assume, though, that while we have not had a massive attack like we had on September 11th, I would think that you could 

still—there are a lot of terrorist attacks that take place all across 

the world. You all could use those in trying to figure out modeling, 

can’t you? 

Mr. LEWIS. The issue is frequency—not really, because those are 

different locations, different tactics, and then when you start getting into attacks with the potential for nuclear, biological, chemical, 

and radiological weapons, there is no precedent. And we have 

heard that terrorists say that their intention is to try to deploy 

those weapons. We have no basis to try to price for them. 

Mr. HURT. Thank you. 

Chairwoman BIGGERT. Thank you. 

Mr. Green, you are recognized for 5 minutes. 

Mr. GREEN. Thank you again, Madam Chairwoman. 

Mr. Cleaver has covered this, but I would like to make sure I 

have it for the record. Are you, indeed, all of the opinion that TRIA 

should be extended? If someone differs, will you kindly speak up 

just so that I will have a record that reflects that you are all in 

agreement? 

If you are in agreement and you believe that it should be 

tweaked to some extent, would you kindly extend a hand into the 

air, because I would like to know what your opinion is about 

tweaking? What would you have us do to make it better than it is? 

Anyone? 

Am I to assume that you all think it is fine as it is and that— 

let’s just sort of stay the course, is that what I am hearing? 

Mr. LANZA. I think it is we understand what TRIA does and so 

we understand that. We are covered for an uninsurable risk and 

we understand what TRIA does for us, and that is why we like it. 

Mr. RYAN. Representative Green, if I could offer— 

Mr. GREEN. Yes, sir? 

Mr. RYAN. The insurance and reinsurance industry has had 10 

years to grow accustomed to the current backstop and the program 

and the way the insurance industry responds to that. It is not too 

hard to envision a situation that was better for the insurance industry. I think any tweaking would reduce the benefit of the Federal program and introduce some uncertainty into the insurance industry and be to the detriment of insureds and insurers. 

Mr. GREEN. Mr. Bartlett, I read your testimony and I am appreciative of what you said on pages three and four. You sort of explain how the system works. Thank you very much for the way you 

have codified this and explained it. 

The 3 percent is especially important because it helps us to recoup after, God forbid, some devastating incident occurs. But I do 

want to ask this, Mr. Bartlett: Are we putting the insurance comVerDate Nov 24 2008 18:25 Apr 18, 2013 Jkt 076126 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\76126.TXT TERRI
41 

panies in a position wherein they can make a bad bet but they 

won’t ever suffer the ultimate loss—meaning companies now that 

they don’t assess risk properly, they can possibly go out of business. Will the companies—are they—are we putting them in a position now such that they are insured, or are we insuring them to 

the extent that they will always be in business? 

Mr. BARTLETT. It is actually quite the reverse. TRIA, as it was 

finally authorized in the last round, was quite—was—at least proposes to be quite expensive to insurance companies should there be 

a terrorist event, as it should be. But I have to say, it is—had you 

asked if there were any tweaks that we should make—if you had 

asked me 5 years ago, I might have hesitantly put up my hand and 

said it is too expensive. 

But it is a very expensive program—the 3 percent surcharge, the 

20 percent deductible, the 15 percent copay, in fact, put the burden 

where it should be, and that is squarely on the private sector, both 

insurers, but also developers, property owners, and lenders. So 

there is full and adequate and very overwhelming incentive to mitigate against terrorism risk, to ensure properly, and to—and there 

is a large amount of payment that insurance companies would pay 

if it were to. 

Would companies go out of business if a terrorist attack happened? Perhaps. This is a—if a terrorist attack happens it would 

be very expensive for the insurance industry, and it should be, because they are in the insurance business. But it would be achievable for the overall economy, and that, of course, is the goal. 

Mr. COPEMAN. Congressman, as a small mutual insurance company—and I emphasize mutual because we exist for our policyholder; we have no stockholders; we have no one who invests in 

us—we certainly take very seriously the fact that we put, as I mentioned earlier in this particular example in New York, 16 percent 

of our policyholders’ surplus on the line just for the risk of terrorism. There is still fire, there are still other catastrophic losses 

that can take place and we have to align our capital against those 

particular exposures. 

So as a small company, TRIA makes a huge difference in whether or not we are able to make a marketplace for our mutual insurance company policyholders. 

Mr. GREEN. Thank you. 

Mr. Lanza, I believe you indicated that we should do this by 

2013. Was that you who made the comment that we should extend 

it by 2013? 

Mr. LANZA. No. The issue is that in 2013, as we go about renewing policies or issuing quotes on new policies, we will be advising 

insureds that the TRIA would be subject to sunset, and that would 

have issues for us and our ability to provide terrorism coverage. 

Mr. GREEN. So is your request that we do whatever we are going 

to do by 2013—the end of 2013— 

Mr. LANZA. By the end of 2013. 

Mr. GREEN. —just so that—to help the market to build in the 

necessary risk factors and take the uncertainty out of it. Is that 

what you are saying? 

Mr. LANZA. Correct. 

Mr. GREEN. Okay. 

42 

Mr. RYAN. Congressman Green, I might have been the person 

who made that reference. I think it is vitally important for the reinsurance industry, too, to know where they stand in terms of what 

reinsurance they will be required to give for terrorism. 

Mr. GREEN. Thank you, Madam Chairwoman. 

And I would like to thank all of you for appearing. I truly don’t 

want to see anybody go out of business. My questions have more 

to do with how much we do to— 

Chairwoman BIGGERT. The gentleman’s time has expired. 

Mr. GREEN. Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Mr. Sherman, you are recognized for 5 

minutes. 

Mr. SHERMAN. Propitious time. 

Mr. Lanza, without TRIA would the private sector offer more terrorism coverage or less, and how would that affect the availability 

of commercial insurance overall? 

Mr. LANZA. Without TRIA, there would be no terrorism coverage, 

and so availability would be limited. And for the reasons we spoke 

of earlier, there is no way to underwrite the risk, and that is why 

we won’t be able to extend the coverage without TRIA. 

Mr. SHERMAN. I assure you, there is simply no way to predict 

that risk. You could put the whole Foreign Affairs Committee together and try to guess what the risk is and none of us would be 

able to do it. 

Mr. RYAN. Congressman Sherman, may I interject? Sorry. 

Mr. SHERMAN. Yes. 

Mr. RYAN. Aon Corporation, in advance of the last two pending 

terminations of the TRIA legislation, surveyed insurance carriers, 

and we determined that we would lose about 80 percent of the insurance capacity that was currently devoted to terrorism were 

TRIA to lapse. 

Mr. SHERMAN. And while it is getting more difficult to predict the 

weather and hurricanes, that is easy compared to predicting a 

major terrorist attack. 

What are the take-up rates of your company, Mr. Lanza, and for 

the industry as a whole? 

Mr. LANZA. We are slightly above the industry average, which is 

around 64 percent. We are at about 86 percent for the commercial 

lines that are not mandatory, so that is not workers’ comp. Workers’ comp is 100 percent. 

Mr. SHERMAN. So you are saying 86 percent of your customers 

choose to buy terrorism insurance? 

Mr. LANZA. Correct. 

Mr. SHERMAN. And so terrorism insurance isn’t just for La 

Guardia, LAX, and the Empire State Building, who I assume are 

not your clients. It is for medium-sized businesses from cities that 

terrorists have heard of and some they don’t know about or they 

haven’t focused on. 

Mr. LANZA. Correct. Terrorism doesn’t have any boundaries. 

We primarily write for small businesses that have an average of 3 commercial policies and about $10,000 in total premium, and 

they elect 86 percent of the time when they have the choice to have 

TRIA. And we distribute— 

Mr. SHERMAN. Mr. Lewis, did you have a comment on that? 

43 

Mr. LEWIS. I think you raise an important point. After 9/11, one 

of the great lessons that we learned is a lot of attention was paid 

on the large buildings and the large companies. Horrible losses, but 

they shifted production to other areas. 

We also are a large provider of small business insurance and the 

critical thing was there are a lot of small businesses in Lower Manhattan that were just down because they closed down Lower Manhattan. If the claim checks did not keep coming to keep them in 

business then those would have all been out of business— 

Mr. SHERMAN. So even if you are not in an iconic location, you 

could be half a mile away and be affected. 

Mr. LEWIS. Absolutely. 

Mr. SHERMAN. But even—for Mr. Lanza’s 86 percent, I am sure 

the vast majority of his clients are not within walking distance of 

one of the 500 most notable sites in America. But they want and 

need the terrorism insurance. 

Do you find that your clients are taking—are getting the terrorism insurance because they need to do it in order to satisfy their 

creditors, or they simply think they want to do it for their own 

business, or is it a combination? 

Mr. LANZA. I believe it is a combination. Also, we distribute exclusively through independent agents, such as Mr. Jensen, who do 

a lot of consulting with the clients. 

Mr. JENSEN. Mr. Sherman, if I may? 

Mr. SHERMAN. Yes. 

Mr. JENSEN. As I testified before, most of my clients and my 

agencies are in smaller rural and suburban communities. An awful 

lot of my clients do purchase coverage because they still have the 

need even though we are not in one of these highly visible properties. 

As a note, I insure an awful lot of volunteer fire departments, as 

an example. These are folks who need to have claims payments 

quickly if something were to arise. They are also, as our Nation is, 

and they are the ones that respond to the bad things and they are 

running to the circumstances rather than away from them, and 

they may very well respond to a larger city to help in other communities, so it is very important for those communities as well. 

Mr. RYAN. Congressman Sherman, if I may, in addition to some 

of the other studies we have done, we have analyzed the take-up 

rate by segment of the economy, and I would like to introduce with 

my written testimony, if I have not already, some— 

Mr. SHERMAN. I would ask unanimous consent to allow this document into the record. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. SHERMAN. I think the testimony has been very interesting 

today. I know my time has expired, and I think a lot of us have 

learned that terrorism insurance is something that the vast majority of medium-sized businesses need and want, and that these are 

risks that cannot be priced by the private sector. 

I yield back. 

Chairwoman BIGGERT. Thank you. 

Let me—just some food for thought, maybe, from Mr. Ryan for 

the reinsurance, and maybe some of you, but just thinking about 

this, in science and some other areas of the government there are 

44 

public-private partnerships and classified information is shared. It 

does cause concern about intelligence, but could such a partnership 

be developed to model for terrorism risk, and then pricing for reinsurance and then ultimately for insurance? 

So maybe if you could think about this, Mr. Ryan, and get back 

to us. I don’t know that you want to answer right now. 

And any of you— 

Mr. RYAN. Actually, could I make one comment along those lines? 

Chairwoman BIGGERT. Sure. 

Mr. RYAN. There has been a lot of concern expressed regarding 

the severity of terrorist attacks, and while that is certainly true, 

there is a lot of science that has been shared regarding the impact, 

physically, of terrorist attacks, but fundamentally it is the frequency issue, and I think everyone on this panel has said and most 

of the people on the previous panel, unless there is some hard 

science behind the frequency of it I don’t know that that will be addressed. 

But certainly in terms of the severity issue, I think we have a 

head start on that portion of it, yes. 

Chairwoman BIGGERT. All right. Thank you. 

I ask unanimous consent to insert the following material into the 

record: a September 11, 2012, statement by Congressman Peter 

King from New York. 

Without objection, it is so ordered. 

With that, I would like to thank the panel for a really good discussion. The Chair notes that some Members may have additional 

questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses, and 

to place their responses in the record. 

Again, I would like to thank all of you. You have been a wonderful panel. And we will be having some more hearings, too. 

So thank you so much for being here, and with that, this hearing 

is adjourned. 

[Whereupon, at 1:24 p.m., the subcommittee was adjourned.] 

(45) 

A P P E N D I X 

September 11, 2012 

46 


76126.001

Rep. Peter King: Statement for the Record on TRIA 

Insurance & Housing Subcommittee Hearing: "TRIA at Ten Years: The Future of the 

Terrorism Risk Insurance Program," Sept. 11, 2012 

Eleven years ago today, our nation was rocked by the horrific terrorist attacks that hit the World 

Trade Center and the Pentagon. The staggering loss of innocent lives was the greatest tragedy. 

But in addition to this loss, the U.S. economy went into a tailspin foHowing the attacks, with 

American businesses and workers left struggling financially. 

Following 9/11, the insurance industry paid out and an unprecedented $31.6 billion in terrorismrelated claims. After an attack of that magnitude, insurance companies did not know how to 

model for or project future terrorism-related costs. The private sector stopped offering terrorism 

insurance. Since all commercial borrowers had to have terrorism risk insurance in place, efforts 

to rebuild after 9/11 were stymied by the inability to insure against the threat of future attacks. 

According to a Real Estate Roundtable study, over $15 billion in real estate-related transactions 

were stalled or cancelled because terrorism risk insurance wasn't available. This translated into 

tens of thousands of construction jobs lost. My state of New York was hardest hit by this market 

failure. 

The enactment of the Terrorism Risk Insurance Act in 2002 -- which I strongly supported and 

worked to extend -- filled this significant coverage gap. TRIA has been a tremendous success. 

This program provides the stability needed to keep our economy going in the face of continued 

terrorist threats, with businesses able to secure the insurance needed to operate. It is a sound 

policy that helped reestablish the economies of New York and our Nation's Capital City 

foHowing the attacks. It will also enable the U.S. to quickly recover should another terrorist 

attack occur on our soil. 

This Committee has rightly placed emphasis in finding private market-based solutions to reduce 

the role the federal government has played in housing, finance and insurance. TRIA has been 

successful because it allows the private sector to partner with the public sector in managing risk, 

with the private sector having significant "skin in the game." With our economy still struggling 

to recover from the financial crisis, it makes no sense to remove a successful federal backstop 

that aids market stability and has not cost taxpayers a dime in insurance claims. In fact, TRIA 

likely saves taxpayer money. If a future catastrophic attack were to occur and a federal backstop 

didn't exist, the same market failures that we saw in 2001 would occur, and Congress would be 

left appropriating huge sums in disaster assistance and again stepping up to the plate to provide 

insurance guarantees. Maintaining TRIA prevents us from repeating the past. 

Finally, TRIA is not just an economic issue but also a homeland security issue. As Chairman of 

the Homeland Security Committee I regularly see intelligence reports of potential plots to attack 

the U.S. It is essential to provide the necessary stability to areas that have been and are at risk of 

being attacked by terrorists. We should not allow our enemies to decide which American cities 

will be insured and which sites can be redeveloped. TRIA has unquestionably made our 

economy stronger. 
47 


76126.002

Statement of the 

Honorable Steve Bartlett 

President and Chief Executive Officer 

The Financial Services Roundtable 

before the 

Committee on Financial Services 

Subcommittee on Insurance and Housing and Community Opportunity 

U.S. House of Representatives 

September 11,2012 
48 


76126.003

Chairwoman Biggert, Ranking Member Gutierrez, and Members of the 

Subcommittee, thank you for the opportunity to testify today - appropriately and humbly 

as we meet on September 11 tho 

I am Steve Bartlett, the President and CEO of the Financial Services Roundtable. 

The Roundtable is a national trade association composed of 100 ofthe nation's largest 

banking, securities and insurance firms. Our members provide a full range of financial 

products and services to consumers and businesses. Member companies participate 

through the Chief Executive Officer and other senior executives nominated by the CEO. 

Roundtable member companies provide fuel for America's economic engine, accounting 

directly for $92.7 trillion in managed assets, $1.2 trillion in revenue, and 2.3 million jobs. 

TRIA IS A NEEDED PUBLIC-PRIVATE PARTNERSHIP 

The property & casualty insurance sector is an important part ofthe country's 

physical and economic infrastructure. Insurance helps protect the U.S. economy from the 

adverse effects of the risks inherent in economic growth and development. Insurance 

also provides the resources necessary to rebuild physical and economic infrastructure in 

the evcnt of catastrophic losses to persons or property. Insurance provides a safety net 

that is critical to healthy economic activity. 

The Financial Services Roundtable supports the Terrorism Risk Insurance Act 

(TRIA), which provides an absolutely essential federal backstop in the face of 

catastrophic losses arising from a terrorist attack. Importantly, any federal outlay may, 

under the statute, be recouped by assessments on policyholders. In addition, it is 

imperative that the program be reauthorized to avoid disruptions in coverage. 

TRIA, and the Terrorism Risk Insurance Program it created, provides stability in 

the market by making an uninsurable risk insurable. Originally signed into law on 

November 26, 2002, TRIA was amended by the Terrorism Risk Insurance Extension Act 

of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007, and is 

now set to expire on December 31, 2014. 

TRIA must be reauthorized because it makes terrorism risk insurance accessible. 

It provides an orderly mechanism through which terrorism losses are absorbed by the 

private sector, and because it helps support the economy when we as a country are 

attacked. 

TERRORISM RISK PRESENTS UNIQUE CHALLENGES 

Effective insurance underwriting requires the ability to predict with some accuracy 

frequency, location and severity (amount ofloss). Though normal insurance risks can be 

unpredictable, when those events are assessed over a large enough area and timeline, the 
49 


76126.004

randomness of those events provide a pattern which informs underwriting deeisions and 

allows insurance companies to cover the appropriate level of risks. 

Terrorism changes that equation beeause it is not random; it is purposefuL Neither 

the frequency nor severity of the attack can be predicted or modeled. A terrorist may not 

act for years and then strike multiple times in multiple different ways, none of which is 

predictable. This dynamic risk, driven by free will and unlimited in scope, makes 

managing the risk by the private sector near impossible. Terrorism knows no geographic, 

seasonal, or other objectively verifiable pattern. It can happen anywhere, any time and in 

any way imagined by the mind of the terrorist. 

Modeling methodologies for terrorism are also nascent. While insurers continue 

to refine modeling methodologies, underwriters have yet to identify a model that can 

account for the erratic and purposeful behavior of a terrorist. These difficulties are 

substantially compounded by the very nature of terrorist activity - terrorists seek to 

disguise intent and their planned actions - and the highly secure nature of government 

intelligence sources. Similarly, there is no way to predict the severity of an event. 

Depending on the type of attack, thousands of dollars, millions of dollars or billions of 

dollars in insured commercial activity can be at risk. 

Absent TRIA, the insurance industry'S ability to absorb another terrorist attack, 

whether on the magnitude of September 11, 2001, or worse, is compromised. State 

legislatures and insurance regulators limit the industry's ability to manage or limit 

terrorism exposure and, since catastrophic terrorism is unpredictable, insurers caunot 

adequately price the exposure and are subject to a significant degree of adverse selection. 

TRIA is essential to ensure that the risk spreading mechanism that is the foundation of 

the insurance industry, works. We acknowledge that even with TRIA, the insurance 

industry remains vulnerable to significant financial disruption in the event of another 

catastrophic terrorism attack given the substantial insurer retentions TRIA requires. 

SiInilarly, in the absence of an effective backstop for terrorism losses, another 

terrorist attack, especially if the impact is concentrated on a small group of primary 

insurers, may very well be enough to render the industry unable to absorb a second 

catastrophic loss, such as from a hurricane, earthquake or other natural catastrophe. 

We have insufficient experience, significant modeling uncertainty, incomplete 

data, and a huge loss potential that may exceed the insurance indUStry's claims paying 

ability. It is, therefore, critical that the U.S. continues to have a backstop for the largest 

events. 

2 
50 


76126.005

TRIA IS DESIGNED TO KEEP THE WHEELS OF COMMERCE MOVING 

Prior to 9/11, insurance companies included insurance for terrorism risk in their 

general policies with no additional premium assessed for this risk. Following that tragic 

day, insurers were left with little option but to exclude terrorism coverage as an 

uninsurable risk from policies. There was little or no market for commercial 

policyholders who sought coverage. 

In the absence of all-peril coverage, banks and other investors were less willing to 

lend or invest money in construction projects and businesses without telTorism coverage; 

this ultimately hampered construction and jobs. During the fourteen-month period 

between 9/11 and the passage of TRIA, approximately $15 billion in real estate-related 

transactions were delayed or cancelled, according to the Real Estate Roundtable. During 

that same period, the White House Council of Economic Advisors estimated that 300,000 

jobs were lost. 

TRIA was designed to mitigate the negative economic impact from the stalled 

real-estate development and investment. First and foremost, TRIA includes a "make 

available" provision, which means that insurers must offer terrorism insurance to 

commercial clients. With coverage available, banks looking to lend and investors 

looking to deploy their capital can do so while protecting their investments from the 

threat of a terrorist attack. 

With TRIA in place, the number of business that purchased terrorism insurance 

has risen dramatically. In 2003, the take-up rate was 27 percent; by 2009, the take-up 

rate rose to 61 percent, according to a 2010 Marsh Report. 

TRIA ENSURES PRIVATE SECTOR PROTECTION OF TERRORISM RISK 

TRIA ensures that private insurance and reinsurance pays the first losses in the 

event of a terrorist attack. The current version of TRIA has a "program trigger" of $1 00 

million for certified acts of terrorism, under which the private sector takes all the loss. If 

losses exceed $100 million, each individual insurance company with losses will realize 

the entire loss up to 20 percent of its direct written premium the prior year - for some 

companies this would be over $1 billion in money being paid out before one dollar of 

govermnent money is spent. 

Following the 20 percent deductible, private insurers begin to share losses with the 

federal government; the govermnent absorbs 85percent of additional losses and the 

private sector absorbs the remaining 15 percent with a program cap of$100 billion. 

Importantly, if the government backstop is called upon, the law requires that 

government payments will be recouped by increasing future policyholders' premiums by 

3 
51 


76126.006

up to 3 percent a year. Government funding for events that occur after January 1,2012, 

must be collected by September 30,2017. 

FAILURE TO EXTEND TRIA WOULD HAVE ECONOMIC CONSEQUENCES 

Without federal support, insw:ers' limited ability to manage terrorism risk would 

become unstable and they would withdraw or reduce their offerings. This is neither 

supposition nor hyperbole - we know how the market reacts in the absence of this 

program. In the absence of TRIA, limited insurance and reinsurance for terrorism risk 

will be available, and what is available will be offered at largely cost-prohibitive prices. 

Lending, especially for large-scale development in high-risk areas will be significantly 

restricted as credit is not extended to businesses unable to obtain terrorism risk insurance. 

