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50–310 2009

S. HRG. 110–907 

EXAMINING THE TERRORISM RISK INSURANCE 

PROGRAM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

MAINTAINING AND IMPROVING THE NATION’S SECURITY AND PROSPERITY THROUGH THE PUBLIC-PRIVATE PARTNERSHIP CREATED BY 

THE TERRORISM RISK INSURANCE ACT OF 2002 THAT PROTECTS 

AMERICAN WORKERS, JOBS, BUSINESSES, AND INFRASTRUCTURE 

FROM FUTURE ATTACKS 

WEDNESDAY, FEBRUARY 28, 2007 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

ALEX STERNHELL, Professional Staff 

JULIE Y. CHON, International Economic Policy Adviser 

MARK OSTERLE, Republican Counsel 

ANDREW OLMEM, Republican Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 

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(III) 

C O N T E N T S 

WEDNESDAY, FEBRUARY 28, 2007 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Reed ..................................................................................................... 5 

Senator Enzi ..................................................................................................... 6 

Senator Brown .................................................................................................. 7 

Senator Bennett ................................................................................................ 8 

Senator Martinez .............................................................................................. 9 

Senator Carper ................................................................................................. 9 

Senator Bunning ............................................................................................... 10 

Senator Menendez ............................................................................................ 11 

Senator Schumer .............................................................................................. 13 

WITNESSES 

Charles Clarke, Vice Chairman, The Travelers Companies, Inc., on behalf 

of The American Insurance Association ............................................................. 14 

Prepared Statement ......................................................................................... 42 

Response to written questions of: 

Senator Enzi .............................................................................................. 162 

Senator Bunning ....................................................................................... 166 

Thomas Minkler, President, Clark-Mortenson Agency, Inc., on behalf of the 

Independent Insurance Agents and Brokers of America, Inc ........................... 16 

Prepared Statement ......................................................................................... 47 

Michael J. Peninger, President and Chief Executive Officer, Assurant Employee Benefits, on behalf of the American Council of Life Insurers ............... 18 

Prepared Statement ......................................................................................... 56 

Response to written questions of: 

Senator Shelby ........................................................................................... 170 

Senator Enzi .............................................................................................. 173 

James H. Veghte, Executive Vice President/Chief Executive Officer of Reinsurance General Operations and Chief Executive Officer of XL Reinsurance 

America, Inc., on behalf of the Reinsurance Association of America ............... 19 

Prepared Statement ......................................................................................... 62 

Response to written questions of: 

Senator Enzi .............................................................................................. 173 

Senator Bunning ....................................................................................... 175 

Michael McRaith, Director, Illinois State Division of Insurance, on behalf 

of the National Association of Insurance Commissioners ................................. 21 

Prepared Statement ......................................................................................... 72 

Travis B. Plunkett, Legislative Director, Consumer Federation of America ...... 23 

Prepared Statement ......................................................................................... 84 

Arthur M. Coppola, President and CEO, Macerich Company, on behalf of 

the Coalition To Insure Against Terrorism ........................................................ 25 

Prepared Statement ......................................................................................... 132 

Janno Lieber, Senior Vice President, World Trade Center Properties ................ 27 

Prepared Statement ......................................................................................... 141 

Don Bailey, CEO, Willis North America, on behalf of the Council of Insurance 

Agents and Brokers .............................................................................................. 29 

Prepared Statement ......................................................................................... 149 

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Page

IV 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement from the National Association of REALTORS® ................................. 178 

Hot Topics from the National Association of REALTORS® ................................. 185 

Statement from the Property Casualty Insurers Association of America ........... 193 

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(1) 

EXAMINING THE TERRORISM RISK 

INSURANCE PROGRAM 

WEDNESDAY, FEBRUARY 28, 2007 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:36 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order, if we can. 

I thank all of you for being here with us this morning. 

Earlier this year, upon assuming the chairmanship of this Committee, I stated that the Committee would focus on two overarching 

goals: maintaining and improving our Nation’s security and prosperity. The subject of today’s hearing—namely, a public-private 

partnership created by the Terrorism Risk Insurance Act of 2002 

to protect American workers, jobs, businesses, and infrastructure 

from future terrorist attacks—is, in my view, critical to both the security and prosperity of our Nation. 

This morning, the Committee will hear testimony from policyholders, insurers, and regulators, those who have firsthand knowledge of the challenges associated with buying, selling, underwriting, and regulating terrorism risk insurance. I would like to 

thank our witnesses—we have a long panel here this morning—for 

being here. I would also like to thank them for the testimony they 

are going to give this morning on this legislation. 

Many of my colleagues on this Committee have worked very, 

very hard for a number of years on this issue. We have collaborated 

on a bipartisan and bicameral basis to enact both the Terrorism 

Risk Insurance Act, known as TRIA, in 2002 and an extension of 

the TRIA program in 2005. And I would be remiss at this moment 

if I did not thank my colleague from Alabama, who has some 

strong views on the issue and has been tremendously cooperative 

and helpful in trying to put together some worthwhile legislation 

in this area. 

In 2002, the Senate voted by an overwhelming margin of 86–11 

to pass TRIA. In 2005, the Banking Committee, under the chairmanship of Senator Shelby, reported by a unanimous vote legislation to extend TRIA for an additional 2 years. The bill later was 

approved by the full Senate, also by a unanimous vote. 

I think it is important to take a moment to talk about the importance of TRIA and why I believe we must act again to establish a 

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2 

more permanent Federal initiative to provide coverage from potential terrorist attacks. In the aftermath of 9/11, the market for terrorism risk insurance disappeared—disappeared—and the American economy dealt with a great deal of uncertainty. We repeatedly 

heard from businesses, large and small, from labor unions, manufacturers, builders, and lenders, from the nonprofits like universities and hospitals, and from insurers about the need for the Federal Government to help stabilize the market and ensure the availability of affordable insurance against the risk of future terrorist 

attacks. 

The critical U.S. industry sectors were in dire need of terrorism 

insurance to obtain credit, loans, and investments necessary for 

their normal business operations. Without terrorism risk coverage, 

the economy faced instability and dislocation, which is exactly what 

the terrorists hope to accomplish in many ways. The policyholder 

community and insurers together called for a response to the 9/11 

attack on our Nation and our Nation’s economy. Congress listened 

and we acted in 2002, creating the Terrorism Risk Insurance Act. 

TRIA created a 3-year program, as many of you will recall. The 

Terrorist Risk Insurance Program, located within the Department 

of Treasury, established a Federal backstop against catastrophic 

losses in the property and casualty insurance marketplace. In December of 2005, a 2-year TRIA extension was signed into law. The 

provisions of that bill will expire, as many of you know, on December 31st of this year—hence, the hearing today and the sense of urgency about moving rather quickly here. 

Under TRIA, the Federal Government shoulders a share of the 

financial risk of future attacks. The burden sharing makes sense, 

in my view. These attacks are against us as Americans and our 

way of life. The attacks are aimed at the American public and, 

therefore, require, in my view, a public role in addressing this 

threat in light of the circumstances we face. But TRIA also requires that the private sector bear a significant financial responsibility and help to impose market discipline in the claims and underwriting processes. 

In the past 5 years, we have heard an overwhelming response 

from policyholders across the country. TRIA has worked, and it has 

worked very, very well. According to a recent study by the Wharton 

Risk Management and Decision Processes Center at the University 

of Pennsylvania, roughly 50 percent of commercial enterprises 

through 2005 purchased terrorism insurance. According to Marsh, 

Inc., and cited by the President’s Working Group on Financial Markets, take-up rates have increased from 23 percent at the beginning of 2003 to 64 percent at the end of 2005 while the price of 

terrorism insurance has actually declined. The median cost of property terrorism insurance was 25 percent lower in 2005 than the 

2004 rates. These trends demonstrate, in my view, that TRIA has 

achieved its primary goal: continued availability and affordability 

of insurance against future attacks. What we have seen and what 

we may hear and what many of our witnesses will explain today 

is that the re-emergence of limited terrorism risk insurance would 

not have happened without the enactment of TRIA. We will also 

hear that the private sector does not have the capacity to provide 

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3 

affordable terrorism risk insurance on its own without the existence of a Federal backstop. 