According to a 2010 President's Working Group report, marketplace terrorism risk 

insurance capacity has increased. Nevertheless, capacity is constrained and commercial 

insurance policyholders have difficulty obtaining coverage with sufficient limits. 

Essentially, market capacity is improving, but it is not sufficient. TRIA requires that 

terrorism coverage is available and provides the market the tools to grow. 

THE ALTERNATIVE TO TRIA IS NO PROTECTION AT ALL 

While some have argued TRIA exposes U.S. taxpayers to losses that will increase 

an already high debt and deficit, the opposite is actually true. As detailed above, losses 

from a terrorist act must reach a substantial total before the federal government becomes 

involved by loaning funds to pay claims. And once that level is reached, the insurer 

shares those losses with the federal govemment and then uses future premium charges to 

repay federal funds. 

In fact, TRIA puts in a place an orderly system to make sure that the private sector 

absorbs most if not all of the losses. Without TRIA, terrorism insurance will be available 

only in limited quantities. This not only deters investments and costs jobs, but it also 

means that little to no coverage is in place if another attack occurs. It is difficult to 

imagine a situation in which the federal govemment will not be forced to absorb the loss 

from such an attack - when businesses are left with no protection from physical and 

fmancial disaster. 

The risk of such an attack is not limited to a geographic region, industry or target. 

It can happen anywhere. And no matter where it happens, its impact goes far beyond that 

specific target. High-density areas and high-value properties have more difficulty 

obtaining coverage, but commerce is interconnected. What happens in one region or to 

one location has ralnifications across the country. If a port or transportation hub is 

disabled by an attack, businesses that rely on that center in their supply chain are 

damaged and may face business continuity challenges. 

4 
52 


76126.007

But it is important to remember, the ultimate target of a terrorist attack is likely not 

a business or particular building. Rather, it is the government and population of the 

United States. If future attacks do occur, we, as a country, must respond to support our 

citizens and businesses. TRIA acknowledges this by ensuring that the U.S. response is 

one that supports its people and its economy by providing a mechanism in which such 

unpredictable losses can be underwritten and absorbed by the private sector. 

CONCLUSION 

The Roundtable applauds the Subcommittee for its attention to this topic at such 

an early date. Although expiration seems a long way off, business decisions that involve 

terrorism risk coverage are continually being made; if uncertainty is allowed to persist 

around renewal of the program, we will see an increasingly negative impact on the 

economy. 

The Roundtable strongly believes TRIA should be reauthorized. Doing so will 

make our economy and country stronger. We look forward to working with you on this 

important issue. I am happy to answer any questions. 

5 
53 


76126.008

........ ~® C ::. 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Statement 

of 

National Association of Mutual Insurance Companies 

to the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Insurance, Housing and Community Opportunity 

Hearing on 

TRIA at Ten Years: The Future of the Terrorism Risk Insurance 

Program 

September 11, 2012 
54 


76126.009

Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11, 2012 

Introduction 

Page 2 

Chairman Biggert, Ranking Member Guiterrez, and members of the House Financial 

Services Subcommittee on Insurance, Housing and Community Opportunity, thank you 

for the opportunity to provide testimony on the Terrorism Risk Insurance Act (TRIA) and 

its vital role in helping protect our country and our economy as we continue to consider 

how to best handle the threat of terrorism. 

My name is Darwin Copeman and I am president and chief executive officer of Jewelers 

Mutual Insurance Company. A mid-sized company founded in 1913 and headquartered 

in Neenah, Wisconsin. Jewelers Mutual is licensed in all 50 states and is the only 

insurance company in the U.S. that specializes exclusively in protecting the jewelry 

industry and individuals' jewelry. Our company participates in the TRIA program and 

understands first-hand its importance of this unique partnership between the private 

insurance industry and the federal government. 

Jewelers Mutual is proud to be a member of the National Association of Mutual 

Insurance Companies (NAMIC) made up of 1,400 property/casualty insurance 

companies serving more than 135 million auto, home and business policyholders, with 

more than $196 billion in premiums accounting for 50 percent of the 

automobile/homeowners market and 31 percent of the commercial insurance market. 

NAMIC is the largest and most diverse property/casualty trade association in the 

country, with regional and local mutual insurance companies on main streets across 

America jOining many of the country's largest national insurers who also call NAMIC 

their home. More than 200,000 people are employed by NAMIC members. 

It is our firm belief that the threat of terrorism is not an insurable risk. As such, no selfsustaining private market for terrorism risk coverage is likely to develop. However, the 

presence of a robust private/public partnership that has provided stability and 

predictability has allowed insurers to actively participate in the market in a meaningful 

way. Without a program such as TRIA, many of our citizens who want and need 

terrorism coverage to operate their businesses all across the nation would be either 

unable to get insurance or unable to afford the little coverage that would be available. 

The result when the next terrorist attack occurs, will be more - not less - federal 

exposure as the government will be under extreme pressure to pay for all of the losses. 

Therefore, we believe it is vitally important to our nation's finances, security, and 

economic strength that we maintain a long-term private/public partnership for terrorism 

risk insurance. 

The Nature of Terrorism Risk 
55 


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Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11, 2012 

Page 3 

Before the events of September 11, the abstract possibility of a major terrorist attack on 

the U.S. was known, but largely dismissed by most people. At the lime, terrorism was 

typically included in "all-risk" policies because the risk was deemed so small as to be 

incalculable. Overnight, the insurance industry's understanding of the nalure of 

terrorism risk fundamentally changed. 

What became immediately clear is that managing terrorism risk defies the normal 

underwriting practices of insurers. First, it was apparent that there was an absence of 

meaningful actuarial data that insurers normally rely on when considering whether 

coverage can be offered and, if so, at what price. In the case of natural catastrophe risk 

for example, a company can rely on decades of relevant event data that can be plugged 

into mathematical models 10 quantify risk - there is no comparable historical record on 

which to draw for large-scale terrorist events. Further, much of the relevant data that 

might be used by an insurance company is appropriately kept secret by the federal 

government for national security reasons. Without access to this type of information 

insurers cannot meaningfully calculate the likelihood, nature, or extent of a potential 

event, making pricing and reserving virtually impossible. 

Second, like the risk from flooding, the risk is too highly concentrated to effectively pool 

across geographical locations and policyholder type, particularly in an age of masscasualty terror. Acts of terrorism on the scale of 9/11 are what are known as a "clash 

events" meaning they cause significant losses across multiple lines of insurance. In the 

case of the attack on the World Trade Center, there were enormous insured losses in 

the property, liability, life, and workers compensation lines, among others. Naturally, 

these types of events directly threaten the solvency of both insurers and reinsurers and 

are not typically covered risks. In a fully free market, it would likely be the case that 

highly concentrated urban areas in particular would find it difficult to find or afford 

coverage for terrorism. 

Third, there is no clear way to determine the possible severity of a given attack, 

particularly those using nuclear, chemical, biological, or radiological (NCBR) weapons. 

There is no real loss data to rely on to understand the extent of damage from such 

weapons. That said, several years ago, the Rand Corporation found that "a radiological 

attack in an urban core would likely lead to catastrophic levels of uninsured business 

interruption and property losses." The American Academy of Actuaries estimated 

potential losses from a NCBR attack in New York City at $778 billion, which is more 

than three times the commercial property/casualty industry's claims-paying capacity.l 

These estimates underscore the uninsurability of such an event. 

Fourth, the existence of interdependencies in local, national, and global systems further 

complicates any effort to accurately price terrorism risk insurance. At the very highest 

level, the nation's foreign policy decisions and the effectiveness of its homeland defense 

have a direct impact on the likelihood and success of an attack. At the policyholder 

1 Insurance Information Institute, "Terrorism Risk: A Reemergent Threat." April, 2011, p. 15. 
56 


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Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11, 2012 

Page 4 

level, the vulnerability of one organization is not simply dependent on its own security 

decisions, but also on the decisions of other organizations and agents beyond its 

control. Further, interdependence does not require geographical proximity - one need 

only consider the 2001 anthrax scare utilizing the U.S. Postal Service to grasp that 

breakdowns in systems far away can have a serious impact on potential losses. 

Finally, and most importantly, is the human element. The fact that human beings plan 

and strategically execute terrorist events means that these events are not fortuitous; 

they are caused deliberately and do not occur randomly. Because of this, there is no 

way to determine the probability that a particular property or asset will experience a 

terrorism-related loss. Part of the difficulty in assessing terrorism risk stems from the 

fact that, because of response measures taken in the wake of an attack, the next event 

is unlikely to follow a similar pattern. Unlike criminal acts such as robbery where the 

goals are predictably targeted, the goal of maximizing death and destruction can be 

accomplished in countless ways, anywhere, and at any time. 

All of the above factors lead us to conclude that it is unlikely that insurers will ever have 

the necessary tools to predict when, where, and how terrorist events will occur. 

Immediately following 9/11, there was hope that, given time, more accurate modeling 

could be developed and utilized to help insurers manage this type of risk. And indeed, 

much has been done to develop tools to manage aggregate loss exposures that are 

based on a predetermined event of a certain magnitude in a given area. However, 

models that attempt to predict the frequency or severity of an attack are not considered 

reliable. Given that modeling is typically effective only in determining the likelihood that 

particular events will occur and the fact that the data inputs will always be extremely 

limited, improved modeling will not solve the fundamental challenges of offering 

terrorism coverage. 

Similarly, the nature of terrorism risk does not allow insurers and risk managers to 

create effective mechanisms to mitigate the risk of loss due to terrorism. Unlike in other 

types of coverage where a policyholder might get a premium discount for storm-proofing 

her home, it is not at all clear how a commercial property-owner could reduce the 

probability of experiencing a terrorism-related loss. With the interdependencies 

mentioned above the possible scenarios are endless - a company might spend a 

significant sum of money to secure a facility while a neighboring company does not and 

is then used as a staging area for an attack. Additionally, the presence of human 

volition drastically reduces the value of preventative measures, given that a terrorist 

usually will plan an attack with those measures in mind. Again, terrorism is not 

comparable to a random event - a hurricane cannot study wind-damage mitigation 

efforts and then think up new ways to get around them. The only truly effective 

mitigation tools - if there are any -- reside within the government's national security 

apparatus, and as noted above, these are understandably kept secret. 

No amount of innovation in catastrophe modeling and risk mitigation will change the 

factors that fundamentally distinguish catastrophic events randomly caused by natural 

forces, from catastrophic events caused by the calculated machinations of human 
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Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11, 2012 

Page 5 

beings. In any discussion about terrorism risk or the TRIA program, we must be clear 

about the unique nature of the terrorist threat. 

The difficulty facing risk managers who wish to purchase private insurance coverage for 

terrorism-related events can be seen in the recent experience of the city of Chicago. To 

manage the liability risk associated with hosting a two-day NATO summit in mid-May, 

the city sought, and was able to easily acquire from domestic insurers, liability coverage 

for slip-and-fall accidents, automobile damage, and medical coverage. But city officials 

also feared that this important international gathering could be the target of a terrorist 

attack. They therefore attempted to purchase additional coverage for any liability the 

city might incur specifically related to terrorism. Insurance brokers acting on the city's 

behalf were unable to find a single standard commercial insurer that was willing to 

provide the needed coverage at any price. The city was finally able to purchase a policy 

from Lloyd's of London, which is known for insuring unusual risks. According to a report 

in the Chicago Tribune, the policy, which provided $100 million in terrorism liability 

coverage for just two days, cost the city $1.3 million. That premium represented more 

than 10 percent of the total cost of hosting the NATO surnmit. 

It should be noted that the $100 million liability limit under the city's Lloyd's policy is 

equal to event "trigger" under TRIA, so that in effect, the TRIA backstop for losses in 

excess of that amount was irrelevant to this transaction. Yet the city's $100 million 

policy limit would not even begin to cover the potential property losses from a largescale terrorist attack launched in downtown Chicago. Based on Chicago's NATO 

surnmit experience, it seems reasonable to conclude that in the absence of TRIA, few if 

any private insurers would be willing to provide the rnuch larger amount of property 

coverage that would be needed to insure a large office building or hotel. Indeed, 

Chicago's experience suggests that, if anything, Congress should consider lowering the 

event trigger when it begins the work of extending the TRIA program beyond its 2014 

expiration date. If the current trigger had been set at, say, $50 million, Chicago would 

probably have found numerous domestic insurers willing to offer the coverage it 

needed, and at a much lower premium. 

The story of Chicago's search for terrorism liability insurance is noteworthy because it 

forcefully illustrates that the real beneficiaries of TRIA are not insurance companies, but 

the many entities that need the financial protection from terrorism that can only be 

provided by terrorism insurance that is both available and affordable. These 

beneficiaries consist not only of commercial enterprises, but include America's cities 

and other government entities as well. 

The TRIA Program 

The 9/11 attacks caused roughly $40 billion in insured losses. Soon after the events, 

reinsurers and insurers moved to exclude terrorism coverage from their new and 

renewing policies. There were certain at-risk areas of the country that saw extremely 

hard markets in property and workers compensation coverage. In states like New York 
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Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11, 2012 

Page 6 

which prohibited carriers from excluding coverage for terrorism and with reinsurance 

companies universally excluding terrorist acts in property/casualty treaties, most 

carriers' only alternative was to offer less coverage or not write the business at all. 

The few companies willing to provide coverage increased their prices because of the 

Significant terrorism exposure. However, many of those companies began to cut back 

when concentrations of values and employees became too large. Again using New 

York as an example, the lack of adequate insurance capacity and significant increases 

in pricing of commercial multi-peril business resulted in the postponement of many 

construction projects. It was estimated at the time to have delayed or cancelled $15.52 

billion in real estate transactions and cost 300,000 construction workers their jobs. 3 

Given this economic uncertainty and the insurance industry's uncertainty about its ability 

to properly manage terrorism risk, Congress passed and President George W. Bush 

signed into law the Terrorism Risk Insurance Act of 2002. The bill established TRIA as 

a temporary federal government program that created a private-public partnership to 

share in the compensation for privately insured commercial property/casualty losses 

resulting from acts of terrorism. The program was designed to guard against further 

economic dislocation and to allow the insurance industry a transition period to develop 

the capacity to adequately provide terrorism insurance without government involvement. 

At the time, some analysts thought that it might be possible to develop a truly private 

market for terrorism given time to build capacity and to study the risk. However, it was 

soon realized - for the reasons discussed above - that without the program American 

businesses would be hard pressed to find or afford the coverage they needed and so 

TRIA was extended for two years in 2005 and again in 2007 for seven years. Both 

extensions included modifications that required a greater share of the potential losses 

be borne by the private sector. 

Essentially, the program is a federal backstop for commercial property/casualty 

insurance that acts as reinsurance in the event of a certified terrorist event A private 

insurance company pays for losses up to a certain level and then the government 

covers the majority of the losses up to a ceiling of $100 billion, after which neither the 

government nor the company is required to pay further. The private sector insurers' 

share of the losses is made up of several components: 

1. A deductible currently 20% of the prior year's direct earned premium on all 

lines of business covered in the TRIA program - up from 7% when the 

program first began. 

2. Share of the losses above the deductible the insurer still pays 15% of all 

losses above the deductible up from 10%. 

3. Industry aggregate retention - Federal government is required to recoup any 

losses from private industry up to $27.5 billion - up from $10 billion. 

, Real Estate Roundtable, "Survey Confirms Economic Toll of Terrorism Insurance Gap: Over $1 0 Billion of Real 

Estate Projects Affected Across U.S.," September 4, 2002. 

3 President George W. Bush, "President Reiterates Need for Terrorism Insurance Agreement," October 3, 2002. 
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Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11,2012 

Page 7 

Further, an event must hit a certain "trigger level" in order for there to be any Federal 

involvement. The trigger is currently set at $100 million which is up from $5 million 

when the program was first started. Insurers are required to offer coverage for acts of 

terrorism on the same terms and conditions as other coverages, although this does not 

include coverage for NBCR attacks. 

With the passage of TRIA, the fear that a worst-case terrorist event could render 

companies insolvent was somewhat reduced, making it possible these companies to 

continue to do business in higher-risk, urban areas. TRIA placed a ceiling on individual 

company terrorism losses, which permitted them to quantify their terrorism exposure 

and find a way to write the coverage. 

TRIA Is Needed to Increase Private Industry Participation in Terrorism 

Insurance Market 

In its 2010 report, the President's Working Group on Financial Markets concluded that 

the availability and affordability of terrorism risk insurance has improved over the last 

several years. The marketplace has increased capacity and prices have in general 

declined. However, the report also concluded that only about 60 percent of commercial 

insurance policyholders are buying terrorism coverage, a take-up rate that has 

remained flat for six years. Also, despite the fact that marketplace capacity has 

increased in general, it has remained very constrained in certain markets where 

policyholders have difficulty obtaining sufficient coverage. 

Clearly private industry has at least a limited capacity to offer coverage for terrorism. 

However, we must recognize that the entire marketplace as it stands today has grown 

up in the presence of the TRIA program. We cannot hastily conclude that because the 

private sector can handle a portion of the risk, it could figure out a way to handle all of it. 

For one, capital is the key to availability, and insurance industry capital remains 

insufficient to absorb the cost of a large-scale terrorist attack. Further, capacity could 

disappear altogether for subsequent attacks. Simply put, the private sector's capacity is 

dwarfed for most modeled terrorism events and cannot be exposed beyond a 

reasonable level without failing in its primary purpose - supporting the economy by 

protecting against non-terrorism related losses and events. For example, in the case of 

workers compensation, in 2010 Marsh & McLennan have cited industry-wide capacity at 

only $30 billion, while the "worst case scenario" single loss is $90 billion. 

Additional capital is needed in order to address this problem effectively. The private 

market is unable to absorb terrorism risk without a federal component. Even without a 

federal component, the government would bear the ultimate risk of uninsured losses as 

businesses and citizens turn to the federal government for assistance - the presence of 

a well-managed partnership program between the government and private insurers 

serves to ultimately reduce, not increase, federal liability for terrorism losses. The 
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Comments of the National Association of Mutual Insurance Companies 

TRIA at Ten Years 

September 11, 2012 

Page 8 

purpose of the partnership is not to protect insurers, but to make sure that the economy 

can recover in as orderly a fashion as possible from a terrorist event. 

We would add that an effective public-private partnership also depends on participation 

by insurers of all sizes and structures. Any discussion of increasing private sector 

involvement in the TRIA program must be had with an eye toward ensuring participation 

by smaller and mid-sized insurers. Event trigger and deductible levels are key to the 

ability of these insurers to continue to provide coverage. Large increases in the trigger, 

company deductibles, or insurer co-payments could drive medium and small insurers 

out the market, reducing competition and further constraining availability of terrorism 

risk coverage. There have been no changes in the market that would change this 

calculus. 

Difficulties in measuring risk, raising sufficient capital, and the limits on ability to 

constrain risk exposure, all point to the continuing need for a public-private partnership. 

Given that we cannot predict the severity or frequency of terrorist events, having a cap 

on what a company knows that it will have to pay allows it to at least begin to manage 

its risk exposures. Without a program, we would see a drastic reduction in both the 

availability and affordability of terrorism risk insurance like we did in the aftermath of 

9/11. 

Conclusion 

It is much easier to argue the feasibility of a fully private market for terrorism insurance 

when no losses have been incurred since TRIA was enacted. Suffice it to say, the 

memory of the market immediately following 9/11 ought to give pause to anyone 

pushing to end the private/public partnership that has worked to provide commercial 

policyholders with the coverage they need. The result when the next terrorist attack 

occurs will be more - not less federal exposure. In order to encourage private sector 

involvement in the terrorism insurance marketplace - and thereby protect and promote 

our nation's finances, security, and economic strength - we must maintain a long-term 

private/public partnership for terrorism risk insurance. 
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TRIA at Ten Years: 

The Future of the Terrorism Risk 

Insurance Program 

House Financial Services Subcommittee on 

Insurance, Housing and Community 

Opportunity 

Testimony of 

Robert P. Hartwig, Ph.D., CPCU 

President & Economist 

Insurance Information Institute 

New York, NY 

September 11, 2012 

Washington, DC 
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Thank you, Representative Biggert, Ranking Member Gutierrez and mcmbers of the 

Committec. 

Good morning. My name is Robert Hartwig and I am President and Economist for the 

Insurance Information Institute, an international property/casualty insurance trade 

association based in New York City. I I am also a Chartered Property Casualty 

Underwriter (CPCU) and have workcd on a wide variety of insurance issues during my 

19 years in the property/casualty insurance and reinsurance industries, including many 

related to the industry'S exposure to catastrophic loss, including acts or terrorism. The 

Institute's members account for nearly 70 percent of all property/casualty insurance 

premiums written in the United States. Its primary mission is to improve understanding 

of the insurance industry and the key role it plays in the global economy. 

I have been asked by the Committee to provide testimony on the status of the market for 

terrorism insurance in the United States. For the purposes of my testimony, I will divide 

my testimony into the following major sections: 

(i) Review of the impacts of the September 11, 2001 attacks on the insurance 

industry; 

(ii) A brief summary of changes in the terrorism threat landscape since the enact 

of the original TRIA legislation in 2002; 

(iii) A discussion of why most terrorism risk remains fundamentally uninsurable in 

the private insurance and reinsurance markets; 

(iv) The impact of the Terrorism Risk Insurance Program in maintaining market 

stability; 

(v) Obstacles to insuring and reinsuring losses arising from acts of terrorism; 

(vi) The success of the Terrorism Risk Insurance Program and the current state of 

the market for terrorism coverage, and; 

(vii) Possible options for expanding private sector terrorism coverage. 

1 Contact infonnation: Tel: (212) 346-5520; Email: bobh@iii.org. 

2 
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Summary of Impacts on the September 11, 2001 Terrorist Attack on Insurers and 

Insurance Markets 

The terrorist attacks of September 11, 200 I, produced insured losses larger than any 

natural or man-made event in history. Claims paid by insurers to their policyholders 

eventually totaled some $32.5 billion dollars--$40.0 billion in 20 II dollars (Exhibit 1) 

and to this day remain the second most costly insurance event in United States history 

(Exhibit 2). 2 The losses sustained by the insurance industry that fateful day were 

unprecedented in virtually every respect, producing catastrophic losses not only in 

property coverages, but also for the first time in life insurance, disability and workers 

compensation lines. Aviation insurers also suffered their worst-ever losses stemming 

from a single event. The sheer enormity of the loss--coming from an entirely unforeseen 

peril for which no premium had been collected-combined with the possibility of future 

attacks and uncertainty arising from the United States' rapid military response to the 

threat, produced financial shockwaves that shook insurance markets worldwide and 

provoked an extraordinarily swift and severe underwriting and pricing reaction by 

insurers and reinsurers. 