In a 2005 Treasury Department survey, nearly 50 percent of insurers said that they do not plan to write terrorism insurance after 

TRIA expires. So the question before us today is: Do we do nothing 

to financially protect our country against future attacks? Do we 

provide another short-term extension to meet the current market 

needs? Or do we try to create a longer-term solution for the security of our people and our economy? I firmly believe that doing 

nothing is simply not an option and one that cannot even be considered here. 

The world has fundamentally changed since 9/11. Nearly all of 

the data and the experts say that there is no reason to think that 

private forces alone could and would provide against this very 

unique risk. We have every reason to believe that the Federal role 

for terrorism risk insurance coverage is needed for the foreseeable 

future. Several industrialized countries have already recognized 

this fact. The United Kingdom, France, Germany, and others have 

created permanent Government programs to manage terrorism 

risk. We know from the tragic attacks in London, Madrid, India, 

and Indonesia—and elsewhere, I might add—that terrorism has increased since 9/11. In a world of more terrorism, we should be providing more security, not less. 

Our Nation has truly been fortunate enough not to suffer the tremendous loss of life or destruction of property that we endured on 

September 11th of 2001. But by no means has the political climate, 

either domestically or abroad, returned to a sense of normalcy. We 

are engaged in a violent conflict in Iraq, and we have seen desperate terrorist attacks abroad in Europe and elsewhere. The 

threat of terrorism is not simply a short-term threat. It has potential to be a long-term reality. I think most of us recognize that. 

As a result, I believe that we must act once again to ensure that 

stability, availability, and affordability remain in the market for 

terrorism risk insurance. But I do not believe that we should continue to extend the program for short-term periods, causing further 

uncertainty and confusion in our economy. A more permanent Federal commitment, I think, is not only something we should do but 

something we must do. I am committed to finding a solution that 

will address the long-term security needs of our people and our 

economy and ensure that our Nation is best prepared to deal with 

future terrorist threats. I believe that one of the most fundamental 

obligations of our National Government is to provide security and 

opportunity for our fellow citizens. 

With the expiration of TRIA approaching later this year, it is important to gather information about the current market for terrorism risk insurance, to assess the impact that TRIA has had in 

this marketplace, and to develop some ideas for creating more permanent terrorism risk insurance. Today’s witnesses offer an extraordinary range of expertise and experience that I think can be 

very useful to this Committee as it undertakes this important effort, and I thank them again for their attendance and participation. 

More than 5 years after the tragic events of 9/11, we continue to 

see a need to provide a Federal backstop to protect our people, 

businesses, and critical infrastructure from these attacks. We have 

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4 

heard repeated dire warnings that terrorism will return to U.S. 

soil. We must be prepared against this threat, and in my view, providing insurance against those attacks allows our economy to function and is a critical part of our national preparedness. And I believe that by working together we can establish a more permanent 

solution. 

So, again, I thank my colleagues for their work over the years 

on this issue, many of whom on this Committee were very involved 

as we went through this process now twice before. And, again, my 

thanks particularly to Senator Shelby, who has been a leader on 

this issue over the last number of years as he chaired this Committee. 

So, with that, let me turn to my colleague from Alabama for any 

opening comments he has. I will then turn to my colleagues for any 

comments they might want to make on the subject matter. And I 

would ask them to be relatively brief, if they could, so we can get 

to our witnesses and their statements this morning. 

Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. 

In November 2002, Congress passed the Terrorism Risk Insurance Act, or TRIA, to address perceived failures in the terrorism 

risk insurance market stemming from the September 11th terrorist 

attacks. The stated purpose of the legislation was to establish a 

temporary Federal program that would ensure the widespread 

availability and affordability of terrorism risk insurance. This temporary program was intended to provide, and I quote, ‘‘a transitional period for the private markets to stabilize, resume pricing of 

such insurance, and build capacity to absorb any future losses.’’ 

This year, the Committee will consider once again whether to reauthorize the Terrorism Risk Insurance Program. The reauthorization of a program typically involves a careful review of the program’s success at fulfilling its legislative mandate. A review of the 

Terrorism Risk Insurance Program, however, is particularly important due to the disincentives that the program creates for the private sector to devise solutions to terrorism risk. Because the program involves a commitment by the Federal Government to pay for 

a large portion of the losses incurred by a terrorist attack, the market has significantly less incentive to create new ways to manage 

terrorism risk. 

To prevent such crowding out of private sector solutions, I believe we need to ensure that the program is focused on addressing 

the market failure described in its legislative purpose. Considering 

the dramatic improvement in our Nation’s economy and insurance 

market since TRIA was enacted, it appears that the program has 

made substantial progress in satisfying its purpose. In its report to 

the Committee, the President’s Working Group on Financial Markets reported that the availability and affordability of terrorism 

risk insurance has improved since 9/11. It found that prices for terrorism insurance have fallen and take-up rates have increased. In 

light of the improved condition of our terrorism insurance market, 

additional scrutiny of the scope of the Terrorism Insurance Program appears warranted here. 

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5 

Finally, as we begin our review of TRIA today, we should be 

mindful of the inherent limitations of Government solutions to complex and technical problems. We should recognize that it is very 

unlikely that Congress can create an insurance program better 

than market forces, given the opportunity to do so. Congress might 

be able to devise a quick fix to a temporary market failure, as we 

have done, but in the long run, the most durable solution will in 

all probability come from our private sector. The creativity of our 

financial markets and their ability to innovate are factors that 

should be given great weight in this debate. Although we are likely 

to hear testimony today about the difficulties in insuring against 

terrorism risk, it is important to remember that innovation springs 

from necessity. While we need to appropriately address any market 

failures in the insurance industry, we must also encourage at the 

same time the facilitation and innovation beyond the Government 

program as well. 

I want to welcome all of our witnesses today, and, Chairman 

Dodd, I appreciate you bringing this to our attention and calling 

this hearing. 

Chairman DODD. Thank you very much, Senator Shelby. 

Senator Reed. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Well, thank you very much, Mr. Chairman. Thank 

you, gentlemen. 

I, too, want to commend Chairman Dodd and former Chairman 

Shelby for their leadership on this issue. Terrorism, regretfully, is 

still with us. In fact, open-source reporting suggests that Zawahiri 

and Bin Laden are somewhere in Pakistan attempting to re-establish their network. So this threat has not gone away. In fact, many 

people have suggested that it is high probability that the United 

States will be attacked again. So this is not an academic discussion 

today. 

I think TRIA has worked very well. I think it should be extended 

on a more permanent basis. I think also, too, there are particular 

areas of concern that have to be addressed. One is workmen’s compensation. Typically, the incidents that we have seen involve a concentrated attack on one facility involving in some cases employees 

of just one company or several companies. The workers’ compensation insurers in those cases have an unusual liability and exposure. 

In fact, in my home State of Rhode Island, we have one agency, a 

quasi-governmental agency, Beacon. There are 26 other States, including New York, Utah, Colorado, Wyoming, Kentucky, Hawaii, 

Ohio, Pennsylvania, Idaho, and Montana, that have a similar arrangement. If there was such an incident in any one of these 

States, it is quite possible that that insurer would fail without reinsurance, and that failure would be now the burden of the State or 

some other ad hoc arrangement. So I do think we have to continue 

support this effort. 

A final point I will make. We are concerned on this Committee— 

and I think the Chairman is going to lead us in our efforts—about 

the competitiveness of American financial markets and other markets around the globe. TRIA is one of those factors that provides 

a certain degree of certitude, safety, predictability that gives our 

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6 

market strength vis-a-vis other markets. I would hate to see a situation where we take this away and create competitive incentives to 

move business into other markets other than the United States. 

For all these reasons, I think we have to press forward on this 

reauthorization. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Reed. 

Senator Enzi. 