Terrorism Exclusions and Price Shocks in the Wake o/the 9/11 Attack 

The shock of the September 11 attack led insurers and reinsurers to exclude coverage 

arising from acts of terrorism from virtually all commercial property and liability 

policies. Before 9111 terrorism exclusions were virtually nonexistent in commercial 

insurance contracts sold in the United States. The economic consequences of such 

exclusions were quick to manifest themselves. Major commercial property construction 

projects around the country, unable to secure coverage against the now very real risk of 

terrorist attack, were in jeopardy of being tabled, hurting job growth at a time of rapidly 

rising unemployment and when much of the country was in recession. Banks, in turn, 

threatened to choke off lending to businesses if borrowers failed to secure coverage 

against terrorist acts. The problem was not confined to high profile "trophy" properties 

located in major metropolitan areas. Shopping malls, office complexes, factories, sports 

2 The loss totals do not include the March 20 I 0 settlement of up to $657.5 million announced by New York 

City officials and plaintiffs' lawyers to compensate about 10,000 workers whose health was damaged 

during the rescue and cleanup at the World Trade Center. 

3 
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stadiums, hotels, utilities, airports, port facilities and other critical infrastructure all across 

the United States were impacted. 

Even as exclusions proliferated, prices soared. The average rate increase for a business 

seeking to renew coverage in the fourth quarter of 2001 was nearly 30 percent. 

Reinsurance prices rose sharply as well. Very little private sector coverage for terrorism 

entered the market as a general consensus emerged that terrorism risk is fundamentally 

not insurable. Insurers, who are regulated by the states, therefore took the unprecedented 

step of seeking financial protection from the federal government in the event of future 

attacks. Only when the Terrorism Risk Insurance Act (TRIA) was enacted by Congress 

in November 2002-fourteen months after the attack--did stability finally return to the 

market and coverage for terrorist attacks resume. 

Changes in the Terrorism Threat Landscape and Impacts on Terrorism Insurance 

Markets 

In the immediate aftermath of 9/11 the ability of commercial policyholders to purchase 

adequate limits of terrorism coverage at affordable prices was severely constrained. 

Commercial property owners and businesses were faced with suhstantially reduced 

protection for terrorism-related risks, in addition to higher property/casualty rates overall. 

As a result, many were forced to go without coverage or only partly insure their assets. 

Today, reports of property owners having problems securing terrorism coverage due to a 

lack of capacity in the market are no longer making headline news. Indeed, it is therefore 

tempting to conclude that in the ten years since TRIA was first implemented that 

insurance markets have fully adjusted to the post-9/lJ environment and that insurers and 

reinsurers have concluded that terrorism is a fully insurance risk. 

The reality is quite different. The fact of the matter is that terrorism risk today is almost 

every bit as uninsurable as it was a decade ago. Recent major successes in the war on 

terror, including the killing of al-Qaida leader Osama bin Laden in 2011, do not alter this 

conclusion. This is because the current stability in the terrorism insurance market in the 

United States is due almost entirely to two factors: 

4 
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(i) There has been no successful terrorist attack on U.S. soil since 2001, and 

(ii) TRIA remains in place. 

The influence of both of these factors is discussed in the sections that follow. 

Absence of Successful Attacks Does Not Imply Terrorism Risk is Inconsequential 

The fact that there has been no successful terrorist attack in the United States in eleven 

years is a remarkable achievement. It is a testimony to the hard work and dedication of 

this nation's counterterrorism agencies and the bravery of the men and women in unifonn 

who fought and continue to fight battles abroad to keep us safe here at home. 

Unfortunately, the threat from terrorist attack in the United States is both real and 

substantial and will remain as such for the foreseeable future. Indeed, the U.S. State 

Department warned in a recent report that despite the death of bin Laden and other key 

al-Qaida figures, the terrorist network's affiliates and adherents remain adaptable and 

resilient, and constitute "an enduring and serious threat to our national security.,,3 

Table I below shows that interest in attacking targets within the United States remains 

undiminished. Indeed, it is clear from Table 1 that in addition to an ongoing threat from 

foreign terrorist networks, the United States also faces homegrown (domestic) terrorist 

threats from radical individuals, who may be inspired by al-Qaida and others, but may 

have little or no actual connection to militant groups. 

Catastrophe modeler Risk Management Solutions (RMS) points to an increase in the 

number of homegrown plots in the U.S. in recent years.4 Many of these have been 

thwarted, such as the attempt by Najibullah Zazi to bomb the New York subway system 

and Mohamed Osman Mohamud who targeted a Portland, Oregon, Christmas tree 

lighting ceremony. Also among the more notable unsuccessful attacks was a 2010 

attempted car bomb attack in New York City's Times Square. Other thwarted attacks 

3 C ountly Reports on Terrorism 20 J J, U.S. Department of State, July 31, 2012. 

'IUvlS Terrorism Risk Briefing, July 2012. 

5 
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against passenger and cargo aircraft, including the Christmas Day 2009 attempt to blowup ajet over Detroit. are indicative of an ongoing risk to aviation infrastructure. 

Table 1 

RECENT TERRORIST ATTACK ATTEMPTS IN THE U,S. 

Sourc", federal Bureau of In_ligation (FBI): various news reports: Inswdnce Informallon Inslitute. 

Table I also demonstrates that the threat of terrorism is not confined to the country's 

largest cities such as New York and Washington. Recent attell1lpt(:d attacks havc 

occurred in medium and small areas Portland, Oregon, in 

Lubhock, Texas and Springfield. minois. 

6 
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Another evolving threat is cyber-terrorism. Recent high profile attacks, such as the 

sabotaging of Iran's nuclear program via the Stuxnet computer worm and malicious 

infiltration attempts here in the U.S. by foreign entities, underscore the growing threat to 

both national security and the economy. 

All these factors suggest that terrorism risk will be a constant and evolving threat for the 

foreseeable future. 

The Federal Role: Impact of TRIA in Maintaining Insurance Market Stability 

Without question, TRIA and its successors are the principal reason for the continued 

stability in the insurance and reinsurance market for terrorism insurance today. As 

discussed previously, TRIA is credited with restoring terrorism coverage in commercial 

insurance policies upon its enactment in late 2002. 

It is worth noting that in 2004, more than a year before the original Act's expiration at 

year-end 2005, terrorism exclusions once again emerged for policies with exposure 

extending into 2006. This was an unmistakable indication that insurance and reinsurance 

markets felt that terrorism risk, at least for larger scale attacks, remained uninsurable in 

the private sector. After Congress agreed to extend the program for another two years 

under the Terrorism Risk Insurance Extension Act of 2005 (TRIEA), terrorism coverage 

remained available and affordable in the market. However, with TRIEA's looming 

expiration in year-end 2006, terrorism exclusions once again appeared in the market, 

signaling the market's assessment that terrorism risk remained fundamentally 

uninsurable. These exclusions largely disappeared following passage of a 7-year 

extension of the program under the Terrorism Risk Insurance Program Reauthorization 

Act of 2007 (TRIPRA). With TRIPRA's expiration now a little more than two years 

away (year-end 2014), it is virtually certain that terrorism exclusions will reappear in the 

market in 2013. Indeed, insurance broker Aon estimates that at least 80 percent of the 

commercial property market will be impacted by these exclusions and other restrictions. 

7 
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Studies by various organizations, including the University of Pennsylvania's Wharton 

School Risk Center, the RAND Corporation and the Organization for Economic Cooperation and Development (OECD), have supported the idea of a substantive federal 

role in terrorism insurance. In particular, the Wharton School found that TRIA has had a 

positive effect on availability of terrorism coverage and also has significantly contributed 

to reducing insurance premiums.s The OECD notes, however, that the financial (capital) 

markets have thus far shown little appetite for terrorism risk. 

Evidence from Other Countries: Terrorism Risk Insurance Programs Abroad 

Additional evidence that terrorism risk is fundamentally uninsurable comes from abroad. 

A number of countries have established their own terrorism risk insurance programs and 

these have operated successfully, often for many years. Australia, Austria, Belgium, 

France, Germany, the Netherlands, Spain, Switzerland and the United Kingdom have all 

created programs to cover terrorism in the event of an attack on their own soil. 6 

This begs the question as to why--eleven years after the 9/11 attack and a decade after 

the initial terrorism risk insurance program legislation was enacted-terrorism risk, 

particularly for large-scale attacks, is still viewed as uninsurable? The answer is 

surprisingly simple and explains why even the absence of a successful major attack on 

U.S. soil since 2001 does not alter this assessment. 

Obstacles to Insuring Losses Arising from Acts of Terrorism 

Simply put, acts of terror violate all four of the basic requirements traditionally associated 

with insurability of a risk. In situations where these requirements cannot be met, it is 

diflicult or impossible to ascertain the premium to be charged and/or diflicult or 

impossible to achieve the necessary spread of risk to avoid excessive exposure to 

5 Evaluating the Effectiveness o/Terrorism Risk Financing Solutions, Howard C. Kunreuther and Erwann 

O. Michel-Kerjan, September 2007, National Bureau of Economic Research. 

6 In 1993, the British government formed a mutual reinsurance pool for terrorist coverage following acts of 

terrorism by the Irish Republican Army. Insurance companies pay premiums at rates set by the pool. The 

primary insurer pays the entire claim for terrorist damage but is reimbursed by the pool for losses in excess 

of a certain amount per event and per year based on its share of the total market. Following 9111. coverage 

was extended to cover all risks, except war, including nuclear and biological contamination, aircraft impact 

and flooding, if caused by terrorist attacks. The British government acts as the reinsurer of last resort, 

guaranteeing payments above the industry retention. 

8 
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catastrophic loss, thereby threatening the insurer's solvency. Consequently, such a risk 

would generally be deemed to be commercially not viable (i.e., insurable) in whole or in 

part. 

The four basic requircments for insurability of a risk are detailed below (as well in 

Exhibits 3A and 3B), with a description of how terrorism risk violates each requirement: 

1. Estimable Frequency: Insurers require a large number of observations to 

develop predictive, statistically sound rate-making models (an actuarial concept 

known as "credibility"). For example, insurers handle millions of auto, home, 

workers compensation and business property claims every year, providing them 

with vast amounts of data from which they can reliably estimate the frequency of 

such claims. For major catastrophic risks such as hurricanes and earthquakes that 

occur less frequently insurers still maintain databases with hundreds or even 

thousands of these events, supplemented by sophisticated catastrophe models, that 

help provide statistically reliable estimates of frequency. Terrorism risk is clearly 

different in this respect. 

Obstacle: There are very few data points on which to base frequency estimates 

for acts of terror in the United States, thus estimates lack any true actuarial 

credibility. The opinions of experts on the likelihood of terrorist attacks, which 

might be viewed by some as substitutes for actuarially credible data, are also 

highly subjective. At any given time, there is a wide range of viewpoints among 

national security experts on the likelihood, location and/or attack modality. 

Moreover, insurers have no access to data used internally by counterterrorism 

agencies. Given the paucity of historical data and diversity and shifting nature of 

expert opinions, catastrophe models used to estimate terrorism risk are relatively 

undeveloped compared to those used to assess natural hazard risks. The bottom 

line is that estimating the frequency of terror attacks with any degree of accuracy 

(credibility) is extraordinarily challenging, if not impossible in many 

circumstances. 

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2. Estimable Severity: Insurability requires that the maximum possible/probable 

loss be estimable in order to calculate the insurer's exposure (in dollar terms) and 

minimize its "probability of ruin." No insurer can expose itself to losses of a 

magnitude that present an unreasonable risk of insolvency. 

Obstacle: Potential losses arising from terrorist attacks are virtually unbounded. 

In this sense terrorism risk is akin to war risk, which is almost universally 

excluded from commercial insurance policies worldwide. Consequently, losses 

arising from acts of terror can easily exceed an insurer's claims paying capital 

resources. Workers compensation coverage, which does not permit any 

exclusions or limitation if injuries or deaths arise from terrorist acts, can lead to 

extreme losses that on their own could potentially bankrupt an insurer under some 

attack scenarios. In addition, when it comes to estimating losses from potential 

terrorist attacks there also appears to be significant variability in outcomes (Le., 

disagreement on estimated severity impacts), underscoring the degree of 

uncertainty associated with potential terrorist attacks. 

3. Diversifiable Risk: Insurability requires that the losses can be spread across a 

large number of risks. This is an application of the "Law of Large Numbers" and 

helps makes losses more manageable and less volatile. Failure to achieve an 

adequate spread of risk increases the risk of insolvency in the same way that an 

undiversified portfolio of stocks (or any asset) is riskier than a well-diversified 

portfolio. 

Obstacle: Terrorism attacks are likely to be highly concentrated geographically 

(e.g., World Trade Center site), concentrated within an industry (e.g., power 

plants, airports) or within a certain span of time (e.g., coordinated attack). 

4. Random Loss DistributionlFortuity: Insurability requires that the probability of 

a loss occurring be random or fortuitous. This implies that individual events must 

be unpredictable in terms of timing, location and magnitude. 

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Obstacle: Terrorism attacks are planned, coordinated and deliberate acts of 

destruction. Again, they are likely to be highly concentrated geographically (e.g., 

World Trade Center site) or concentrated within an industry (e.g., power plants). 

Terrorists engage in "dynamic target shifting" whereby terrorists shift from 

"hardened targets" to "soft targets" which implies that losses are not random or 

fortuitous in nature. 

The Success of the Terrorism Risk Insurance Program 

Thc Terrorism Risk Insurance Program, by all objective measures, is a success. The 

program not only succeeded in restoring stability to the country's vital insurance and 

reinsurance markets in the wake of the unprecedented market dislocations associated with 

the September II, 200 I terrorist attack, but it continues to deliver substantive, direct 

benefits to businesses, workers, consumers and the economy overall-all at little or no 

cost to taxpayers. 

Availability and Affordability 

One measure of success is the "take-up rate" (i.e., share or businesses purchasing 

coverage) of insurance coverage among. Insurance brokers Marsh and Aon both estimate 

that take-up rates for terrorism coverage are in the 60% to 65% range over the past 

several years (ranging as high as 80% in some industries), up from approximately 27% in 

2003-the first full year under TRIA. This suggests that coverage is widely available, is 

affordable and is routinely purchased in the market. It is important to note, however, that 

the take-up rate for workers compensation coverage is effectively 100%. This is because 

workers compensation is a compulsory (all employers must purchase coverage) combined 

with the fact that states do not allow exclusions for terrorism losses in workers 

compensation programs. 

Affordable pricing is another measure of the program's success. While pricing varies 

across industries, reflecting differences in risk, the average commercial terrorism 

premium is equivalent to approximately 0.5% of a company's total insured value, 

according to brokers. Prices can also be stated as a share of the cost of the insured's total 

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insurance program, in which case annual premiums account for approximately 5% to 6% 

oftolal costs, again varying by industry. 

Capacity 

One primary goal of TRIA and it successors has been to encourage private sector 

capacity to enter (and remain) in the marketplace so that an increasing share of losses 

from future terrorist attacks could be borne in the private sector. 

Evidence of the program's success in this respect has been documented by a number of 

governmenl entities and other organizations. In its latest report on terrorism risk 

insurance market conditions, the President's Working Group on Financial Markets noted 

that the program provides an incentive to property/casualty insurers and reinsurers who 

might not otherwise provide terrorism insurance at current capacity levels or prices. 7 The 

u.s. Government Accountability Office (GAO), commenting on the availability and 

affordability of terrorism coverage in large metropolitan areas, reported that with a few 

exceptions, commercial property terrorism insurance appears to be available nationwide 

at rates policyholders believe is reasonable, suggesting ample capacity. 8 

Note that this statement is very different from an assessment that such capacity would 

exist in the absence of a terrorism backstop. Again, it is important to emphasize that the 

majority of the coverage that exists in the market today exists because of the continued 

existence of the Terrorism Risk Insurance Program. As noted earlier, insurance broker 

Aon estimates that 70% to 80% of the market would encounter terrorism exclusions if the 

program were discontinued. Thus capacity in the market is largely contingent upon the 

continuation of the program. 

The so-called market for "standalone" terrorism coverage also provides evidence that in 

the absence of a Terrorism Risk Insurance Program, coverage capacity (supply) will fall 

well short of demand. Insurance brokers Marsh and Aon both report that the "theoretical" 

7 Market Conditionsfor Terrorism Risk Insurance 2010, Report of the President's Working Group on 

Financial Markets. 

, Initial Results on Availability of Terrorism Insurance in Specific Geographic Markets, GAO-08-9J9R, 

July 2008. 

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maxImum amount of coverage available per risk in the "standalone" market is 

approximately $2 billion with larger sums available under some circumstances. This is in 

contrast with limits of just $150 million or less available in early 2002 before TRIA was 

enacted. At the time, such coverage also was subject to high deductibles equal to 7 to 10 

percent of the stated value of the coverage. 9 While the sums available in the market 

today may seem large, especially in comparison to 2002, there are many risks for which 

the coverage is inadequate. Consider, for example, that back in 2001 (prior to the 

introduction of terrorism exclusions) the twin towers at the World Trade Center site were 

insured for $3.55 billion-more than what is generally available in the market today. 

Multibillion dollars risks are now quite common in the United States, from office and 

shopping complexes to large manufacturing facilities, sports stadiums, transportation 

hubs and energy infrastructure not to mention infrastructure such as bridges, tunnels and 

dams. 

Reinsurance capacity, which was extremely limited in the aftermath of 9111, is up as 

well. A 2011 report from reinsurance broker Guy Carpenter noted that there is between 

$6 billion and $8 billion of terrorism reinsurance capacity available in the U.S. market, 

but cautions that the market remains vulnerable to a major terrorism loss. This caution is 

appropriate. Indeed, many modeled loss scenarios result in insured losses in the tens or 

even hundreds of billions of dollars-some even exceeding the claims paying capital of 

the entire industry. As noted previously, much of the capacity in the market today is 

predicated on the existence of the Terrorism Risk Insurance Program. In the absence of 

the program, reinsurance capacity would be greatly reduced. 

Factors that Could Influence Greater Private Sector Participation in the Terrorism 

Insurance Marketplace 

As discussed previously, the primary factor influencing private sector participation in the 

market for terrorism insurance, apart from the absence of a successful attack on U.S. soil 

since 2001, is the continued existence of the Terrorism Risk Insurance Program. 

9 September 11, 2001: One Hundred Minutes of Terror that Changed the Global Insurance Industry 

Forever, Robert P. Hartwig, John Liner Review, January 2002. 

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The program's success to date has stabilized insurance and reinsurance markets, 

enhanced availability and affordability of coverage and encouraged private sector 

capacity to enter the market, thereby helping businesses invest, grow and create jobs. 

What follows are several options, based on international experience and U.S. experience 

to date, that could potentially further increase private sector participation in the markets 

for terrorism insurance and reinsurance. 

Long-Term Extension or Permanence ola Terrorism Risk Insurance Program 

The positive experience of other countries, some of which have had programs in place 

much longer than the United States. combined with favorable recent U.S. experience 

under the current 7-year extension of the program under TRIPRA, suggests that a longterm extension--or a decision to make the program permanent--could be an effective 

means to achieve increased private sector participation in the program. If insurers and 

reinsurers are assured that the program will be in place for the indefinite future, 

uncertainty is reduced. From an economic perspective, the reduction in uncertainty 

would likely be conducive for investment under the program. 

Pooling Proposal 

As Congress begins to explore alternatives to enhance private sector participation in the 

market for terrorism risk, it is instructive to recall that insurers began their effort to create 

a fcderal "backstop" very shortly after the September 11 attacks. By late September 

2001, insurers had already drafted an outline describing their plan for a federal backstop 

and legislation was drafted in early October. Dubbed the "Insurance Stabilization and 

Availability Act of 2001," the bill proposed the establishment of a privately run and 

financed terrorism reinsurance pool, organized as a federally-chartered mutual insurance 

company, that would reinsure the terrorism risks of U.S. licensed insurers and reinsurers 

and purchase reinsurance from the federal government in exchange for a premium. The 

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organizational structure of the pool would have been similar to that of Pool Reinsurance 

Company Ltd. (often referred to as "Pool Re"), a mutual insurer established in Great 

Britain in 1993 after several bombings attributed to the Irish Republican Army (IRA) 

made insurers reluctant to offer coverage for terrorist acts (Pool Re now provides 

coverage against a broad range of terrorism risks). While no doubt adjustments would 

need to be made given the passage of more than a decade since the industry's initial 

pooling proposal, the concept ofa pool has worked succcssfully in the U.K. for 20 years. 

Summary 

In the eleven years since the tragedy of the September II, 2001 terrorist attack on the 

United States, much has been learned about the nature of terrorism risk and its 

insurability. There is no question that the Terrorism Risk Insurance Act and its 

successors brought much needed stability to the market in the aftermath of the most 

costly insurance loss in global history. In the decade since, private sector insurers, 

reinsurers and the federal government have successfully partnered with one another in 

order to maintain that stability, providing tangible benefits for businesses large and 

small-and their employees-all across America. 

The looming expiration of the TRIPRA at the end of 2014 brings to a head the question 

of whether terrorism risk is now, or ever will be, a risk that can be managed entirely 

within the private sector. The evidence, both in the United States and from similar 

programs abroad, is that market stability in terms of both pricing and availability of 

terrorism coverage, as well as the ability to maintain adequate and expanding levels of 

capacity over time, are contingent on the continued existence of the Terrorism Risk 

Insurance Program. 

Thank you for you for the opportunity to testify before the Committee today. I would be 

happy to respond to any questions you may have. 

15 
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Aviation 

Liability 

$4.3(11%) 

Event 

$1.2(3%) Aviation Hull 

Workers 

COOIP 

$0.6 (2%) $2.2 (6%) 

Biz 

$13.5 (33%) 

Total Insured Losses Estimate: $40.08** 
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"

ndependent 

Insurance 

Agent® 

STATEMENT OF JON JENSEN 

ON BEHALF OF THE 

INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA 

SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY 

OPPORTUNITY 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

UNITED STATES HOUSE OF REPRESENTATIVES 

SEPTEMBER 11, 2012 

Good morning Chairman Biggert, Ranking Member Gutierrez, and members of the 

Subcommittee. My name is Jon Jensen and I thank you for inviting me to testify today on behalf 

of the Independent Insurance Agents & Brokers of America (IIABA or the Big "I") in order to 

provide our association's perspective on the topic of terrorism insurance. I began my insurance 

career over 35 years ago and now serve as President of Correll Insurance Group, a South 

Carolina-based insurance agency with 12 offices and 132 associates. In addition, I have served as 

Chairman of the Government Affairs Committee for the Big "I" since 20 II and also represent 

my home state on IIABA's Board of Directors. 

IIABA is the nation's oldest and largest trade association of independent insurance agents and 

brokers, representing a network of more than a quarter of a million agents, brokers, and 

employees nationwide. Big "I" member small businesses possess the unique ability to offer 

consumers a wide array of insurance products - property, casualty, health and life - from many 
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different insurance companies. Independent agents scll nearly 80% of all commercial lines 

policies in the country, and our expertise and experience with businesses and the commercial 

marketplace affords our membership a one-of-a-kind perspective with which to speak to the 

topic of terrorism insurance. 

The scheduled expiration of the Terrorism Risk Insurance Program Reauthorization Act 

(TRIPRA) at the end of2014 is quickly approaching, and I applaud the Committee for 

scheduling this hearing now and for proactively initiating its important review of the Terrorism 

Risk Insurance Program (TRIP). Although the threat of unprovoked, unpredictable, and possibly 

devastating attacks continues to loom large and creates complex and unique challenges for 

insurance providers, the existence of the TRIP has successfully helped preserve a stable and 

viable market for terrorism insurance. Continuing this stability and maintaining this narrow and 

limited public-private partnership is vitally important, and the Big "I" looks forward to working 

with members of the Committee to develop long-term solutions to the unique challenges created 

by the continued threat of terrorist attacks. 

The Terrorism Risk Insnrance Program 

The enactment of the Terrorism Risk Insurance Act (TRIA) in November 2002 and the 

subsequent establishment of TRIP were key elements of our government's response to the 

heinous, unprecedented, and unforgettable attacks of September 11, 2001. 

America had never endured a terrorist attack of such magnitude, and the attacks quickly 

produced severe disruptions in the insurance marketplace and in our national economy. Insurers 

were forced to confront the reality that large terrorism events could indeed occur and that they 

posed very unique risks. The underwriting and pricing of these exposures proved nearly 

impossible due to the inability of carriers to assess and measure the likelihood and magnitude of 

future terrorism events, and many insurers simply stopped providing terrorism coverage to 

commercial policyholders as a result. The inability of businesses to secure adequate terrorism 

coverage also had significant and negative repercussions across broad sectors of the national 

economy. The commercial real estate market, for example, was acutely affected as insurance for 

new construction projects could not be obtained and therefore funding from lenders could not be 

secured. 

The original enactment of TRIA and its extension in 2005 and again in 2007 successfully 

stabilized the insurance marketplace and helped eliminate the market disruptions and 

uncertainties that followed the September 11th attacks. Congress wisely structured the program 

so as to involve the private sector as much as possible and created a successful and limited 

public-private partnership that has operated at virtually no cost to taxpayers. The private sector 

remains solely responsible for terrorism-related losses related to personal insurance (auto and 

homeowners), group life, reinsurance, and numerous other lines of coverage, and less than onehalf of property-casualty premiums are written in lines covered by the terrorism risk insurance 

program. 

TRIP also has numerous cost sharing provisions that limit the exposure of the federal 

government should the worst happen and a need for the backstop arise, and the portion of 

2 
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terrorism-related losses that are the responsibility of the private sector has increased over time. 

The program now has a "trigger" of $1 00 million in aggregate industry insured losses that must 

be incurred before any federal dollars are spent (a significant increase from the $5 million trigger 

incorporated in the original law), which limits the application of the existing program to only 

severe events. If a terrorist attack of this size and scope did occur, each insurance company 

would have a deductible equal to 20% of its commercial property-casualty premium volume and 

would also be responsible for a 15% share of relevant losses above its retention level. The 

insurance marketplace retention of losses (i.e. the amount covered by deductibles and the 

copayment mechanism) must add up to at least $27.5 billion (an amount that has also increased 

significantly over time), or the federal government may recoup the difference through a 

surcharge on commercial policies. Lastly, there is an annual $100 billion cap on the program. 

Ongoing Need for Limited Federal Role 

The Big "1" believes the continued operation of TRIP or a similar pUblic-private partnership is 

essential given the continued threat of terrorism and the unique and unpredictable nature of this 

devastating risk. 

The factors and marketplace realities that caused Congress to enact and reauthorize TRIA remain 

in place today. It is widely believed that the size and severity of a terrorist attack could threaten 

the capacity of the insurance market, and such risks still cannot be assessed by traditional 

methods. Insurers do not have access to the data and information to perform proper 

underwriting, as much of the information that does exist is available only to governmental 

agencies that fiercely guard it for security and law enforcement reasons. 

Despite the significant and meaningful progress that has been made in protecting our country 

from terrorists, the threat of terrorism remains with us daily. Those government officials most 

directly involved in protecting us from such threats - from the Secretary of Homeland Security 

to the Director of the National Counterterrorism Center regularly remind us that such threats 

continue to evolve and have become more decentralized and diverse in recent years. The 

evolving nature of terrorist threats makes it even more difficult for insurers to assess and make 

meaningful judgments about possible terrorist events, and this unfortunate reality is why it is so 

important to have a thoughtful terrorism risk insurance program in place. 

TRIP has had an incredibly beneficial impact on the nation's economy, but terrorism coverage 

will once again become extremely difficult - or impossible for many businesses to obtain if the 

program is allowed to expire with no policy solution in its place. The private sector simply lacks 

the ability and capacity to fill the considerable void that would be created if the program expires, 

and such an outcome would be especially troubling for the countless small and medium-sized 

businesses that already struggle to remain profitable in a challenging economic environment and 

are unable to self-insure. The vast majority of businesses in this country are of this size, and 

these commercial enterprises will be unable to properly protect their assets, property, and 

investments against the threat of terrorism without such a partnership. This problem is 

particularly acute in urban and suburban areas. In short, we believe the termination of TRIP 

would have destabilizing effects on the economy in many regions of the country. 

3 
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Conclusion 

It has been eleven years since the terrorist attacks of September 11, 2001, and r am certain the 

memory of those events and the ensuing weeks and months remain vivid to all those in this 

room. Although our nation has thankfully been spared from further events in recent years, the 

threat of terrorist attack is as great as ever, and our country must take the steps necessary to 

protect itself from a similar future event. We must also take the steps necessary to protect our 

national economy against such events and ensure that terrorism insurance is available in a 

meaningful way to our nation's businesses and job-creators. 

The Big "I" believes that TRIP has worked well and that some form of limited federal 

involvement is still needed to maintain a stabilized and viable market for terrorism insurance. 

We applaud the Committee for the foresight to delve into this subject matter this Congress and 

look forward to working with you as you consider solutions to address the unique nature of the 

risk presented by terrorist attacks. 

4 
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~. Wel~A'!il'!!!!!JJL9c!t 

214 Massachusetts Avenue, NE· Washington DC 20002· (202) 546-4400· heritage.org 

CONGRESSIONAL TESTIMONY 

TRIA: Time to End the Program 

Testimony before 

Subcommittee on Insurance, Housing and 

Community Opportunity, 

Committee on Financial Services, 

United States House of Representatives 

September 11, 2012 

David C. John 

Senior Research Fellow 

The Heritage Foundation 
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Chainnan Biggert and Ranking Member Gutierrez, thank you for inviting me to 

participate in this hearing. I am David C. John, the Senior Research Fellow in Retirement 

Security and Financial Institutions at The Heritage Foundation. The views I express in 

this testimony are my own, and should not be construed as representing any official 

position of The Heritage Foundation. 

The Terrorism Risk Insurance Act (TRIA) served a very real purpose in the days 

after 9111 when insurance companies and their customers feared the cost of providing 

coverage for acts of terrorism would be prohibitivc. However, we have now reached a 

point where the private sector is increasingly capable of providing that coverage at 

appropriate prices without government support. In fact, the continued existence of TRIA 

may keep the industry from further progress. However, the industry will need time to 

make the transition to a fully private terrorism system, and it is greatly to the 

Subcommittee's credit that you are beginning to discuss this issue now instead of waiting 

until closer to the program's 2014 expiration date. 

Back in 2001, TRIA served a real purpose. Without swift but well-considered 

action from Congress, thousands of American businesses might have been unable to 

continue purchasing affordable terrorism insurance. The massive losses from the 

September 11, 2001 attacks made property and casualty insurers understandably reluctant 

to continue to issue property insurance policies that included terrorism coverage until 

they could evaluate their exposure to potential terrorist attacks. They were equally 

reluctant to issue stand-alone policies that only covered acts of terrorism. 

Before TRIA, property and casualty insurers faced a serious dilemma. Many of 

their corporate policies issued before the 9111 attacks insured against terrorist attacks in 

much the same way they covered natural disasters or more conventional accidents. Then 

and now, insurance premiums on most types ofloss were based on sophisticated 

estimates of the likelihood that a particular claim will have to be paid. Until September 

11, insurers never expected the scale of damage inflicted in those attacks. Thus before 

9/11, terrorism coverage often carried a very low price tag and often was included 

without much additional though in more comprehensive coverage. 

Then the world changed. Insurers and the rest of us discovered that such attacks 

were possible and could cause catastrophic damage. At the time, none of us had any finn 

idea whether those attacks were isolated incidents or not. As a result, they were unable to 

price terrorism coverage quickly and accurately, and unwilling to expose their companies 

to claims that could run in the tens of billions of dollars. 

Losses from the World Trade Center attacks were spread among many foreign 

and domestic insurers and "reinsurers." This is standard practice for large policies; 

insurers essentially spread the risk among many other companies in return for a share of 

the premiums generated by the policies. Some of the risk is sold to reinsurers, who 

generally insure the insurance companies against huge losses. In this way, no one 

company is left facing ruin when there is a huge claim on a policy. This method enabled 
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the industry to absorb the roughly $35 billion in claims from the attacks on the World 

Trade Center. However, in the days after 9111, many insurers and reinsurers that would 

have had great difficulty paying another such loss were unwilling to renew policies that 

include terrorism coverage. 

As we knew at the time, the wrong government response could prevent the market 

trom taking the necessary actions. Any program that essentially transferred the risk from 

companies to the government by promising that tax dollars would pay most of the losses 

would only make it more difficult for private insurers to establish the real market price 

for terrorism coverage. Because the industry would be collecting premiums without 

facing the true value of potential losses, such coverage would be underpriced. Those who 

bought this insurance would not have any incentive to reduce their risk, but every 

incentive to support extending the federal program indefinitely. 

While the problem in 2001 was real, it should have been temporary. By now, 

normal insurance industry processes should have already been able to resolve it. The 

industry should have developed ways to price terrorism coverage properly, which could 

include upper limits on company liability. And reinsurers should have found ways to 

involve sophisticated investors who, for a price, could face the type of losses that could 

occur. 

Recent industry data indicates that there has been a great deal of progress towards 

making terrorism coverage both widely available and affordable. While coverage varies 

according to geographic area and industry, some industries show that over three-quarters 

oflarger firms have purchased some form of terrorism coverage. In addition, the cost 

appears to be declining, with one major report suggesting that the cost dropped by almost 

a third between 2008 and 2009 alone. Clearly, the process is well underway, and 

Congress should remove the last barriers to restoring full private coverage for acts of 

terrorism by ending TRIA. 

The recession has had a negative effect on the number offinns that have been 

able to renew their coverage, but this is to be expected. Faced with cash flow problems, 

finns will cut wherever that can. What is conceming is that industry sources suggest that 

the risk models used for terrorism insurance are still more primitive than those used for 

other types of catastrophic coverage. This may well be due to the continued presence of 

TRIA, which limits a finns risk exposure and may cause them to focus more on the risk 

that the finn retains than on the potential losses that the govemmcnt would cover. 

TRIA was not intended to be a pennanent program. As the original bill stated, 

TRIA would "provide temporary financial compensation to insured parties, contributing 

to the stabilization of the United States economy in a time of national crisis, while the 

financial services industry develops the systems, mechanisms, products, and programs 

necessary to create a viable financial services market for private terrorism risk 

insurance." Retuming this coverage to the private sector is an important goal, because 

there is no reason why taxpayers should continue to have the ultimate tinancial 

responsibility for paying insurance losses on private property. The insurance crisis has 

2 
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passed, and the insurance industry now has enough infonnation about terrorist attacks to 

again provide this coverage. As a result, there is no reason to extend TRIA beyond its 

scheduled 2014 expiration date. 

Some insurance industry associations and others argue that without TRIA, 

terrorism coverage will revert to some level of problems, but this should not be the case. 

By 2014, the industry should have over 12 years of data that would allow it to 

appropriately price its coverage. If, and let me stress the if, the industry cannot assume 

total responsibility, Congress should start the process in early 2013 by implementing 

proposals such as increasing the deductible to be paid by insurers, increasing the insurer 

co-participation, increasing the event trigger, removing coverage for acts of domestic 

terrorism; and reducing the recoupment percentage from 133 percent to 100 percent. 

These changes should take effect almost as soon as they can be passed 

That should be followed by a full phase-out of TRIA so that the entire program 

has ended no more than two years after the current 2014 expiration date. lfthese steps 

are necessary, Congress should also strongly indicate to the industry that further 

extensions will not come, and that it should expect to offer terrorism coverage after that 

without any further taxpayer subsidies. 

Let It Expire 

Congress should neither extend nor expand TRIA without a finn and short phaseout, and if Congress passes any longer extension, whoever is in the White House after 

January 20 should reject such legislation. Continuing to pass the risk of property 

insurance losses caused by terrorist attacks to taxpayers does nothing to increase security. 

Rather, programs like TRIA encourage insurance companies to avoid the proper pricing 

of coverage, with the expectation that federal reinsurance under TRIA will enable them to 

pass on significant losses to taxpayers. TRIA is thus a pre-approved bailout for insurance 

companies, the essence of corporate welfare. There was a good reason to establish TRIA, 

but those days are over. TRIA has served its purpose and should now be allowed to 

expire. 

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******************* 

The Heritage Foundation is a public policy, research, and educational organization 

recognized as exempt under section 50 I (c)(3) ofthe Internal Revenue Code. It is 

privately supported and receives no funds from any government at any level, nor does it 

perform any government or other contract work. 

The Heritage Foundation is the most broadly supported think tank in the United States. 

During 20 II, it had nearly 700,000 individual, foundation, and corporate supporters 

representing every state in the U.S. Its 2011 income came from the following sources: 

Individuals 

Foundations 

Corporations 

78% 

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5% 

The top five corporate givers provided The Heritage Foundation with 2% of its 2011 

income. The Heritage Foundation's books are audited annually by the national accounting 

firm of MeGladrey & Pullen. A list of major donors is available from The Heritage 

Foundation upon request. 

Members of The Heritage Foundation staff testify as individuals discussing their own 

independent research. The views expressed are their own and do not reflect an 

institutional position for The Heritage Foundation or its board of trustees. 

4 
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Testimony of Michael H. Lanza 

Executive Vice President and General Counsel 

Selective Insurance Group, Inc. 

On Behalf of the Property Casualty Insurers Association of America (PCI) 

Subcommittee on Insurance, Housing and Community Opportunity 

Committee on Financial Services 

United States House of Representatives 

September 11, 2012 

Chairman Biggert, Ranking Member Gutierrez, Members of the Subcommittee: 

Thank you for the opportunity to testify today on terrorism insurance issues. I am Michael 

Lanza, Executive Vice President and General Counsel of Selective Insurance Group, Inc. Selective 

is the 49th largest property and casualty insurance group in the country. I am testifying today on 

behalf of our national trade association, the Property Casualty Insurers Association of America 

(PCI), which represents approximately 40 percent of the nation's home, auto, and business 

insurance market. 

Today we memorialize the anniversary of the tragic 9-11terrorist attack that killed thousands 

and resulted in economic devastation greater than any insured loss in history. With economic 

investment freezing, President Bush asked Congress to immediately enact legislation to protect 

our country's security. This Committee responded swiftly and passed the Terrorism Reinsurance 

Act, or TRIA, in just 2 months. In September 2002, the House adopted the TRIA conference 

report by voice vote. In 200S, and 2007, the House voted overwhelmingly to renew this 

important national security program. These three House votes passed by wide margins under 

different majorities - and reflect TRIA's historic bipartisan support. 

In the last 11 years, the threat of terrorism has not receded. Dozens of terrorist attacks against 

our nation are attempted annually, with terrorists evolving new strategies to circumvent federal 

security. TRIA is a low-cost, fiscally prudent terrorism safety net that protects our nation's 

economic security. Absent its extension, insurance policies will begin in 2013 to exclude 

terrorism coverage or, to the extent permitted under state law, not be renewed for major 

underlying risks. 

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PC! and Selective strongly believe in the private insurance market. We also believe that the 

private insurance market can adequately cover risks that are fully insurable. Fully insurable risks 

are those for which a private insurer can adequately predict the likelihood and severity of a loss. 

We know terrorism when we see it, but it is difficult to define. Is it a crime or an act of war? 

Neither, however, is generally insurable -let alone fully insurable - in the private insurance 

market. 

Some Committee Members who have philosophical concerns about government programs that 

support or displace private markets may have some philosophical doubts about TRIA. TRIA, 

however, is essential to the private insurance market because terrorism is not a fully insurable 

event. The likelihood and severity of terrorist attacks cannot be adequately predicted. 

Terrorism in the 9/11 form, which is what TRIA was designed to address, is an inherently 

unpredictable political act designed to frighten the nation's security and public through death, 

mutilation, and the destruction of public and private property. We know that after 9-11 the 

federal government set up costly victims' protection funds where private coverage was 

inadequate. TRIA has been the government's best security protection to keep the private sector 

largely responsible - and avoid future federal post-event bailouts. 

National security is the primary responsibility of the federal government - not the private 

insurance market. Our national security apparatus is focused on anticipating and preventing 

terrorist acts and assessing the probability and severity of such events against major economic 

centers and public and private symbols of our country. These government agencies gather and 

have access to classified intelligence information not available to the private insurance market. 

Insurers analyze exposure to hypothetical terrorist events, but insurers don't have access to this 

sort of intelligence information necessary to predict the acts of terrorists. Our policyholders 

who purchase TRIA coverage (and in Selective's case that is 86% of our Commercial lines 

policyholders and the mandated 100% of our workers compensation policyholders) also do not. 

The pool of potential terrorists and the risk of terrorism are not static. They change based on 

U.S. domestic and foreign policy - which is constantly evolving. These policy changes, coupled 

with technological developments, can also lead to new forms of attack. The scope and breadth 

of these policy changes cannot be adequately predicted or tracked by the private insurance 

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industry. Companies such as Selective, which writes primarily in 22 states east of the Mississippi 

and has approximately $1.6 billion in premium, certainly don't have the resources to do so. And 

Selective's small business clients, who pay an average of $10,000 for 3 commercial policies, 

certainly do not. This is why they need TRIA. 

Let me elaborate on this. To be insurable, events must be predictable in frequency and severity. 

Property casualty insurers can estimate, based on experience, roughly how many car accidents, 

house fires, and industrial accidents will occur in a year and what their costs will be. With over a 

hundred years of weather history and free access to weather pattern science, the industry can 

also model storm paths and predict weather losses. This experience, and access to factual 

evidence and trends, however, does not exist for terrorism. In fact, only one data point exists 

for a catastrophic terrorist event - and that happened 11 years ago today. 

Another difference between fully insurable events and terrorist acts is that insurable events are 

generally not correlated. That means they are random and independent of each other. For 

example, the likelihood of a hurricane in Florida is not correlated with the likelihood of an 

earthquake in California. The likelihood of correlated terrorist events is known and was 

demonstrated 11 years ago. Coordinated attacks can cause more terror, thus simultaneous 

attacks on New York City and Washington. Correlation of occurrence is another reason why we 

believe TRIA is required. 

While some terrorism coverage is available in the private market now, it is not widely available 

for the reasons I have discussed - and because the potential losses are so large. Industry 

models have shown potential losses for another major terrorist event to be up to $250 billion. 

That figure is more than half the surplus for the entire property casualty insurance industry. 

Without TRIA, the private insurance market would have significant difficulty handling a loss of 

that magnitude. 

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There are three additional points about TRIA that I would like to make: 

1. TRIA Is Fiscally Responsible. To date, TRIA has not cost taxpayers one cent in direct 

payments. If losses were to occur, the private insurance market would repay any 

government assistance up to $27.5 billion. According to the C80, TRIA's net cost to 

taxpayers through 2017 is roughly zero. That's not bad for a program that helps ensure 

hundreds of billions of dollars in annual insurance coverage. In the absence of TRIA, 

taxpayers would face much more exposure. Without private insurance, the Federal 

government will step in to assist in a disaster. That means the demand for government 

assistance will be greater without the possibility of any TRIA recoupment. 

2. TRIA Protects Private Sector Growth. The impetus behind TRIA was to prevent severe 

terrorism-related economic disruptions. Insurance is a substitute form of capital that 

supports balance sheets and permits businesses to own properties and engage in 

activities, such as hiring and business expansion, they might not otherwise do in its 

absence. Moreover, insurance permits immediate rebuilding after a loss. Without TRIA, 

insurers may simply exclude terrorism coverage or not renew policies covering major 

commercial risks to the extent permitted under state law. That means if there was a 

terrorist act, there would be less private capital to rebuild, which is key to the economy, 

economic development efforts, and public morale. 

3. TRIA Is Vital to Keeping the Cost of Workers Compensation Down. State workers 

compensation laws mandate coverage for terrorist acts that occur in the workplace. 