STATEMENT OF SENATOR MICHAEL B. ENZI 

Senator ENZI. Thank you, Mr. Chairman. You and I got to head 

up the Subcommittee under the direction of Chairman Sarbanes 

and Ranking Member Gramm that did the original TRIA bill. 

Chairman DODD. Right. 

Senator ENZI. And I am glad that we are having this hearing. I 

hope that the testimony today and in future hearings on this subject will help us understand the state of the insurance industry 

since the 9/11 attacks, and specifically since the last reauthorization of the Terrorism Risk Insurance Act. 

Following the September 11th attacks, our insurance market suf- fered losses of approximately $32 billion, an enormous amount by 

any standard. The Committee responded by crafting legislation to 

create a shared public-private partnership to allow the markets to 

stabilize and make terrorism insurance available again. This program was envisioned to be limited and temporary; however, as I 

am sure some witnesses will testify today, it has taken longer than 

expected for the markets to recover, so now in 2007, this Committee is meeting to consider another reauthorization of the TRIA 

program, or possibly to make it permanent. 

As this Committee moves forward on this topic, I have some concerns that I will be focusing on. The first is taxpayer liability. In 

2001, I supported a bill, along with other Members of this Committee, including Chairman Dodd, that would have created a temporary program containing explicit protections for the taxpayer in 

the case of terrorist attacks and lawsuits resulting from an attack. 

The bipartisan bill never came to a vote on the Senate floor. In 

fact, it never was allowed by Majority Leader Daschle to actually 

be introduced. 

Many of the taxpayer protections, including a ban on punitive 

damages and the regulations of out-of-court settlements, were later 

added. I believe these protections against punitive damage payments and settlements are very important to the American taxpayer, and I will be looking to ensure that they remain intact 

should this Committee consider reauthorization legislation in the 

future. 

I also supported the 2005 TRIA reauthorization because it represented a significant scaling back of the program, allowing the private market to grow in its place. And studies have shown that the 

insurance market has grown significantly in response. The 2006 report on terrorism risk insurance conducted by the President’s 

Working Group on Financial Markets found that firms have had 

more success modeling and managing terrorism risk. Reinsurance 

capacity continues to grow, and insurance companies’ net worth is 

rising. That is positive progress as a result of the 2005 reforms 

that increased event triggers and deductibles for the insurance 

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7 

companies and excluded number of eligible insurance lines. However, I am concerned that this progress will slow down or stop if 

the TRIA program is not allowed to continue along this projection. 

In 2005, the Congressional Budget Office stated that if the Government continued to subsidize terrorism insurance, it would probably contribute to deferring the private sector’s long-term adjustment to the increase in risk. This is a significant issue, especially 

if some are considering an expansion of the program. We must 

allow the markets to continue to innovate and price terrorism risk 

accurately. I do not think this can be done with such a large Government presence in the marketplace. In a free market, prices are 

accurate and competition leads to innovation. I am worried that the 

continued presence of the TRIA program would distort the market 

in both price and competition. And as this Committee evaluates 

TRIA, I will be looking for ways to allow the market to grow and 

strengthen without large Government subsidies and without leaving the taxpayer on the hook. 

I thank you, Mr. Chairman. 

Chairman DODD. Thank you. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman and Senator Shelby. 

I commend you for your leadership in scheduling today’s hearing 

on such an important topic. I appreciate the witnesses for taking 

the time to come and share their perspectives on the proper roles 

for the Federal Government and for the private sector in responding to these terrorism risks. 

I think these roles are dynamic ones. Each year we learn a little 

more. Each year our economy and our Government adapt and 

change in response to the challenges we face. I think this is certainly true of the insurance market. 

In the wake of September 11th, we were, of course, stunned and 

uncertain as to what the future would hold. But the economy as 

a whole soon regained its footing, even though the economy since 

then and the recovery since then has benefited some Americans a 

lot more than it has others. 

We talk a lot today about risk. Many families in Ohio are facing 

different kinds of risks—lost health care, lost jobs, lost homes—and 

are struggling to make ends meet. While this may not seem to be 

the topic of today’s hearing, it should always be relevant. I want 

to be absolutely sure that the burden assigned to those people personally who are taking risks in their lives every day, that the burden assigned to them as taxpayers in my State and elsewhere is 

as small as possible. 