Without TRIA, it will be very difficult to obtain reinsurance in the private market. This 

could lead insurers, where possible, to exit the workers compensation market. For 

those that remain in the market, the extent of losses could impair the ability to pay the 

claims of injured workers. Just as insurance is substitute capital for business, 

reinsurance is substitute capital for insurers. Without it, more capital would be required 

to support workers compensation writings. This would certainly drive up the costs of 

workers compensation insurance. This could be a significant impediment to economic 

recovery, particularly as it impacts small businesses. 

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Given what terrorism is, the private insurance markets cannot provide terrorism coverage 

without TRIA. TRIA is a critical national security and economic development program in which 

the private insurance market is proud to participate. PC! stands ready to assist you as you 

continue your deliberations. Thank you very much. 

5 
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TRIA at Ten Years: The Future of the Terrorism Risk Insurance Program 

September 11, 2012 

Testimony before the Subcommittee on Insurance, Housing and Community Opportunity 

of the House Financial Services Committee 

U.S. House of Representatives 

Christopher M. Lewis 

Senior Vice President and Chief Insurance Risk Officer 

The Hartford Financial Services Group 

Chairman Biggert, Ranking Member Gutierrez, and Members of the Subcommittee, 

thank you for the opportunity to appear before you today on behalf of The Hartford Financial 

Services Group (The Hartford) and our property-casualty insurance trade association, the 

American Insurance Association (AlA), to discuss the important issue of terrorism risk 

insurance. My name is Christopher Lewis and I am Senior Vice President and Chief Insurance 

Risk Officer for The Hartford. Founded over 200 years ago, The Hartford is one of our nation's 

oldest insurance companies, among the largest commercial property-casualty insurers, and an 

insurance partner to over one million small businesses across the United States. 

In my capacity as a chief risk officer, I believe that I can offer an important perspective on why 

terrorism risk remains a unique and uninsurable risk, describe the limited tools available to 

insurers to manage that risk, explain the market stabilizing value of the program established by 

the Terrorism Risk Insurance Act of 2002 (TRIA) and its successors, and underscore the 

importance of maintaining this essential program into the foreseeable future to protect our 

economy in the event of another major terrorist attack on U.S. soil. 

The Insurance Industry's Response to September 11,2001 

Today marks the 11 th anniversary of the tragic attack on September 11, 2001. That event 

forced all Americans to confront directly the previously unforeseen realities associated with a 

catastrophic terrorist attack on U.S. soil- quite literally, to face a new form of war. Despite the 

unanticipated nature of the event, The Hartford and other insurers responded to September 11 

claims in an unwavering manner and without a single dollar of federal assistance. 

However, the devastating economic consequences of the attack forced insurers and other 

businesses to re-examine the nature of terrorism-related risks, as well as to review how such 

risks were being spread and managed. 

In today's dollars, the September 11th attack is estimated to have resulted in almost 3,000 

deaths, as well as over $23 billion in insured property loss and $40 billion in total insured loss 1 

The Hartford's share of this loss was approximately 3 to 3.5%, as we helped our policyholders 

recover from the tragic loss. Of course, a large portion of the insured industry loss was 

effectively reinsured, and the reinsurance industry honored its obligations. 

Unfortunately, in the aftermath of the attack, the reinsurance markets withdrew new capacity 

and the reinsurance market for terrorism evaporated. Without the ability to spread and diversify 

these risks globally through reinsurance and with no ability to price the risk of terrorism, 

insurance companies were unable to provide adequate terrorism coverage to commercial 

1 Source: Insurance Information Institute, 2010 dollars excluding Victims Compensation Fund 
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policyholders. The effects of this chain of events trickled down to lenders and the construction 

industry, putting a significant drag on the economy. To support the economy and allow private 

markets to stabilize, Congress stepped forward in bipartisan collaboration and passed the 

Terrorism Risk Insurance Act of 2002 (TRIA). 

TRIA provides a federal backstop to insurance companies for large certified terrorism events -

above a $100 million loss - while requiring insurers to "make available" (offer) terrorism 

insurance to commercial policyholders for such coverage as business interruption and property 

insurance. Under the current program, insurers would need to absorb an estimated $25 to $30 

billion of insured losses before the federal govemment begins to share the losses. Put another 

way, a terrorism loss would have to be larger than $25 to $30 billion before the federal 

government would be called on to make any payment. Even then, TRIA requires each insurer 

to pay 15 cents on every dollar of loss above its deductible, and then provides a recoupment 

mechanism to recover federal dollars that are expended. 

By creating a post-event pooling mechanism that preserves significant industry "skin in the 

game" and only accesses federal dollars for extremely large-scale terrorism losses, the Act 

allows insurance companies to understand and manage their potential exposure to losses 

attributable to terrorism attacks while providing a cap on the potential loss to capital from such 

an attack. As a result, insurers are able to offer terrorism coverage to commercial policyholders 

while TRIA provides the all-important market stability. 

In the event of a future terrorist attack, TRIA ensures that private insurance payments flow to 

those affected businesses that have purchased coverage, as well as to their employees, which 

in turn helps businesses and the economy recover. These payments will be crucial to 

minimizing the economic, psychological, and social fallout from an attack. At the same time, if 

an attack is so massive that it triggers the federal protection established by TRIA, government 

payments are ultimately recaptured through a recoupment mechanism that was established in 

the legislation. This greatly mitigates any costs of this federal program. 

It is important to emphasize that taxpayers are protected at every step under TRIA. First, they 

benefit from the economic security that insurance coverage provides before an attack. Second, 

after an attack occurs, the immediate flow of claims payments provides stability and minimizes 

economic disruptions to those who suffer from the attack directly as well as to all Americans. 

And finally, in the event of a catastrophic terrorist attack that triggers the government program, 

any dispersed federal funds are ultimately repaid through TRIA's recoupment mechanism. Thus, 

TRIA is both a sensible and indispensable component of national economic security. 

Terrorism Risk is a Unique, Uninsurable Risk 

A public-private solution is necessary for the risk of terrorism because, from an insurance 

perspective, terrorism does not meet the core characteristics of a privately "insurable peril." 

Private insurance markets are founded on the ability to (a) measure the likelihood and potential 

severity of loss to a policyholder for any specific peril and then (b) to effectively pool the loss 

experience across many policyholders exposed to relatively homogeneous, random and 

independent risks. Quite the opposite, terrorism involves an intentional act carried out at the 

direction of individual actors and groups with the explicit intention of maximizing overall loss of 

life, property, and economic disruption across as many insureds as feasible. Terrorists can pick 

the target, change the target at will to bypass security, and coordinate an attack on multiple 

targets in diverse locations. As result, terrorism, like war risks, fails the basic requirements for 

"ex ante" (before the event) pooling in the private insurance markets. 

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• Insurers lack any basis for assessing the likelihood or probability of a major terrorist 

attack, especially given the limited information that is publicly available. While insurers 

can price insurance when the nature of the risk is estimable but highly uncertain, ex ante 

insurance mechanisms fail when there is no credible basis for assessing the likelihood of 

an event. 

The potential magnitude or severity of large scale terrorist attacks, particularly those that 

involve the use of unconventional weapons involving nuclear, biological, chemical, and 

radiological (NBCR) agents, is largely unknown given the fortunate dearth of prior 

experience. While insurers can manage loss aggregations for "conventional" attack 

modes, the industry has limited information on managing exposures to wide-area loss 

event scenarios that would be the hallmark of NBCR attacks. 

• Given the concentration of insured lives and property values in business centers, the risk 

of wide-area terrorism attacks poses a real solvency threat to insurers -- a threat that 

can easily eclipse that of natural disasters given the stated intention of a terrorist to 

exact maximal economic disruption. 

The interdependent nature of terrorism risks limits the markets' ability to rely on 

mitigation to manage exposures. Hardening a potential target may simply cause a 

terrorist to shift to a softer target or shift the manner of attack. Moreover, since a portion 

of a terrorist objective is to wage psychological war, the terrorist attacks can be directed 

throughout the U.S. - from New York City, to Chicago, to San Francisco and to the main 

streets of any town in between. 

Limited Risk Management Tools are Available 

Even with the existence of TRIA, insurers' ability to manage terrorism risk is limited. From a 

coverage perspective, while TRIA requires a mandatory "offer" as a condition for participation, 

state laws actually mandate coverage for terrorism for certain lines of insurance. For example, 

in the 49 states that require workers' compensation insurance, on-the-job injuries are covered 

without exclusion, whatever the cause. Further, a number of states (including those with 

significant business centers) mandate that insurers cover terrorism-created fire losses, even if a 

policyholder does not purchase terrorism coverage. As a result, while an insurer may exclude 

NBCR terrorism coverage in some states, losses caused by the fire following an explosion from 

one of these perils would be covered. 

Second, as noted above, the industry's lack of credible methods for assessing the likelihood of 

an attack limits our ability to determine an actuarially fair premium. As noted by the most recent 

report on terrorism risk insurance market conditions from the President's Working Group on 

Financial Markets (PWG Report), "despite the reported improvements in modeling to measure 

an insurer's aggregate loss exposure, the industry remains uncertain about the reliability of 

probabilistic models to predict frequency and severity of terrorist attacks." 

Third, reinsurance capacity for terrorism losses is minimal. Citing many of the same issues 

identified above for primary insurance companies, reinsurance companies offer extremely 

limited capacity for terrorism risk and generally do not offer coverage for terrorist attacks 

committed with NBCR weapons. According to the PWG report, reinsurance capacity available 

for terrorism risk remains in the $6 billion to $10 billion range, an amount that is well below the 

estimated industry-wide retention figure under TRIA 

To provide some perspective, The Hartford's 2011 retention under the Terrorism Risk Insurance 

Program Reauthorization Act (TRIPRA) is approximately $1.1 billion in company losses. With 

respect to property, terrorism reinsurance of any material amount within this retention is 

3 
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effectively non-existent. In contrast, for natural catastrophe losses, The Hartford's principal 

corporate catastrophe treaty provides just under $700 million in reinsurance protection in excess 

of a $350 million deductible, The Hartford has an additional $400 million in reinsurance 

protection above $1,1 billion financed through non-traditional reinsurance markets (e,g" 

catastrophe bonds), As the person in the company responsible for purchasing reinsurance 

protection for The Hartford, I can attest that I wish that the reinsurance markets were willing to 

provide the same capacity for terrorism within our TRIA retention as is available for natural 

catastrophes, But the reinsurance capacity is simply not available, The recent PWG report is 

interesting in that it indicates that the total amount of reinsurance capacity is up slightly from 

prior studies, The small increase in reinsurance capacity, undoubtedly available to smaller 

companies, actually demonstrates the value of the TRIA program to "crowd in" additional 

reinsurance capacity - that is, it provides reinsurers some assurance that the reinsured 

companies can manage through a large scale event and remain viable trading partners after a 

loss, 

Given these challenges, how do insurance companies manage the risk of terrorism today? The 

main tool available to manage the risk of terrorism is to limit exposure concentrations in 

potential "high target areas." If terrorism exposure concentrations get too high relative to 

surplus, an insurance company could non-renew entire commercial policies to reduce the 

terrorism exposure - often creating hardships for the underlying policyholders, These exposure 

concentrations are especially difficult for certain lines of business like workers' compensation 

and fire following coverage in certain states where exclusions for NBCR attacks are not 

recognized. Over the past 11 years, with the benefit of TRIA, the insurance industry has 

successfully managed these concentrations of exposure within the TRIA retentions, Policies 

shed by one company have generally been absorbed by a competitor. 

Without TRIA, however, individual insurers would face large uncapped exposure and would face 

difficult choices about how to manage down exposures relative to capital, including facing 

decisions on whether or not to non-renew large portions of their commercial policyholder 

portfolios, especially given the fact that they cannot exclude the peril of terrorism from workers 

compensation coverage and fire following coverage in a number of states. For the record, we 

do not believe that this outcome would be in the best interests of our policyholders or the overall 

economy. 

Bottom Line: TRIA Has Worked 

Almost ten years into TRIA, there should be no doubt that the program has brought stability to 

the private market and has enabled insurers to provide capacity despite the unique 

characteristics of terrorism riSk, As the President's Working Group concluded at the end of 

2010, "the Program provides incentive to property and casualty insurers and reinsurers who 

might not otherwise provide terrorism risk insurance at current capacity levels, or at current 

prices, absent Federal support or State law mandates, It does this by providing some degree of 

certainty of an insurers' maximum loss exposure." TRIA has been shown thus far to be a 

successful partnership among the federal government, insurers and policyholders to protect the 

economy in the event of an attack. Thanks to TRIA and its successors, The Hartford has been 

able to manage our terrorism exposure within acceptable limits while supporting our 

policyholders' need for terrorism coverage. In 2011, The Hartford's take-up rates for terrorism 

insurance were over 98%, 

As a nation, we can take some comfort in the fact that since 9/11 and despite numerous 

attempts, terrorists have not succeeded in attacking U,S, interests on our soil. Other countries in 

the world have been less fortunate, The inescapable conclusion is that as long as this terrible 

4 
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risk threatens our way of life, we must fortify our economy against the potential consequences. 

TRIA and its successor programs have been very successful and continue to make terrorism 

coverage widely available. It is essential that the program is maintained so that the United 

States can enjoy national economic security for years to come. 

5 
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insure against terrorism.org 

AGAINST TERRORISM 

STATEMENT 

OF 

ROLF LUNDBERG, JR. 

SENIOR VICE PRESIDENT, CONGRESSIONAL & PUBLIC AFFAIRS 

U.S. CHAMBER OF COMMERCE 

ON BEHALF OF 

THE COALITION TO INSURE AGAINST TERRORISM 

BEFORE A HEARING OF 

THE SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY 

OPPORTUNITY OF THE HOUSE COMMITTEE ON FINANCIAL 

SERVICES 

ENTITLED 

"TRIA AT TEN YEARS: THE FUTURE OF THE 

TERRORISM RISK INSURANCE PROGRAM" 

SEPTEMBER ll, 2012 

••• 1875 
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Good morning, Chairwoman Biggert, Ranking Member Gutierrez, and members of the 

Subcommittee. I appreciate the opportunity to testify today regarding the important issue of 

terrorism risk insurance and its importance to the economy. My name is Rolf Lundberg, and I 

am the Senior Vice President for Congressional and Public Affairs at the U.S. Chamber of 

Commerce. The U.S. Chamber of Commerce is the world's largest business federation 

representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as 

well as state and local chambers and industry associations. 

I am appearing today on behalf of the Coalition to Insure Against Terrorism (CIAT), of 

which the U.S. Chamber is a member. CIAT is a broad coalition of commercial insurance 

consumers formed immediately after 9/11 to ensure that American businesses could obtain 

comprehensive and affordable terrorism insurance. CIA 1"s membership of 79 major trade and 

membership associations, representing virtually every sector of the economy, has remained 

resolute from the original proposal through the 2005 and 2007 reauthorizations and now, in 

recognizing, as did Congress and the Administration, that only the Federal govemment could 

provide the framework to make this coverage available to all those who required it to invest on 

new construction and to carry on commerce. The diverse CIAT membership represents 

commercial real estate, banking, energy, construction, hotel and hospitality, entertainment, 

manufacturing, transportation, the major league sports, as well as public sector buyers of 

insurance. CIA T is the true consumer voice on terrorism risk insurance, as we are comprised 

of the principal policyholders of commercial property and casualty lines of insurance in the 

United States. 

I am pleased today to offer the policyholder perspective on terrorism risk insurance, and 

to highlight why the TRIA program continues to be vital to our economy. As we saw in the 

months following the 9111 terrorist attacks, the lack of terrorism risk insurance contributed to a 

paralysis in the economy, especially in construction, tourism, business travel and real estate 

finance. Enactment of TRIA changed that by making terrorism risk coverage widely available to 

commercial policyholders, and delivering it through a private insurance mechanism that keeps 

the private industry's skin in the game through the insurer deductible and co-share layers. It also 

CIA T ••• insureagainstterrorism.org 

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protects taxpayers by providing recoupment -- from us the commercial policyholders -- of any 

federal share paid out in the wake of a large-scale terrorist event. While private insurance 

capacity apparently has grown slightly in the past decade, these years have also taught us that a 

continuing federal role in this unique risk remains vital. The terrorism peril is simply too 

intrinsically linked to government policy and intelligence to be solely handled by the private 

sector alone. TRIA needs to be reauthorized, and we therefore commend you, Chairwoman 

Biggert and the Subcommittee, for your leadership on tl1is issue and for convening this important 

hearing. 

The 26 foot tall banner that stretches across the front of the U.s. Chamber of Commerce 

headquarters in Washington, D.C., spells out our nation's biggest challenge and our highest 

priority in one word-J-O-B-S. That banner has served as a reminder to us and to all of 

Washington of where our focus must be. 

The Chamber believes that stronger and faster economic growth is the best way to 

successfully put Americans back to work. We must not only affirmatively clear away 

impediments to job creation, but we must avoid taking steps that would create more uncertainty 

and strangle businesses, stifling our economy's ability to grow, and also negatively affect job 

creation. 

At the same time as we seek to remove barriers that will allow businesses to invest and 

grow, we also have to recognize what policies work - policies that allow business to continue to 

invest and look ahead and have confidence in the future. 

We know from previous experience following 9111 that the impact on jobs of the absence 

of terrorism insurance was widespread and growing. Our economy today is more than 20% 

larger than it was a decade ago. There is every reason to expect that the jobs impact would be 

greater and more widespread today were the certainty of the terrorism insurance program to be 

pulled out from under our economy. 

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America has strong demographics, abundant natural resources, the world's most 

productive workers, and a long history of picking ourselves up when we are down. We should 

not self-inflict additional and unnecessary damage to our fragile economy, and possibility 

extinguish the prospect of economic recovery and new jobs for Americans. 

With this in mind, [would like to focus my remarks today on three main areas: (1) the 

importance of terrorism risk insurance to the broader economy; (2) how and why the TRIA 

program continues to serve an important purpose; and (3) the current state of the terrorism risk 

insurance market. 

The Importance of Terrorism Insurance to the Ecouomy 

On today's solemn anniversary we remember the thousands of innocent lives lost on 

that tragic day eleven years ago, and offer our thoughts and prayers to the families and loved 

ones left behind. The terrorists who perpetrated that terrible attack intended to paralyze us 

with fear -- but the best of America shone through that day, and in the weeks and months that 

followed. 

It is incumbent upon us to remember the lessons of 9/11. Among those lessons is the 

importance of maintaining safeguards to ensure that such catastrophic events do not cause 

lasting harm to our economy. As we saw in the months that followed 9/11, managing the risk 

of terrorism is an imperative. It was a critical situation: it was difficult, if not impossible, for 

commercial policyholders to secure coverage against terrorism risk, yet banks and other capital 

providers would not provide financing without it. In 14 months between the 9/11 attack and 

enactment of TRIA, over $15 billion in real estate related transactions were stalled or even 

cancelled because of a lack of terrorism risk insurance, according to a Real Estate Roundtable 

study. Furthermore, the White House Council of Economic Advisors found that there was an 

immediate and dire<;t loss of 300,000 jobs in that period from deferred construction 

investment. 

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The simple fact is that our recovery from 9/11 was slowed due to a lack of any realistic 

solution for the private sector to manage terrorism risk. Furthermore, our ability to recover 

from a further attack was also severely weakened by the situation. The months following 9111 

made clear that a strong, resilient economy requires a plan to deal with potentially devastating 

terrorism losses. Indeed, several other nations have terrorism insurance programs, including 

several that pre-date TRIA. Undoubtedly, we would face the same post-9/11 danger to our 

economy if Congress were to let the TRIA backstop expire without replacing it with a 

permanent solution. 

The Terrorism Risk Insurance Act 

In recognition of the critical post-9I11 situation, Congress and the Bush Administration 

worked together in 2002 to enact TRIA -- a public-private partnership to deal with terrorism 

risk that has served our nation and its economy well for nearly 10 years. The TRIA program 

ha<; a dual purpose: (I) to keep our economy functioning smoothly by requiring private 

insurers to make terrorism coverage available to commercial policyholders; and (2) to provide 

an efficient mechanism for managing terrorism losses in a way that maximizes private sector 

involvement and provides strong protection for taxpayers. 

As commercial policyholders, we are well versed in the benefits of TRIA's first 

purpose, i.e., the "make available" provision. We have no interest in seeing a return to the 

standard terrorism exclusions became the norm in the months following 9/11. In fact, when 

TRIA was originally set to expire in 2005, and again in 2007, we saw policy renewals with 

"springing exclusions" that would have voided terrorism coverage upon expiration of the 

program. Having TRIA in place, quite simply, has been difference between being able to 

manage terrorism risk or holding one's breath. 

Policyholders understand that the reason terrorism coverage is available is because of the 

TRIA backstop. However, to view the TRIA program as simply a federal backstop is to miss 

key components of the program. In truth, the TRIA program is a public-private partnership 

CIA T ••• insureagainstterrorism.org 

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where all parties participate in managing risk. Private insurers take a large share of losses 

through both the insurer deductible and through the 15% co-share of any losses exceeding the 

deductible. The federal government steps in only in certain, severe cases, where losses from the 

terrorist event exceed $100 million, and only then if an insurer has losses that exceed its statutory 

deductible. We policyholders also bear substantial costs, in the form of the premiums we pay for 

terrorism coverage, and through the responsibility for paying post-event surcharges so that 

taxpayers may recoup federal assistance provided through the backstop. 

The simple reality is that having TRIA in place actually saves the taxpayers money. As 

currently structured, the program is only likely to trigger federal compensation in truly massive, 

catastrophic terrorism events. In the absence of TRIA, such an event would likely eause 

Congress to appropriate millions, if not billions, in ad hoc disaster assistance, with no strings 

attached. Under TRIA, however, there is a pre-existing mechanism to ensure economic recovery 

-- a mechanism that maximizes which private sector involvement, and protects taxpayers through 

the recoupment provision. 