The financial condition of the insurance industry, by contrast, 

seems to have grown stronger by many measures over the past few 

decades. While this country has experienced substantial losses due 

to terrorism and hurricanes, the headlines are not necessarily reflected in the bottom lines. At the same time, the ability of financial markets to disperse risk has become much more sophisticated 

over this period. This is not necessarily an unmitigated good, but 

it is a reality that we should bear in mind. We need to be careful 

that whatever action we take to extend the Terrorism Risk Insurmstockstill on DSKH9S0YB1PROD with HEARING

8 

ance Program does not interfere with the assumption of more and 

more risk by the private sector. I am not sure that the Federal 

Government should be in the reinsurance business forever. I think 

our goal should be to withdraw the Federal Government from the 

market over time and permit private mechanisms to assume the 

risks now borne by taxpayers. 

I do not pretend to know at this point how long it might take 

or the exact route we need to follow to get there, but I think that 

needs to be our ultimate goal. I hope today’s witnesses can help us 

find answers. 

Chairman DODD. Thanks very much, Senator. 

Senator Bennett. 

STATEMENT OF SENATOR ROBERT F. BENNETT 

Senator BENNETT. Thank you, Mr. Chairman. I have been honored to be a cosponsor with you of this legislation in the past and 

will do what I can to help move it forward. The one thing I think 

we should remember in this overall debate is that insurance companies do not take risks. Insurance companies manage risk. Insurance companies spread risk. Insurance companies make risk affordable. But if there is a huge risk that could eliminate the company, 

the company will not take it. And the cost, potential cost, of a huge 

terrorist act is so great that insurance companies will not take it. 

Now, by putting a cap on the amount of risk that is involved by 

virtue of the TRIA legislation that we passed, we have allowed the 

market that can be quantified, can be spread, can be made affordable to thrive. I am afraid if we take that cap off so that the insurance companies are faced with the entire risk, they will simply say, 

‘‘We cannot take it. It is too damaging to our shareholders. We will 

not write policies above a certain level.’’ And if we do that, ironically, and there is a terrorist attack, the taxpayers will pay for it. 

What we have done with TRIA is create, in effect, a huge deductible for the Federal Government, and we have said, OK, whatever 

the level is set at—$80 billion, $100 billion, wherever it might be— 

this amount the insurance companies cover. Well, that amount we 

can handle. So if the price is higher than that, we have created a 

deductible for the taxpayer to say, well, we only have to pay whatever above that amount. 

I was here during 9/11. Most of us were. We remember the emotions that followed that. The attitude in the Congress was: Whatever it takes, we will pay. Whatever it costs to rebuild New York 

City, we will pay it. And there was no deductible. 

So for those who say, ‘‘Gee, we do not want to put the taxpayer 

at risk,’’ my attitude is we are doing the taxpayer a major favor 

when we are creating a very large deductible and thereby making 

sure the taxpayer does not have to pay the whole bill if we do not 

have TRIA and we have all of the problems of a future attack. 

It is for those reasons, Mr. Chairman, that I have been with you 

on this legislation in the past, and I will do what I can to help 

move it forward now. 

Chairman DODD. I thank you very much, Senator Bennett. You 

have been a great asset as we have—we have had clarity talking 

about this issue and the importance of it. 

Senator Martinez. 

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STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Thank you, Mr. Chairman. I, too, appreciate 

this very timely hearing, and I have been a support of terrorism 

insurance, understanding that, as has been pointed out, the private 

markets cannot always adjust to a terrorism event, as we saw on 

9/11. And more recently, I also want us to make sure that I allow 

the group to know my interest in another problem that we have 

had. This past couple of days ago, Governor Crist led a group of 

Southern Governors, the Southern Governors Association, representing 15 States, Puerto Rico, and the Virgin Islands, passing 

a resolution asking for the creation of a national catastrophic fund 

relating to natural disasters and other issues that have been difficult for the private market to undertake. While that is a completely separate issue and should not be merged into this discussion today of this particular issue, which I know is so important 

and I support its continuation, I did want to highlight this issue 

for the Committee because it is so important to my home State of 

Florida where truly a crisis in insurance is unfolding, and one that 

is impacting not only everyday families as they struggle to make 

ends meet, but really is having a broader impact on business and 

the quality of life. 