Current Market Conditions 

Because of TRIA, today terrorism risk insurance (with one exception) is generally 

available for commercial policyholders. It would not be available without TRIA. CIAT 

members have generally seen a decline in pricing for terrorism insurance, which we attribute not 

just to the normal ebb and flow of the insurance market, but rather to the continued availability 

of the TRIA backstop and the fact that there have been no certified acts of terrorism since the 

enactment of TRIA. 

Even with TRIA, however, we note that coverage for nuclear, biological, chemical and 

radiological ("NBCR") events remains extremely limited in terms of availability and 

affordability. Where insurers do offer such coverage, it may be limited in terms of geographic 

area (i.e., coverage is harder to procure in perceived "target" cities such as New York or 

Washington), and it may also be limited to certain perils (i.e., biological and chemical events 

CIAT ••• insureagainstterrorism.org 

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may be covered, but not nuclear or radiological). Coverage limits for NBCR insurance that is 

available tend to be relatively low and expensive. 

We understand that the principal factor in insurers' decisions not to cover NBCR is their 

lack of sufficient data to properly model their exposure to such losses with any degree of 

certainty. On this point, we would point out that this Committee has previously considered 

measures intended to encourage greater availability and affordability ofNBCR coverage, though 

they were not ultimately included in the TRIA reauthorization legislation. We believe that 

policymakers may need to revisit this issue given that the market for NBCR terrorism coverage 

has generally not improved. 

Conclusion 

The TRIA program has worked extremely well over the past ten years -- albeit with no 

ultimate test on losses and claims -- by providing access for commercial policyholders to 

insurance against terrorism risk. It has done so through a meaningful public-private partnership 

that requires and arguably maximizes private sector involvement and unquestionably protects 

taxpayers in the event of any future act of terrorism. Fortunately, we have yet to see this pay-out 

and recoupment mechanism in practice, but it nevertheless remains clear that our economic 

recovery from any such event depends upon having such a plan in place. The terrorism peril is 

simply too intrinsically linked to government policy and intelligence to be solely handled by the 

private sector. We therefore commend this Subcommittee for its continued consideration of this 

important issue, and we urge you to consider a permanent solution that would extend beyond 

TRIA's current expiration date in 2014. Our CIAT coalition looks forward to working with the 

Subcommittee on reauthorization. 

Thank you again for the opportunity to testify here today, and I am pleased to respond to 

any questions you may have. 

CIAT ••• insureagainstterrorism.org 

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Written Testimony 

prepared for a hearing of the 

Subcommittee on Insurance, Housing and Community Opportunity 

Committee on Financial Services 

U.S. House of Representatives 

on 

"TRIA at Ten Years: 

The Future of the Terrorism Risk Insurance Program." 

by 

Erwann O. MICHEL-KERJAN 

Managing Director 

Center for Risk Management and Decision Processes 

Operation and lnformation Management Department 

The Wharton School, University of Pennsylvania 

Jon Huntsman Hall, Suite 500 

3730 Walnut Street - Philadelphia, PA - 19104 

and 

Chairman 

OECD Secretary-General Board on Financial Management of Catastrophes 

Organization for Economic Cooperation and Development (OECD) 

Paris, France 

Email: erwannmk@'\vhartoo.upenn.edu 

Rayburn House Office Building - Room 2128 

Washington, D,c' 

!0:00a.m. 

September 11,2012 

Erwann O. Miche1-Kerjan. Testimony before of the House Subcommittee on Insurance, Housing and Community Opportunity. September II, 2012. 
105 


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Chairman Biggert, Ranking Member Gutierrez, distinguished members of the Subcommittee on 

Insurance, Housing and Community Opportunity, thank you for inviting me to testify today on "TRIA at 

Ten Years: The Future of the Terrorism Risk Insurance Program." My name is Erwann Michel-Kerjan. I 

teach at the Wharton School of the University of Pennsylvania and I am Managing Director of the 

Wharton Risk Management and Decision Processes Center. 

For nearly three decades, the Wharton Risk Center has been at the forefront of basic and applied research 

to promote effective corporate and public policies for low-probability events with potentially catastrophic 

consequences (i.e., extreme events) based on an understanding of the decision processes of consumers, 

firms and public sector agencies. 

Since 2008 I have also served as chairman of the OECD Board on Financial Management of 

Catastrophes, established by Secretary-General Angel Gurria to advance knowledge on these issues and 

collaborate closely with the goverrunents and the private sector of the now 34 member countries 

(including the United States). 

The question of how best to manage and finance catastrophes is now high on the agenda of top decision 

makers around the world given the series of unprecedented disasters and crises that have occurred since 

2001. Among all countries, the United States has faced the largest number of untoward events of many 

different kinds in this short period oftime: starting with the 9111 terrorist attacks, followed by the anthrax 

attacks, then several major corporate scandals, the Columhia Shuttle accident, followed by the massive 

blackout, the BP oil spill in the Gulf, the 2004/2005 hurricane seasons (and other significant natural 

disasters in the ensuing years), and of course the financial crisis from which our economy has yet to fully 

recover. 

America has proved to he a resilient nation. But if this series of events are predictive of what the near 

future will look like, we as a country have to start a serious discussion ahout our ability to better prepare 

for and recover from future catastrophes physically and financially. My Wharton colleague Howard 

Kunreuther and I made this point explicitly when we jointly testified before the U.S. Senate last year.' 

Thanks to the leadership provided by Congress, this Subcommittee and especially by you, Chairman 

Biggert and Congresswoman Maxine Waters, the long overdue reform of the National Flood Insurance 

Program was passed by Congress at the end of June and signed by the President in early July of this year. 

This bi-partisan reform was the outcome of over two years of hard work, hearings, and public debates. 

The Biggert-Waters Flood Insurance Reform Act of2012 is also based on sound evidence from empirical 

research produced by leading institutions across the country, including our own team at the Wharton Risk 

Center.1I 

For those reasons, I want to express my deep respect and gratitude for the extraordinary service you have 

provided to this nation.'" Your leadership in reopening the national debate about the future of terrorism 

risk insurance now, more than two years before the expiration of the temporary Terrorism Risk Insurance 

Program (TRIP) on December 31, 2014, is very much needed. Today we remember all the victims of the 

9111 tragedy and share our support with their families. 

Erwann O. MicheJ.Kerjan. Testimony before of the House Subcommittee on Insurance. Honsing and Community Opportunity. September II, 2012. 2 
106 


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My testimony today will focus on three questions: 

I) How has the terrorism risk-sharing between the federal government, the private 

(re)insnrance industry (supply side) and exposed businesses (demand side) changed with 

9/11 and the passage of TRIA 10 years ago? Our team at the Wharton Risk Center has been 

conducting research on this topic continuously since 200 I so my response to this question will be 

based on empirical evidence (take up rates, pricing, effects of government intervention). 

2) How does a world without TRIA look post 2014? Here, it is critical to imagine the economic 

consequences of a future attack on U.S. soil. Because we cannot predict when such a catastrophe 

will occur (if ever again) it is difficult for us to fully evaluate the effectiveness of any program to 

finance low-probability extreme-impact events. Paradoxically, if the recent increases in federal 

disaster relief and bailouts serve as evidence, a world without TRIA does not necessarily mean 

less financial exposure of the federal government to the economic consequences of terrorism. It 

might very well mean, de facto, increased financial liability for all of us as American taxpayers. I 

will explain why. 

3) Finally, how have other OECD countries addressed the terrorism risk coverage challenge? I 

will briefly highlight the different solutions currently in place in five other countries that have 

suffered from terrorist attacks on their soil: Israel, Spain, France, the U.K. and Germany. This 

will build on ongoing work undertaken by the OECD Board I have the honor of chairing and in 

partnership with the heads of all terrorism risk insurance programs around the world. 

I. Terrorism Risk-Sharing in the U.S. from 2001 to Today 

Terror Insurance Markets Before and Immediately After 9111 

It is important to remind ourselves of the context in which TRIA was established. Before 9111, major 

insurance losses from terrorism were viewed as so improbable that the risk was not explicitly mentioned 

in standard policies (outside of transportation insurance) and hence the cost for providing such coverage 

to firms was never calculated. Terrorism was covered de facto in most commercial insurance contracts.;' 

One of the first attacks to significantly impact the insurance industry occurred in the U.K. in 1992 and 

cost insurers nearly $700 million (indexed to 200 I). Then in 1993, three other major terrorist attacks 

occurred. The first was the bombing of the World Trade Center in New York City in February 1993. 

perpetrated in one of the garages of the Towers. The bombing killed six people and injured one thousand, 

and caused $725 million in insured damages. The second was a series of 13 bomb attacks in India that 

killed 300 and injured 1,100 others. Given the lack of insurance coverage there, these attacks had no 

major impact on insurers, though. The third major attack occurred with a bomb exploding near NatWest 

Tower in April 1993 in London. This attack triggered $900 million in insured losses. 

Notably, the British insurers recognized the significance of these earlier attacks for the future of their 

industry and created a dedicated terrorism insurance program that same year, Pool Re. Surprisingly, 

insurers in the U.S. - and those international insurers and reinsurers covering activities in the U.s. -

continued to cover this peril without explicitly pricing it in their commercial insurance policies. Two 

years later, the Oklahoma City bombing killed 168 people, but the largest losses were to federal property 

and employees, and were covered by the government. In 1998, bomb attacks on the U.S. embassy 

complex in Nairobi, Kenya killed more than 250 people and injured 5,000 others. Still, U.S. insurers and 

international reinsurers operating here continued to cover terrorism. 

Erwann O. Micbel-Kerjan. Testimony before of the HotL<;;c Subcommittee on Insurance, Housing and Community Opportunity, September It 2012. 3 
107 


76126.062

As Berkshire Chairman Warren Buffett said in his November 9, 2001 letter to shareholders: 

"1Ve did not price for manmade mega-cats, and we were foolish in not doing so. In effect, we, and the rest 

of the industry, included coverage for terrorist acts in policies covering other risks-and received no 

additional premium for doing so. That was a huge mistake" ,. 

Things radically changed on September II, 2001. The Al Qaeda attacks killed more than 3,000 people 

from over 90 countries and injured more than 2250 others (victims of the attacks in New York City, 

Washington, DC, and aboard Flight 93 which crashed in Stony Creek Township, Pennsylvania, as well as 

among teams of those providing emergency service). The attacks also inflicted damage estimated at 

nearly $80 billion, about $32.5 billion (2001 prices, or $42 billion in today's prices) of which was 

covered by nearly 150 insurers and reinsurers worldwide, many of them in Europe (including $21 billion 

for damage and business interruption alone)." This illustrates the power of international diversification of 

these markets. 

Private reinsurers, who covered the large portion of these losses, then decided to exit the U.S. market, 

which they could do, as they are unregulated vis-a-vis the risks they decide to cover. Insurers were thus 

left without protection for future terrorism catastrophes. By early 2002, insurers had excluded terrorism 

from their policies in 45 states.'" Commercial enterprises thus found themselves in a very difficult 

situation, with insurance capacity extremely limited and. when offered, very highly priced. 

September ll, 2002 

One year after 91l1, when national security had become the number one priority on the agenda of the 

United States and other countries, our commercial enterprises remained largely uninsured at home. If 

another large-scale attack had occurred, the impact on the economy could have been much more serious 

than it was on 91l L Indeed, the economic losses would not have been spread over a large number of 

insurers and reinsurers worldwide. In the absence of massive post-disaster federal relief, these direct and 

indirect losses such as business interruption, would have been sustained by the firms themselves. 

Terrorism Insurance under the Current Public-Private TRIA Arrangement 

The lack of availability of terrorism insurance shortly after the 9/11 attacks led to a call from some private 

sector groups for federal intervention. For example, the U.S. Government Accountability Office reported 

in 2002 that the construction and real estate industries complained that the lack of available terrorism 

coverage delayed or prevented several projects from going forward because of concerns by lenders or 

investors. 

In response to such concerns, the Terrorism Risk Insurance Act of 2002 (TRIA) was passed by Congress 

and signed into law by President Bush on November 26, 2002.';;; This program was originally aimed at 

providing a three-year temporary measure to increase the availability of risk coverage, but the program 

has been renewed twice since, in 2005 and 2007. TRIA is now extended up to the end of 20 14. 

This Subcommittee is familiar with the current design of TRIA so I will not discuss it in detail here. In 

brief, TRIA requires insurers to offer terrorism coverage to all their commercial clients (a legal "make 

available" requirement). (Note that residential coverage is not included in this program). These firms have 

the right to refuse this coverage unless it is mandated by state law, as in the case of workers' 

compensation in most states. 

Erwann o. ~ichel-Kerjan. Testimony before of the House Subcommittee on Insurance, Housing and Community Opportunity. September II, 2012 4 
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Loss sharing under TRIA is organized as follows: The first layer is provided by insurers through a 

deductible. That deductible is calculated as a percentage of the direct earned premiums each insurer 

received in the preceding year from its policyholders for all lines of business covered under TRIA. In 

order to increase the role of the private market over time, this percentage has increased sharply from 7% 

in 2003, to 10% in 2004, 15% in 2005, and it has been 20% since 2007. For some insurers this represents 

billions of dollars before they receive any federal assistance. The second layer up to $100 billion is the 

joint responsibility of the federal government and insurers. Specifically, the federal government is 

responsible for paying 85% of each insurer's primary losses during a given year above the applicable 

insurer deductible; the insurer covers the remaining 15%. 

Contrary to what is done in other countries (see the review in Section Ill), the U.S. federal government 

does not collect any premiums for covering 85% of the insurer's losses above the deductible. In essence, 

the government intervened to provide insurers with free up-front reinsurance for exposure that would 

ordinarily require a substantial amount of (costly) capital should the insurers seek protection from the 

private reinsurance market. The "up front" is important here since the U.S. Treasury can recoup part of its 

payment from insurers over time, in charge for them to recoup this amount against their own 

policyholders (whether they have suffered from the attack or not, which poses equity issues that have not 

been discussed at any length in analyses of TRIA). 

Has TRIA Worked as Intended? 

The main policy goal of TRIA was to ensure that commercial firms across the nation could access 

subsidized coverage, and as a result, more companies should purchase this coverage. 

Market Penetration Has Increased Substantially. The empirical evidence reveals that this strategy has 

worked. Market data from the two largest insurance brokers, Aon and Marsh, on their own clients (which 

tend to be larger firms), indicate that commercial take-up rates for terrorism insurance have more than 

doubled from 27% in 2003 to 60% in 2006, a level that has remained stable since (62% today). These 

figures have been cited in a number of publications and by my fellow panelists today. 

Three important points should be noted about this 60% figure. First, this is not a TRIA take-up rate but 

combines all types of terrorism coverage used by businesses in the United States: U.S. risks only (TRIA 

only), U.S. risks and non-U.S. risks (clients with foreign values; referred as 'TRIA and non-certified"), 

high risks not covered by the market (referred to as "standalone coverage"), and programs structured as a 

combination of standalone and TRIA coverage (often done through a captive). Second, these are based on 

the portfolio of clients of the above two brokers (in other words, these are samples only, not the full 

market). Third, there is a lot of heterogeneity across industries (e.g., the take-up rate for financial 

institutions and real estate is around 80% but only 40% in the energy sector). 

While we should certainly feel good about the increase observed in 2003-2006, nevertheless, probably 

about 4 out of 10 large corporations in the United States don't have coverage against terrorism today. 

Whether they will be able to sustain a large loss with internal or external capital is an open question 

Congress might want to analyze further. We need to better understand the demand side of this market. 

Let's remember that on 9111 the coverage was virtually 100%. 

Decrease in Insurance Cost. The increase in coverage is partly due to the fact that terrorism insurance 

prices have continuously decreased since 2003. The median premium rate for terrorism insurance for 

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middle-size and large firms was down from $57 per million of total insured value (0.0057%) in 2004, $42 

per million (0.0042%) to $37 per million (0.0037%) in 2008, then to $25 per million (0.0025%) in 2009 

(data from Marsh). A recent report by Aon provides similar information on take-up rates for the twelve 

months ending March 2012: $20 per million for TRIA coverage only (which translates into an average of 

about 3.5% of the premium charged for property coverage for TRIA only and about 5% for TRIA and 

non-certified).~ This decrease is largely explained by the absence of any new attack on U.S. soil, thanks 

to the hard work of our government services here and abroad. It is also explained by the natural effect of 

competition in insurance markets. 

Effects of the Federal Intervention. The design of TRIA had another effect on the insurance supply. My 

colleague Paul Raschky and I recently performed an economic analysis to evaluate how the supply of an 

additional unit of coverage differed between terrorism insurance (with government intervention) and 

property insurance (without it). Partnering with Marsh, we were able to undertake a full demand-supply 

analysis by accessing data on contracts for hundreds of their clients supplied by twenty-six large 

insurance companies operating in the United States. We find evidence that insurers in the U.S. are much 

less diversified for terrorism coverage than they are for property lines of coverage, and to some extend for 

other types of catastrophe risks (e.g., wind and flood); meaning that they wonld more easily provide 

additional coverage to a client for terrorism risk than for these other risks.x 

This result can be interpreted in two ways. On the one hand, and as some have argued, there could be 

gaming here (President's Working Group on Financial Markets, Market Conditions for Terrorism Risk 

Insurance, 2010): some insurers might be taking on much more terrorism risk with the current free upfront reinsurance from the federal government than they would otherwise, knowing that under TRIA they 

collect all the terrorism insurance premiums but are responsible for only a portion of the loss. On the 

other hand, this also means that insurers have provided much more capacity to this market that they would 

have done otherwise, which was the intent when TRIA was designed. 

II. A Paradox: Why Stopping TRIA Might Not Necessarily Lower the Federal Government's 

Exposure to Future Terrorism Economic Losses 

TRIA is set to expire at the end of2014. The question in front of us now is, what do we do next? 

Do we extend TRIA for another few years as is? 

Do we let it expire? 

Do we work to make TRIA more effective and equitable in a redesigned risk-sharing 

arrangement? 

Most of the discussions about TRIA before the 2005 and 2007 renewals have been about whether or not 

to extend the program. This is likely to be a focal point again in the coming months. At the center of the 

debate is an argument that can be summarized as follows: if the federal government continues its pattern 

of renewing TRIA, this will continue to distort the market by displacing long-term private market activity 

that would have otherwise emerged. It is of course impossible to verity this logic unless one lets TRIA 

expire and then observe what happens over time, which can be a risky proposition for the federal 

government as I will show. 

Indeed, if the goal behind terminating TRIA is to limit (or avoid any) additional financial exposure of the 

federal government given the already historical government deficit of$16 trillion today, then terminating 

Erwann O. Mlchel-Keryan. Testimony before nfthe HOllse Subcorrumttee on Insurance. Housing and Community Opportunity, September 11, 2012 6 
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TRIA would seem to make sense. The unnoticed paradox. however, is that a world without TRIA (that is, 

with no federal backstop and no mandatory offer requirement) might not necessarily be one with less risk 

to the federal government and the American taxpayers. 

If TRIA expires, and unless reinsurers reentered the U.S. market with much more capacity than they 

provide today and at a price considered reasonable by insurers, most primary carriers are going to exclude 

this risk from their portfolio everywhere they can. Those that provide it will charge much higher 

premiums than they currently do to take into account expensive capital they need to set aside to meet 

regulatory and/or rating agencies' requirements. As we have seen with the homeowners' hurricane risk 

insurance market in Florida after the 2004 and 2005 hurricane seasons, new poorly capitalized companies 

will emerge to take advantage of this situation and write terrorism coverage with a high degree of 

concentration. 

What happens next depends on whether or not another large-scale attack is perpetrated on U.S. soil. If 

there are no future attacks, the new system will look good (a~ any would in the absence of claims). But 

the day after a large attack, we will realize that many firms are uninsured or poorly insured. 

Under extreme pressure from the media and interest groups, the federal government will be asked to step 

in. Only a small portion of the losses will be paid by insurers and their reinsurers, and the large majority 

of it by all of us as taxpayers. This outcome is pretty certain as one looks at how much more involved the 

federal government has been in providing financial support after catastrophes and crises in the past 

decade than it used to be 50 or 60 years ago. If the attack occurs during an election year, this would be 

even more certain. 

Overall, the number of Presidential disaster declarations has dramatically increased over time, from 191 

declarations over the decade 1961-1970 to 597 for the period 2001-2010. As Figure 1 also reveals, many 

of the peak years correspond to presidential election years. In 1996 and 2008 (both presidential election 

years) there were 75 presidential declarations. This record number was exceeded in 2010 when there were 

81 major disaster declarations, and again in 2011 with 99 declarations. Evidence also shows that the 

portion of economic losses paid by the federal government has been increasing steadily with recent 

disaqters. 

100 

90 

80~~~~~------·~----~~-----~---·------~-~~------1-

70 

60 t"·-"-~-·"-·~--·"---·-·-··-·---·"~~"·-----~··~·-··--·--·--·~~~·~-11 

50 :--.-.... --... -........ -.. -.... ~-... " .... -::--.--.~-.-----.-.--.. -------.. j-.JIA< 

40 ;...-_._ .. -.-... -.. - -. __ ._ .. --j--\ 

30 

20 ,:;;.-~~~t1Htl"'·~····~ 

iG 

Figure 1. U.S. Disaster Presidential Declarations Per Year, 1953-201I (data from FEl\IA) 

Envann O. Miche!·Kerjan. Tes.timony before of the House Subcommittee on Insurance. Housing and Community Oppornmity. September II. 2012. 7 
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Maybe we should rethink options before us as to what should be done post 2014, specifically on working 

to make TRIA more effective and equitable in a redesigned risk-sharing arrangement. 

III. How Have Other OECD Countries Addressed The Terrorism Risk Coverage Challenge?" 

In this last section of my testimony I would like to provide some international perspective. This is 

important for three reasons: a) terrorism threat is international by nature; b) other countries are facing 

similar challenges as we are as to who should bear the risk of terrorism and how best use the strengths of 

the private and public sector in developing a robust compensation scheme; and c) in today's global 

business environment, a growing number of American corporations generate a significant part (if not the 

majority) of their revenues outside the United States. 

I will briefly highlight the solutions currently in place in five other countries that have suffered from 

terrorist attacks on their soil: Israel, Spain, France, the U.K. and Germany (chronologically, as they 

developed their program). The material presented below is public information. 