So I hope at some point in the future we can also address this 

very, very serious issue facing the State of Florida. 

Chairman DODD. Senator Martinez, I think I have told you and 

I have told your colleague, Senator Nelson, as Chair of this Committee, that we will have a hearing on the subject matter you raise 

here this morning. You are right. It is a separate issue, but a very, 

very important one, and certainly one that is deserving of this 

Committee’s attention. So we are planning to schedule a hearing 

to talk about that and the ideas and suggestions coming out of the 

States that are most directly affected by it. So we look forward to 

working with you and your colleague as to a witness list and others 

so that we will have a good, comprehensive hearing on the subject. 

Senator MARTINEZ. Well, thank you, Mr. Chairman. That is terrific. I appreciate that very much. Senator Nelson and I are working very closely together on this. He has expertise, having been 

Commissioner of Insurance in our State, and so we will look forward to working with you on a hearing. 

Chairman DODD. Thanks very much. 

Senator Carper. 

STATEMENT OF SENATOR THOMAS R. CARPER 

Senator CARPER. Thanks, Mr. Chairman. I will be very brief. We 

have got a lot of witnesses here. I am anxious to hear from them, 

as I am sure we all are. 

Mr. Chairman, you and our Ranking Member, and certainly Senator Bennett, have been very active on this front for a number of 

years. I hope I serve long enough in the Senate that we do not have 

to have this kind of program and that it is something that we 

talked about in the old days that we just do not need anymore. 

That would be a blessed event. But I thank you, especially, Mr. 

Chairman, for your leadership. 

I met earlier today with some of the Commissioners, the 9/11 

Commissioners—Lee Hamilton and others—to talk about the 9/11 

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bill that is back on the floor today to sort of clean up and finish 

up the implementing and trying to enact the last recommendations 

of the 9/11 Commission that we did not take up before. It is an important bill that enjoys strong bipartisan support. While on the one 

hand we prepare to address the calamity or catastrophe, should it 

occur, through TRIA, through our insurance and reinsurance program, on the other hand, we are working to make sure that we prevent those kinds of events. And so the two really go hand in glove, 

and we appreciate your advice today as we try to improve on the 

TRIA legislation that I think expires later this year, while at the 

same time literally over on the Senate floor we are working to try 

to prevent these kinds of incidents. 

Thank you. 

Chairman DODD. Thanks very much. 

Senator Bunning. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. Thank you, Mr. Chairman. I am glad we are 

discussing this issue early in the year rather than waiting until the 

expiration of the 2005 extension of the Terrorism Risk Insurance 

Program. While I do believe that at this point in time Congress 

needs to take action to ensure continued availability of terrorism 

insurance, I do not think we should make the current program permanent. Congress first authorized TRIA in 2002 because the private insurance market would not or could not cover terrorism risk 

in that time of uncertainty. Since 2002, our Nation is more secure 

and our private insurance market is more developed. Congress 

must be careful not to promote programs that may endanger further development of that market. Any legislation we pass this year 

should encourage more private insurance coverage for terrorism 

risk and reduce taxpayer exposure. 

Some of the witnesses today are going to ask for an expansion 

of the Federal program. To them, I would like to ask how industry 

can expand its own programs. 

In the 2005 reauthorization, Congress asked for a report from 

the President’s Working Group on the Financial Markets. Last September, that report was completed, and it made some very interesting findings. 

First, private insurance has developed for almost all kinds of terrorism risk. 

Second, further expansion of TRIA is not needed to keep growing 

private markets. 

I am disappointed that the President’s Working Group is not represented on today’s panel, as I think the Committee needs to hear 

from them before we do anything. Instead of granting a blanket extension of TRIA, we should develop incentives to create private reserves. That may require tax incentives, which can complicate legislation, but we should not dismiss the possibility. 