Israel: Government Coverage, No Involvement of Private Insurers 

In this country with a long history of terrorist attacks, losses from attacks are compensated directly by the 

State according to a pre-defined formula. Any direct and indirect damage occurring within Israel due to 

war or hostilities will be covered by apuh/ic compensation fund legislated in 1961. The fund is built from 

the general property tax collected across the country, according to regulations. Insurers do not cover this 

risk. Both individual and business compensation is provided to those who suffer from an attack. 

Businesses can also receive claims payments for workers' compensation and loss of business revenues. 

Spain: Government Coverage Sold by Private Insurers in its Behalf 

Eligibility. Terrorism has been covered as part of the State-backed insurance compensation scheme for 

extraordinary risks (including also storms, floods, earthquakes, riots), Consortio de Compensation de 

Seguros fund, established in 1954. Coverage for these risks is included as an add-on to property insurance 

sold by private insurers who are not financially responsible for losses. The private sector has never 

expressed an interest in covering terrorism or these other extreme events. 

Pricing. Commercial enterprises pay 0.21 euros per thousand of property coverage and another 0.25 euros 

for business interruption to benefit from this state insurance against extraordinary risks. 

Loss History. In the aftermath of the March 11, 2004 terrorist attacks in Madrid, the Consortio paid 41 

million euros in claims (railway vehicles were not insured). The December 2006 attacks against the 

Barajas Airport triggered another 46 million euros in claims. These claims were rapidly paid by the 

Spanish catastrophe fund which currently has over 4 billion curos in reserve and has never used the state 

guarantee in over 50 years of operation. 

EmamI O. Michel~Ketjan. Testimony before of the House Subcommittee on Insurance, Housing and Community Opportunity. September 11, 2012. 8 
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France: Public-Private Risk Sharing; Unlimited Government Reinsurance 

From a legal perspective, the situation in France was especially acute in the aftermath of 9/11 because the 

1986 law does not allow commercial property insurers to dissociate terrorism coverage from commercial 

property. To stop covering terrorism meant to stop covering commercial property at the 2002 renewals. 

The GAREAl; a public-private partnership, was established in December 2001 as a co-reinsurance pool 

organized under a tier structure of risk sharing and shareholders. It operates on an aggregate annual 

excess of loss basis 

Risk-Sharing Arrangement. The first layer presents an annual aggregate capacity of 400 million euros 

shared among all 105 members of the pool prorated to their share of ceded business. A second layer is 

provided by private insurers and reinsurers up to 2 billion euros. Above that, the State layer is an 

unlimited guarantee by the French government provided through the Caisse Centrale de Reassurance 

(CCR), a state-owned reinsurance company. 

Premium Sharing. The premiums levied by insurers against policyholders are transferred to the GAREAT 

and shared as follows: members of the pool keep nearly 52%, the reinsurance layers 36%, and the CCR 

receives around 12% of the total annual premiums collected. 

Eligibility. Terrorism insurance is mandatory in France, so the take up rate in 100%. The pool covers a 

large range of French commercial and industrial risks above 20 million euros for property damage and 

business interruption, including chemical, biological, radiological and nuclear (CBRN) attacks (GAREA T 

does not cover liability risks and personal lines). Moreover, the same deductible is applied for terrorism as 

for other property coverage risk pricing. 

Pricing. Reinsurance rates by the GAREA T do not vary with location: they are identical across the 

country. They apply as a percentage of the property premiums and depend only on the total insured value, 

for which five segments are defined: free (for sums insured below 6 million euros); 6% of the property 

insurance premium (for sum insured between 6 and 20 million); 12% (between 20 and 50 million euros); 

18% (sums insured higher than 50 million euros). Finally, for "special risks" (e.g., nuclear plants) the rate 

is 24%. This cost is much higher than those I have described for the United States, which are in the 3-to8% range of the property insurance premium. 

Renewal and Government Exit Strategy. The pool was first set up for a single year with the option of 

being renewed, as was done in 2003 until December 31, 2012. An agreement has been reached recently to 

renew it on January l, 2013 for another 5 years. 

U.K: Public-Private Risk Sharing; Unlimited Government Debt Issuance 

In the wake of the terrorist bomb explosions in London in April 1992, which cost insurers nearly $700 

million, and an announcement seven months later by British insurers that they would exclude terrorism 

coverage from their commercial policies, the U.K. established a mutual reinsurance organization, Pool 

Re, in 1993 for commercial property and business interruption to accommodate claims resulting from acts 

of terrorism. 

Eligibility. The scale of 9111 attacks in the United States led to a major revamping of Pool Re. Since the 

end of 2002, protection of companies operating in the U.K. under Pool Re has been extended to all risks, 

Erwann O. Miche!-Kerjan. Testimony before of the House Subcommittee on Insurance, Housing and Community Opportunity. September I L 2012. 9 
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a category that now includes damage caused by chemical and biological as well as nuclear contamination 

(while war and related perils as well as computer hacking continue to be excluded). 

Risk-Sharing Arrangement. Pool Re acts as a reinsurer for all insurers that wish to be a member of the 

pool; the U.K. Treasury in turn provides Pool Re with unlimited debt issuance that the pool will have to 

reimburse over time. Pool Re's right to draw funds under the retrocession agreement with the government 

is determined on a strict cash needs basis. That means that premium income earned by Pool Re during the 

time necessary for claims settlement, (i.e. after a terrorist attack), will also be used to pay these claims, if 

necessary. 

All insurers authorized to insure losses arising from damage to commercial property in Great Britain are 

eligible to apply for membership of Pool Re, regardless of their domicile. Most insurers operating in the 

U.K. commercial property market are members. As of September 2012, Pool Re has 230 members (75 

insurers incorporated in the U.K., 41 Lloyd's syndicates, and 114 insurers incorporated elsewhere). They 

have an individual retention before being reimbursed by the pool which is based on their proportion of 

participation in Pool Re, applied to the "industry retention" (£100 million per event £200 million per year 

in 2012). 

Pool Re has a current reserve of nearly £4.7 billion, which would have to be exhausted before the British 

Treasury pays anything. If the government needs to intervene for insured losses above this, it will get 

reimbursed for that payment by the pool over time; and at the end of the day, the members of Pool Re will 

have paid all insured losses due to the terrorist attack. 

Premium Sharing. Pool Re shares 10% of its collected premiums with the U.K. government in order to 

receive this coverage. 

Germany: Public-Private Risk Sharing; Limited Government Reinsurance 

As in the United States, until the events of 9/11, coverage against terrorism risk was included in all 

commercial lines in Germany without an explicit extra premium. After 9111, the extremely limited 

availability of terrorism coverage led to the founding of Extremus AG, a federal government-backed 

property insurance corporation that started operations on November 1, 2002. Unlike Pool Re, Extremus is 

not a reinsurance institution but a private insurance company. 

Risk-Sharing Arrangement. The annual capacity to pay for claims is 10 billion euros. It is completely 

reinsured by national and international insurance and reinsurance companies (first layer limited to a total 

of2 billion euros), as well as by the federal government (second layer of 8 billion euros). As of December 

31,2010, Extremus provided a total of 450 billion euros terrorism insurance coverage to 1,174 firms. 

Premium Sharing. As is the case in France and the U.K., but not in the U.S., the reinsurance provided to 

Extremus by the federal government is not free of charge: the government receives approximately 12.5% 

ofthe 50 million euros in premiums collected by Extremus. 

Eligibility. Extremus provides coverage for buildings, contents, and business interruption. But only risks 

with total insured value over 25 million euros are eligible for coverage. As in the U.S. and the U.K., 

companies operating in Gennany are not required to purchase insurance against terrorism. The annual 

compensation by Extremus for any company is capped at a maximum of 1.5 billion euros. This means 

that a company with a total insured value of 25 billion euros it can purchase coverage for only 6% of its 

Erwann 0, Micbel-Kerjan. Testimony before of the House Subconunittee on Insurance, Housing and Community Opportunity. September 1 J, 2012. 10 
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total insured value from Extremus. A number of risks are explicitly excluded, such as nuclear risks as 

well a' biological and chemical contamination by terrorists, war and civil war, and insurrection. Losses 

due to computer viruses are also not covered. 

This international review shows that different countries have responded to the question of terrorism risk 

financing differently, and that those responses were often modified after terrorist attacks on national soil. 

Some of these concepts may be relevant for the United States as we rethink the role that TRIA should 

play in the future. 

For different governments to be able to compare notes, market developments and ongoing national debate 

about the future of terrorism risk insurance is important as well. The OECD has taken the lead in making 

this happen by organizing an unprecedented gathering of all the heads of terrorism risk insurance 

programs of member countries at its headquarters in Paris in 2010 along with representatives from the 

private sector and intelligence community;"i the next meeting of this group will take place on December 

4,2012. 

IV. Conclusion 

The threat of terrorism is still present in the United States even though there has been no successful attack 

on U.S. soil since 200 I. TRIA provides federal reinsurance to insurers at no up-front cost which is unique 

worldwide. As a result, millions of businesses operating in the United States are able to purchase 

coverage at a price they judged reasonable. Despite its successes, TRIA can be criticized on several fronts 

and can certainly be improved. For example, a significant number of firms do not purchase that coverage. 

Can the market operate in the absence of a federal backstop and a mandatory offer requirement? 

Yes, but there is likely to be a rather thin market except for lines that insurers cannot exclude (such as 

workers' compensation). Could this be sustainable? If there is no successful terrorist act on U.S. soil in 

the next 10 or 20 years, then yes. But when the next attack occurs, experience shows that Congress will be 

called to the rescue by businesses that went uninsured, as it has been so many times in recent years for 

other types of catastrophes and crises. 

Instead, I believe we should try to work together at improving the current system, rather than relying on 

ad hoc response that will come at a time of great sadness and grief. As I showed early in my testimony, an 

improved TRIA could actually limit the financial liability of the American taxpayers, not increase it. 

To make this happen will require leadership from Congress and the Office of the President. 

As we have done since 2001, my colleagues at the Wharton School and I look forward to working with 

both on how we do it. 

I want to thank you again for the opportunity to testifY here today. I would be happy to answer any 

questions you may have. 

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Endnotes and references cited in the testimony 

I Kunreuther, H. and E. Michel-Kerjan. Congressional Testimony before the Senate Appropriations Subcommittee on Financial 

Services and General Government on Federal Disaster Assistance Budgeting: Are We Weather-Ready?, July 28,2011. 

!! Recent studies include: 

Michel-Kerjan, E. (2010). Catastrophe Economics: The U.S. National Flood Insurance Program. Journal a/Economic 

Perspectives 24(4): 165-86. 

Michel-Kerjan, E. and C. Kousky, (2010). Come Rain or Shine: Evidence from Flood Insurance Purchases in Florida, 

Journal of Risk and Insurance. 77, 369-397 (20 I 0). 

Michel-Kerjan, E., S. Lemoyne de forges and H. Kunreuther (2012). Policy Tenure under the U.S. National Flood 

Insurance Program. Risk AnalYSis, 32(4): 644-658. 

Michel-Kerjan, E. and H. Kunreuther (2011). Reforrnino Flood Insurance. Science 333, July 22. 

Czajkowski, L H. Kunreuther and E. Miche1-Kerjan (2012). A Methodological Approach for Pricing Flood Insurance 

and Evaluating Loss Reduction Measures: Application to Texas. Center for Risk Management, The Wharton School, 

Philadelphia, P A. 

'11 Michel-Kerjan, E. and II. Kunreuther. Whv We Should Not (Alwavs) Blame Congress. The IfujJington Post, August 8, 2012. 

1\' Kunreuther, H. and E. Michel-Kerjan. Policy Watch. Challenges of Terrorism Risk Insurance in the U.S. Journal of Economic 

Per~pectives. 2004. 

v Mr. Buffet's letter is available at: http://berkshirehathawav.com/gtrly/webl101.html 

\1 U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, U.S, Securities and Exchange 

Commission, Commodity Futures Trading Commission 2006. Terrorism Risk Insurance: Report of the President's Working 

Group on Financial Markets. Washington, D.C., September. 

"11 Large-scale terrorism is different than many other risks: difficulty to quantifY the risk, thus to price it actuarially; dynamic 

nature of the threat, which partly depends on government actions; interdependencies (the vulnerability of one organization 

depends not only of its own actions but also on actions of other agents) asymmetry of information in favor of government 

services; potential for catastrophe losses, which would require a lot of costly capital for insurers to cover alone; potential for 

bankruptcy; and the fact that other risks present a more attractive return on investment insurers can then present their 

shareholders. See Wharton Risk Center (2005). TRIA and Beyond. The Future of Terrorism Risk Insurance in the U.s. 

Philadelphia, PA and Kunreuther, H. and E. Michel-Kerjan. Terrorism Insurance 2005. Regulation. The Cato In:.iitute. 

\1U The complete version of the original Act can be dO\\'!1loaded at: http://\vww.treas.gov/offices/domestic~financelfinancjalinstitution/tcrrorism-insurancc/claims""pfOcess/program,shtml, 

!X Aon. Property Terrorism Marketplace, Terrorism Insurance Update. March 15,2012. 

x Michel~Kel:ian, E. and P. Raschky. The Effects of Government Intervention on the Market for Corporate Terrorism Insurance. 

European Journal of Political Economy, 2011. 

Xl I would like to thank the chainnen, secretary-generals and general managers of the programs discussed here for ongoing 

discussions and their insights. For more on international terrorism risk insurance markets, see: 

Michel·Kerjan, E. and B. Pedell. (2006). How Does the Comorale World Cope with Mecra· Terrorism? Puzzling 

Evidence from Terrorism Insurance Markets. Journal of Applied Corporate Finance, 18(4):61-75. 

OECD, Terrorism Insurance in GECD Countries, 2005; 

OECD. Terrorism Insurance in 2010: Where Do We Stand? Proceedings of the June 2010 conference, Paris; 

Guy Carpenter. Terrorism. 2011. 

xu Michel-Kerjan, E .. Ensuring that Our Economies Remain Terror-Proof. 771e Huffington Post, June 23, 2010. 

Erwann O. Michel-Kerjan. Teslimony before ofthe House Subcommittee on Insurance. HOllsingand Community Opportunity. September II, 2012. 12 
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TESTIMONY OF JANICE OCHENKOWSKI 

ON BEHALF OF THE RISK AND INSURANCE MANAGEMENT 

SOCIETY, INC. (RIMS) 

BEFORE THE 

U.S HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL 

SERVICES 

SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY 

OPPORTUNITY 

ON 

"TRIA AT TEN YEARS: THE FUTURE OF THE TERRORISM RISK 

INSURANCE PROGRAM" 

TUESDAY, SEPTEMBER 11,2012 

2128 RAYBURN HOUSE OFFICE BUILDING 
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76126.072

Good morning, Madame Chair Biggert and Ranking Member Gutierrez and 

members of the Subcommittees. My name is Janice Ochenkowski. I am a Managing 

Director with responsibility for global risk management for Jones Lang LaSalle, a global 

real estate and financial services company based in Chicago. I am pleased to be here this 

morning to testify on behalf of the Risk and Insurance Management Society, Inc. (RIMS). 

I also appreciate the Subcommittee's foresight and initiative to begin this very important 

policy debate regarding the reauthorization of the Terrorism Risk Insurance Act on the 

anniversary of September II. 

RIMS is a not-for-profit organization dedicated to advancing the theory and 

practice of risk management for the benefit of our member organizations. Our discipline 

is vital to the creation and protection of physical, financial, and human resources. A 

global organization and the largest organization of risk managers in the United States, 

RIMS is comprised of over 10,000 individuals from more than 3,500 entities. 81 % of our 

members are Fortune 500 companies with approximately 1,000 members representing 

small businesses (less than 500 employees). Membership spans the entire economic 

spectrum from the high-tech sector, real estate, financial, healthcare, energy, 

transportation and defense. Members also include universities, hospitals, and public 

entities such as the City of San Francisco, Miami-Dade School District and Orange 

County, California. 

However, as diverse as RIMS member organizations are, they share a common 

characteristic. That is, they are predominantly large consumers of property and casualty 

2 
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insurance and they have a abiding interest in the need for, and availability of, insurance to 

cover risk against acts of terror. 

Application of the Risk Management Discipline to Terrorism Risk 

Risk management is the practice of analyzing an entity's exposures to loss, 

selecting methods to mitigate the exposures, implementing the selected methods, and 

monitoring and adjusting the methods depending on the results. Applications for risk 

management cover all possible exposures to loss, ranging from estimating the number of 

employees who will be injured in a given period to how to effectively use arbitrage in a 

global business. The methods used to mitigate exposures are non-insurance transfers, 

insurance, control, retention, and avoidance. For terrorism exposure, most businesses use 

a combination of control, retention, and insurance as mitigation strategies. 

For example, an owner ofreal property valued at $10 billion located in the 

central business districts of major cities, would have a risk management program that 

would include several different risk management methods to manage concerns about 

terrorism. Those efforts would include a security program with options such as guards, 

cameras, motion detectors and alanns, along with an employee and tenant identification 

program to control building access. Visitors would be limited to one entrance where 

security staff could log entry and departure. Redundancy and security would be built into 

all vital computer operations. If the size and potential risk to the property warranted it, 

the owner might also make physical improvements to the property as well as to the 

3 
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perimeter ofthe facility. In addition, the owner would purchase an all-risk commercial 

insurance policy to cover the property for physical damage risks, including terrorism. 

Property insurance policies have deductibles, and the owner will retain the risk of the 

deductible amount. 

In my job at Jones Lang LaSalle, we purchase insurance for properties owned by 

our clients through several insurance programs. In total, for U.S. exposures, we purchase 

insurance for just under 70 million square feet of real estate with an aggregate insured 

value of under $9 billion. All are commercial properties, and include industrial, retail 

and residential, but most are office buildings. The locations vary from suburban to city 

center but arc generally within major urban areas in populous states. Since the enactment 

of the first terrorism legislation, we have been able to purchase terrorism insurance at 

commercially reasonable limits and in forms acceptable to the properties' lenders. There 

are some limitations on high risk locations as well as some property types, but in general 

we are able to buy the coverage we need at premium that can be absorbed by our tenants 

or investors. 

In the event that the Terrorism Risk Insurance Program Reauthorization Act 

(TRIPRA) is allowed to sunset on December 31, 20014, we believe that we will be 

unable to obtain the limits of coverage necessary to protect the properties and investors 

and to satisfy lenders. A more significant portion of the risk will be retained by owners, 

which would further impede the real estate market's financial recovery. I should also 

note that tenant leases now frequently require that the landlord maintain terrorism 

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insurance and the inability to purchase the coverage could result in a default on the lease, 

renegotiation of terms, or loss ofa tenant. 

One of the basic functions of risk management is to identify potential risks for a 

company in areas such as property, health and safety, and environmental and financial 

risk, and to identify options to mitigate those risks. Insurance coverage is a critical and 

necessary part of the process of protecting our companies from risk, especially risk that 

can produce catastrophic losses. Terrorism is one of those risks that presents catastrophic 

exposure to companies. Accordingly, it is vital that terrorism insurance continues to be 

available to buyers of commercial insurance in a comprehensive and affordable manner 

when the program expires in 2014. 

Stability in Insurance Markets Promotes Economic Stability 

RIMS considers the availability of adequate insurance for acts of terrorism to be 

not simply an insurance problem, but also an economic issue. The inability to acquire 

sufficient insurance for terrorism coverage could result in the inability to secure financing 

for future construction projects as well as potential impacts on existing construction 

projects that require evidence of terrorism coverage. Without TRIA, many companies 

would not be able to comply with various lender covenants within mortgages, which 

would impede the ability to fund real estate transactions and further limit the normal 

functions of the real estate market. Additionally, other businesses and public entities 

face terror exposures critical to the economic well being of our county. Public and 

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private transportation, schools and hospitals, special and sporting events, and certain 

manufacturing exposures need terrorism coverage as well. Furthermore, as a direct result 

of9/11 losses, worker's compensation insurers have restricted coverage for employers 

with aggregations of workers within a single facility or in large metropolitan areas. 

Many businesses and our members in the United States rely on global insurance 

companies for coverage. These insurers decide where to underwrite risk based on their 

assessment of overall profitability in return to their shareholders. If the risk to write 

coverage is perceived to be too great or uncertain, U.S. businesses will be left without the 

coverage they need. This could complicate the already fragile economic recovery. 

Terrorism Risk Poses Unique Issues of Loss Predictability 

Unpredictability of losses is many times greater for terrorism risk than for natural 

disasters, as there are no credible historical data on losses. It is impossible to predict 

frequency with any degree of accuracy, and it is extremely difficult to estimate both the 

frequency and severity of a potential terrorist event, as the timing, location and target 

cannot be identified in advance. Without some form of backstop like TRIA, RIMS 

believes insurance companies will review their portfolios of business and will refuse to 

continue covering certain risks in areas where exposure is greatest. This would be true 

for workers compensation, property, and even third-party liability lines of coverage. 

Both large and small businesses would be affected. 

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Congressional Action and its Impact on Terrorism Risk Insurance 

Availability/ Affordability 

The last ten years have demonstrated that the private insurance market alone will 

likely not be able to respond nor provide adequate coverage for acts of terrorism. 

Following the events of 9111 and prior to the passage of TRIA in 2002, the first longterm authorization, the required supply of commercial insurance coverage for acts of 

terrorism was not available. RIMS members with large concentrations of employees had 

difficulty in purchasing workers' compensation insurance as well as difficulty in 

purchasing property insurance coverage, including coverage for terrorism on buildings 

and construction projects. 

Since 9/11, RIMS has conducted a series of intermittent membership surveys 

(formal and informal) related to member organizations and their access to terrorism risk 

insurance. In 2006, prior to the passage of TRIPRA, the vast majority of members 

indicated their policy renewals were conditioned upon Congress' long-term extension of 

TRIA. As an indicator of what might be expected if a TRIA-type program were not in 

effect, 75 percent said that prior to the passage ofTR1PRA in 2007, their policies 

contained terrorism coverage conditioned upon the extension of TRIA. Seventy-six 

percent stated that they believe their terrorism coverage limits would have been decreased 

had TRIA not been extended, and 82 percent felt their premiums would have increased if 

TRIA had not been extended. In this regard, one of our members reported that the 

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premiums for coverage of a property in a large metropolitan area went from $200,000 in 

2005 to $500,000 in 2006, for one half of the policy limits they had in 2005. 

Furthermore, the member's broker stated that calTiers were unwilling to commit to 

insuring projects inclusive of TRIA if the completion dates went beyond December 31, 

2007, TRIA's original sunset date. 

Subsequent to passage of TRIPRA, a 20 I 0 survey of RIMS members 

indicates that for the most part, capacity is generally not an issue, but continues to be a 

challenge for risks located in major metropolitan areas, including New York, San 

Francisco, Chicago, Boston, and Washington, D.C. Based on our members' experience 

in these densely populated urban areas, the typical situation is that when insurers monitor 

their aggregate liability in these particular areas, the purchase of adequate insurance can 

be difficult. Passage of TRIA in 2002 was followed by a demonstrable increase in the 

number of insurers willing to write the coverage and provide higher limits needed for 

these high-risk areas. However, this does not hold true for all areas, even today. The 

amount and cost of coverage available for high-risk locations continues to vary greatly 

based on the location of the insured and the aggregation of risk in that particular area. If 

the federal backstop were withdrawn altogether, these urban areas considered high risk, 

and those more susceptible to terrorist acts and most in need of terrorism risk insurance, 

would likely be most vulnerable and negatively impacted. 

Elements of Legislation in the 113th Congress 

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As to an appropriate Federal role in terrorism reinsurance, RIMS strongly 

supported bipartisan efforts of this Subcommittee and others to create a Federal Insurance 

Office (FlO) and worked in coalition to secure its incorporation into the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. RIMS support for an FlO was based 

on the belief in the need for federal coordination on international matters as well as the 

necessity for a Federal expertise on insurance issues which became apparent in the 

aftermath of the 9111 attacks. As part of this growing recognition that the Federal 

government has an appropriate role in insurance matters, Congress gave the FlO and 

Treasury joint authority to administer the Terrorism Insurance Program. 

A July 2012 survey of RIMS membership indicates, once again, the strong belief 

in the necessity of a federal backstop. Nearly 85% of RIMS respondents indicated that 

Congress needs to reauthorize TRIPRA and that without another long-term extension, 

issues of affordability and availability will resurface. As the Subcommittee and Congress 

move forward into the next Congress, RIMS supports the following principles in 

development of another long-term solution: 

• A completely private market solution in the long term is probably not feasible 

because of the difficulty in predicting acts of terrorism and thus being able to 

price the risk properly. Businesses, as part of their corporate governance, 

need to be able to assess what the business risks arc and how they can be 

quantified and treated. Without a TRIA-type program, many entities will 

simply be self-insured due to lack of availability or affordability of coverage 

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or both-leaving their companies and their workers exposed to an event that 

could bankrupt the company. 

• As risk managers, we believe that a program should always be in place to 

ensure an orderly and efficient response to minimize any market disruptions 

and ensure benefits are available to any victims-individuals or companies 

from a catastrophic loss scenario. 

• A private/public partnership provides the best alternative to addressing the 

long-term needs of availability and affordability of insurance to cover acts of 

terrorism. Some form of risk pooling may be an appropriate approach. 

Regardless of the extent of private market involvement, the federal 

government will likely be required to continue to be involved in a reinsurance 

capacity at some level with the level of involvement decreasing over time. 

• The solution needs to address the long-term availability and affordability of 

insurance coverage for nuclear, biological, chemical, and radiological (NBCR) 

events caused by terrorism. RIMS believes it is critical that a program be 

developed to insure continued coverage for acts of terrorism, including nuclear, 

biological, chemical, and radiological acts. The federal government has stated 

that potential acts of terrorism from these sources are likely. RIMS believes that 

NBCR represents some of the most problematic areas in the ongoing terrorism 

debate. The stand-alone terrorism insurance market continues to be extremely 

limited, in that it really only exists for the property line and is very limited in 

terms of capacity and price. Rating agencies are increasing the capital 

requirements for reinsurers, which means that they cannot write the same limit of 

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coveragc as last year without increasing their capital reserves. The practical 

impact is that available limits of coverage will be reduced. RIMS believes that it 

is critical that a long-term solution be devcloped to insure that terrorism insurance 

will be available. 

• All commercial property, workers' compensation, auto and general liability 

lines should be included in any new plan. 

• Insurance companies writing commercial lines should be required to 

participate in the program and be required to make coverage available for acts 

of terrorism. 

• Tax incentives and eligibility for participation in the program should be 

, considered to encourage creation of private insurance capacity. 

RIMS appreciates the opportunity to testify and thanks the Subcommittee for beginning 

this very important discussion in advance ofTRIPRA's expiration. Wc stand ready to 

serve as a resource as you bcgin your work to develop legislation next Congress. Should 

you require additional information or have any questions regarding RIMS policy 

positions, please do not hesitate to contact Kathy Doddridge, RIMS Government Affairs 

Director, at kdoddridge@rims.org. 

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REINSURANCE 

ASSOCIATION 

OF AMERICA 

1445 New York Avenue, WI 

7thRoor 

Washington, D.C, 20005 

202/63&3690 

IWIW.reinsurance.org 

TESTIMONY 

OF 

EDWARDB. RYAN 

AON BENFIELD 

TRIA AT TEN YEARS: THE FUTURE OF THE 

TERRORISM RISK INSURANCE PROGRAM 

BEFORE 

UNITED STATES HOUSE FINANCIAL 

SERVICES SUBCOMMITTEE 

ON INSURANCE, HOUSING AND COMMUNITY 

OPPORTUNITY 

SEPTEMBER 11,2012 
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Good Morning Chairwoman Biggert, Ranking Member Gutierrez, and Members 

of the Subcommittee. I am Edward B. Ryan, Senior Managing Director at 

Aon Benfield, the world's leading reinsurance intermediary and fullservice capital advisor. With more than 80 offices in S0 countries, 

our worldwide client base has access to the broadest portfolio of 

integrated capital solutions and services. I thank you for the 

opportunity to testify on behalf of the Reinsurance Association of 

America on the reinsurance perspective of this hearing entitled "TRIA 

at Ten Years: The Future of the Terrorism Risk Insurance Program." 

As we mark the 11th anniversary of the attacks on the US, we remember 

all the victims of 9/11. Aon Benfield, especially the 1,100 of us who 

worked in the World Trade Center, continues to mourn the 176 of our 

colleagues and friends whom we lost that day. 

We know the commercial insurance market and know that reinsurance 

availability is a key component of our economy. We therefore urge 

Congress to act to extend the Terrorism Risk Insurance Act (TRIA). 

Aon and the RAA supported the adoption of the Terrorism Risk Insurance 

Act in 2002, its reauthorization in 2005 (TRIEA) and the 2007 

Extension Act (the current TRIPRA). The response to 9/11 by the 

insurance industry was to pay tens of billions of dollars in claims 

but also to exclude terrorism losses going forward. TRIA created an 

essential federal backstop that enabled the primary insurance industry 

to provide terrorism insurance coverage to our nation's businesses. 

The Program has enhanced the private market for such coverage and has 

had a stabilizing influence on the economy. Under TRIA and its 

extensions, the availability of terrorism risk insurance has 

increased. 

Private Reinsurers' Role under the TRIPRA Program 

There is a role for private reinsurers under the TRIPRA program. In an 

event certified by the Secretary of the Treasury as a terrorist 

attack, TRIPRA provides reinsurance-like protection for primary 

commercial insurance exposures. The program provides coverage for 85% 

of eligible loss up to an industry loss of $100 billion. Coverage is 

subject to an individual company retention of 20% of the prior year's 

direct earned premium (DEP) on covered lines. These individual 

company retentions, and the 15 percent co-pay for losses above the 

retention, require insurers to retain significant losses before TRIPRA 

funding is triggered. 

Private reinsurance provides a vehicle for insurers to manage that 

retained loss. 

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Private Insurers and Reinsurers Still Face Significant Hurdles in 

Underwriting Terrorism Risk 

Since the terrorist acts of 2001, insurers, modelers and reinsurers 

have worked to develop a better understanding of terrorism risk. 

Companies have consulted military and intelligence experts and hired 

specialty risk modeling firms. 

At Aon Benfield, through our wholly-owned subsidiary Impact 

Forecasting, we developed the first terrorism model post 9/11 to 

analyze terrorism exposures. With a comprehensive list of 8,000 hard 

targets in the database, the Impact Forecasting Terrorism Model can 

produce deterministic and probabilistic losses for a full range of 

conventional and NBCR (nuclear, biological, chemical and radiological) 

scenarios. 

Despite these efforts, terrorism risk poses great challenges as an 

insurable risk. 

The main hurdle in assessing and underwriting terrorism risk is that 

the frequency of loss from terrorism is neither predictable nor 

random. Terrorists continually attempt to defeat loss prevention and 

mitigation strategies. In addition, the insurance industry does not 

have access to all existing information about terrorism, targets and 

potential attacks for obvious national security reasons. 

Observations on Private Reinsurance Terrorism Market 

Despite these issues, reinsurers have been willing to put capital at 

risk to manage terrorism losses. Reinsurers typically offer coverage 

for foreign acts of terrorism, i.e. acts committed by non-US agents, 

in stand-alone terrorism contracts, rather than within existing allperils catastrophe contracts. The amount of stand-alone terrorism 

treaty reinsurance capacity available in the private market is 

estimated to be $6-$8 billion, a figure that has remained largely 

unchanged in recent years. 

The bulk of terrorism reinsurance currently comes via existing 

reinsurance programs. Coverage for Personal Lines (which is not 

subject to the Program), for Workers Compensation, as well as for acts 

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of terrorism committed by US agents is generally available in existing 

catastrophe programs. Insurers with exposures limited to rural or 

suburban areas have secured terrorism coverage within existing 

reinsurance programs, with limitations on the size of subject risks or 

events. 

Regarding NBCR exposures, there is little reinsurance appetite for 

this risk. When it is available, pricing for NBCR coverage comes at a 

significant premium and coverage amounts are significantly less than 

those available for conventional terrorism. 

For the foreseeable future, based on current demand, there will be an 

adequate supply of reinsurance capacity for coverage around the 

structure currently provided by the Federal Program. However, were 

the Program to terminate in 2014, we expect insurers to curtail the 

provision of terrorism insurance. u.s. businesses would be more 

exposed to the financial consequences from terrorist activities. To 

the extent that this additional risk forces businesses to seek 

insurance, insurers would offer meaningful but not unlimited insurance 

products. The private reinsurer marketplace would work productively 

with insurers to provide reinsurance coverage for terrorism, but 

capacity would be severely constricted. Moreover, absent a federal 

backstop for terrorism risk, expectations that the vast majority of 

the existing insurance market for terrorism risk would disappear is 

not merely speculative. Aon tracked property insurance market 

behavior prior to the previous expiration of the various iterations of 

TRIA and, in each instance, more than 80% of the existing capacity for 

terrorism risk would have been withdrawn from the market in the 

absence of TRIA and its mandatory offer of coverage provisions. 

TRIPRA Renewal in 2014 

TRIPRA has served an important role to our nation's economy. As TRIPRA 

expires in 2014, we urge this Committee and the Congress to 

reauthorize this program in 2013 to eliminate any uncertainty around 

reauthorization, and to meet the needs of insurers and insureds whose 

contracts will expire throughout the year. We commit the resources of 

Aon Benfield as well as the Reinsurance Association of America to work 

with the Committee to achieve this goal. 

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76126.086

[B NATIONAL 

ASSOCIATION of 

REALTORS· REALTOR' 

500 New Jer~y Avenue, N.W. 

Washington, DC 2(1)O1<,?:O20 

TESTIMONY OF 

LINDA ST. PETER 

Maurice "Moc"Vciss) 

2012 Prt'siJ!.'nt 

Dale A Stinton 

2012 COMMERCIAL COMMITTEE VICE CHAIR 

NATIONAL ASSOCIATION OF REALTORS® 

BEFORE THE 

UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE 

ON FINANCIAL SERVICES SUBCOMMITTEE ON INSURANCE, 

HOUSING AND COMMUNITY OPPORTUNITY 

HEARING TITLED 

TRIA AT TEN YEARS: THE FUTURE OF THE TERRORISM RISK 

INSURANCE PROGRAM 

SEPTEMBER 11, 2012 

IS a registered collectIVe membership mark which may be used only by real estate 

professionals who are members of the NATIONAL ASSOCIATION OF REAL TORS® 

and subscribe to its strict Code of Ethics. 
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76126.087

INTRODUCTION 

Chairwoman Biggert, Ranking Member Gutierrez, and members of the Subcommittee, on behalf of 

more than 1.1 million REALTORS®, thank you for inviting me to testify today on the future of the 

terrorism risk insurance program. My name is Linda St. Peter. r am the 2012 Vice Chair of the 

Commercial Committee for the National Association of REAL TORS® (NAR) and I am the current 

operations manager for Prudential Connecticut Realty in Wallingford, CT. I have specialized in 

commercial and investment real estate brokerage, since 1988. I am pleased to testify of behalf of the 

NAR and its commercial affiliates: CCIM Institute, Institute of Real Estate Management, 

REALTORS®Land Institute, and Society ofIndustrial and Office REALTORS®. Together, 

members of NAR and its affiliates are involved in all aspects of commercial real estate - from real 

estate brokerage to property management. 

RECENT ATTACKS &THREATS 

We still live in an uncertain world and continue to fight the war on terror. Though we have been 

safe at home since September 2001, we only need to look to the 2011 suicide bombing at Moscow's 

Domodevo airport for terrorism's devastating potential. Additionally, conflict in many countries 

across the Middle East and North Africa has increased political and social tensions, factors that 

suggest terrorism risk "Till be a constant and potentially growing threat for years to come. It is in the 

interest of America's economic security to ensure that as much of our commercial real estate 

industry is covered by terrorism insurance as possible. 

111rough my experience working on some of Connecticut's most significant commercial real estate 

projects over the past several years, I personally understand the vital importance of terrorism 

insurance to accomplishing the economic goals of Connecticut. I can tell you that if the terrorism 

insurance program were to expire, many of my firm's community development projects would not 

be possible. 

IMPORTANCE OF TERRORISM INSURANCE 

It is no secret that immediately after the horrific 9/11 terrorist attacks, terrorism insurance coverage 

was virtually non-existent for commercial property owners. Only when Congress enacted the 

Terrorism Risk Insurance Act (fRIll.) in 2002 did coverage for terrorist attacks resume. TRIA 

established a public-private risk-sharing partnership that allows the federal government and private 

insurance companies to share losses in the event of a major terrorist attack. Originally enacted as a 

3-year program, TRIA bas been reauthorized by Congress twice. In 2005, Congress passed the 

Terrorism Risk Insurance Extension Act (rRIEA). 

Insurance Reauthorization Act of 2007 (fRIPRA) 

2014. 

The most recent extension - the Terrorism Risk 

extended the program through December 31, 

Today, there is concern that the uncertain future of TRIA may cause insurance prices to fluctuate. 

Further, this uncertainty may prompt insurers to drop terrorism coverage if a reauthorization of the 

program is not in place by the end of2014. This became evident in 2005 when private insurers 

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became more reluctant to offer terrorism coverage due to uncertainty regarding the program's 

extension. Ultimately, the uncertainty of insurance pricing impacts our net operating income, and 

the value of our properties. The potential unavailability of this coverage at the end of 2014 will 

impact our financing agreements and potentially hurt the fragile commercial real estate market. 

Affordable and available terrorism insurance is a vital component of most commercial real estate 

transactions. It is estimated that 84 percent of outstanding commercial mortgage balances require 

terrorism insurance. Thus, ifTRlA were to expire, and insurers subsequently dropped terrorism 

coverage, those loans would be in technical default. \'i/hile the commercial real estate finance market 

is starting to show signs of life, any disruption in the availability of terrorism insurance in tlus sector 

would have serious consequences on its fragile road to recovery. 

NECESSITY OF THE TERRORISM RISK INSURANCE PROGRAM 

The passage of TRIA in 2002 helped stabilize commercial real estate markets following the 

disruptions of the September 11,2001, terrorist attacks by making terrorism coverage available and, 

over time, more affordable. According to a 2010 President's Working Group on Capital Markets 

(pWG) 1 and 2008 Government Accountability Office (GAO) study', TRIA and its subsequent 

extensions have generally kept terrorism insurance affordable and available nationwide. Owners of 

high-value properties in urban areas, such as Manhattan, however, still face challenges in obtaining 

coverage at a reasonable price. Improved access and lower prenUums are due in part to the 

continued improvement in an insurer's ability to model and measure their aggregate loss exposure, 

and thereby manage terrorism risk. 

However, despite improvements in these measurements, the frequency and severity of terrorism 

attacks cannot be reliably assessed by insurance companies. Primary insurers remain largely averse 

to exposing themselves to potentially catastrophic terrorism losses and continue to have limited 

availability to reinsurance. Reinsurance plays a critical role in insurance markets by allm.ving insurers 

to transfer some of the risks they assume in offering, permitting them to offer additional coverage. 

Similar to the challenges faced by primary insurance companies, reinsurers have !inUted ability to 

predict the frequency and magnitude of future terrorist attacks, which has hindered reinsurers from 

sufficiently managing the industry'S current terrorism risk exposure. 

Thus, without the federal backstop for potential insurance losses related to terrorism, we believe 

coverage availability could decline significantly. In fact, without TRlA providing reimbursement for 

insured losses that exceed the amount of an insurer's deductible, coverage could decline by more 

than 95 percent, according to one insurance company cited in the GAO report. 

l1,brket Conditions for Terrorism Risk Insurance 2010, Report of the President's Working Group on Financial 

r..1arkcts. 

2 GAO, Report to Congressional Committees, Terrorism Insurance - Status of Efforts by Policyholders to Obtain 

Coverage (G,'O-08-1057. Sept. 2008). 

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RECENT MODIFICATIONS TO TRIA 

As mentioned earlier, since its enactment in 2002, TRIA has been modified and extended twice. We 

believe many of the changes made have enhanced the program by providing more access to 

affordable terrorism insurance for businesses, while lowering the potential cost to taxpayers in the 

event of a major terrorist attack. 

This includes the removal of the foreign vs. domestic terrorism distinction. Without this change, the 

Treasury Secretary may be forced to make determinations that may not serve our national security 

needs, and more importantly, the distinction served no policy goal. As the 2005 London bombing 

demonstrated all too well, there can be serious difficulties in distinguishing between foreign and 

domestic terrorism, and the distinction makes no difference to the victims. 

PRINCIPLES FOR A LONG TERM SOLUTION 

Quite simply, an effective homeland security strategy is central to the nation's economic security. 

American businesses must have adequate terrorism risk coverage. Without terrorism insurance, the 

nation's economic infrastructure is totally exposed to large-scale business disruptions after an attack, 

and to a retarded recovery from the damage that is caused by the attack. As our economic interests 

continue to be targeted by terrorists, it is appropriate, necessary, and vital that the federal 

government playa role in maintaining the security of our insurance system which helps provide for 

recovery of the economy. 

Extension & Structure of Program 

We believe the time has come for Congress to enact a long-term solution for insuring against 

terrorism - one that provides the needed market certainty to allow for continued economic growth 

and development. We envision a two-part structure that would finance both conventional terrorism 

risks and nuclear, biological, chemical, and radiological (NBCR) risks. 

Conventional TetTorism Risk. For risk of conventional (i.e., non-NBCR) terrorism attacks, we 

believe the current TRIA backstop should be kept in place, with the insurance deductibles, industry 

retention, and program trigger all maintained at no higher than their current levels. This ensures 

policyholders will continue to have access to coverage through the "make available" provision. 

While TRIA has been largely snccessfuJ in making available private direct insurance coverage against 

conventional terrorism attacks, it has not been without some continuing problems of availability and 

affordability. There are still major markets today, particularly high-risk urban areas, where the 

combination of aggregation risk, high retention rates, and rating agency pressure are causing capacity 

problems for conventional terrorism coverage. Therefore, Congress and the federal government 

need to continue the statutory framework that is known as TIUA for conventional terrorism 

exposure, but this framework needs to be modernized to reflect the continuing market realities of 

capacity shortfalls in some areas. 

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NBCR Terrorism Risk. NBCR terrorism risk is a different matter. Even if the federal backstop 

exposure to conventional terrorism can be reduced over time to all but the most catastrophic 

attacks, the challenges are different for NBCR, according to all of the expert actuarial estimates. As 

it presently stands, TRIA covers NBCR perils; however, we have not seen any evidence that such 

coverage is being written except when mandated for workers compensation. Because TRIA only 

requires that terrorism insurance coverage be made available on the same terms, amounts, and 

limitations as non-terrorism perils, insurers are not required to make NBCR terrorism coverage 

available if NBCR coverage for non-terror events is not offered. 

The GAO and the PWG reports have all recognized that markets simply cannot price the risks 

associated with NBCR perils. Accordingly, we believe that this is a crucial area that the long-term 

solution should address. NAR believes NBCR coverage and pricing can be improved if Congress 

adopts measures that would lower insurer deductibles and co-pays with respect to NBCR risks. It is 

also necessary for Congress to clarify that the federal government is solely liable for NBCR 

terrorism losses above insurers' individual NBCR retentions, thus encouraging insurers to provide 

more capacity. Finally, we urge Congress to add NBCR perils to the "make available" requirement 

under TRIA so that policyholders would have an optional endorsement giving them covcrage for 

NBCR terrorism that would otherwise be excluded by the nuclear hazard or pollution exclusion 

contained in certain commercial lines policies. 

CONCLUSION 

Affordable and accessible terrorism insurance is an integral part of the health of the commercial real 

estate markets. Given that the reinsurance industry has not yet been able to develop a long-term 

solution that would eliminate the need for some form of federal assistance, NAR is concerned that 

the potential sunset of TRIA will result in a spike in terrorism coverage premiums, and cause 

coverage to become unavailable in numerous markets. 

NAR believes the TRIA program has been a success because it provides for the sharing of risk 

between government, private insurers, and policyholders. Ultimately, it is critical for the US. 

economy that commercial policyholders be able to obtain coverage for terrorism risk. Therefore, 

TRIA must be extended beyond its current 2014 authorization. 

o 

5