Another viable idea is the creation of a private pool for terrorism 

risk similar to what has been done in Britain. I would remind my 

colleagues to look at what has happened with flood insurance before we give up on the private marketplace. The National Flood Insurance Program has cost the taxpayers billions of dollars, has 

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stalled innovation of products, and has discouraged insurance companies from entering the market. 

Our financial service companies have some of America’s brightest 

and most innovative people working for them. I have full confidence that they will develop better ways to address the terrorism 

problem if we give them the right tools. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Menendez. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. Thank you, Mr. Chairman. I want to thank 

you for holding what I think is an incredibly important hearing 

today. I want to acknowledge, Mr. Chairman, your leadership on 

this issue over the past few years and the work of so many Members of the Committee. I appreciate Senator Shelby as well in 

terms of moving forward on such a hearing. 

You know, Mr. Chairman, prior to coming to the Senate, I represented a district right across from Ground Zero. My State lost 

700 residents on September 11th. That is an immeasurable, incalculable, priceless loss. But in addition to that priceless loss, what 

would have happened not just to the region’s economy, but as a ripple effect, I would argue, to the national economy is if Congress has 

not passed TRIA, and the consequences that would have flowed 

from that would have even been more enormous, would have been 

magnified. The terrorists would have created much more damage 

than they did as it was. 

So the reality is that for so many of our private sector initiatives 

to have a robust economy, TRIA was incredibly important. I am all 

for the private marketplace trying to come up with its own products, but to be very honest with you, Mr. Chairman, I just simply 

have not seen it. And I do not see it on the immediate horizon. 

And so the question becomes what do we continue to do to ensure 

that economic security—which is how I view this. I do not view this 

as private sector security. I see this as economic security—that economic security is preserved. And so when I look at some of our own 

interests in the region, which are magnified, could be any place in 

the country for that fact, but, for example, we have the mega part 

of the east coast, the port of Newark and Elizabeth, the type of 

cranes, machinery, and equipment there to try to find them insurance in the marketplace, simply cannot happen. I know a lot of our 

colleagues are big promoters of trade. You cannot have that trade 

if you cannot get them in and out of ports, both for exporting our 

products and importing them. That is only one of many, many different dimensions. 

And so, ultimately, I do think we need to clearly at least extend 

TRIA and look at it to see how, in fact, we can continue to provide 

economic security. That is what this is all about, Mr. Chairman, 

and as someone who was actively promoting it formerly in the 

House, I look forward to working with you to promote it here in 

the Senate. 

Chairman DODD. Thank you, Senator, very, very much. 

I would like to ask unanimous consent that the written testimony from the PCIAA, the trade association which represents 

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small and medium-sized insurers, be included at the record. I 

would have liked to have had them here this morning, but, frankly, 

we just could not accommodate everyone at this table. So I appreciate their willingness to have testimony submitted. They are very 

important. We talk about the insurance industry as though it is a 

monolith. There are smaller insurers. I know Senator Enzi always 

reminds us on this Committee of the small and mid-sized companies out there that need to be represented at our tables, and I want 

to make sure that their thoughts and views on this are going to be 

included. And as we go forward, we will insist at later hearings, 

if we have them, they will be a part of the discussion as well. So 

I thank them very much for that. 

Our first witness this morning is Charles Clarke, who is testifying on behalf of the American Insurance Association and is Vice 

Chairman of the Travelers Companies, based in my State of Connecticut—Hartford, Connecticut. Mr. Clarke has been with the 

company since 1958 and has held various management roles for 

Travelers Insurance Group Holdings, including President and 

Chairman and CEO, and I welcome you to the Committee. We are 

very pleased to have you with us. 

Thomas Minkler is the President of Clark-Mortenson Agency and 

is testifying today on behalf of the Independent Insurance Agents 

and Brokers of America. Mr. Minkler has over 28 years of experience in the insurance industry, serves as Chairman of the Independent Insurance Agents and Brokers of New Hampshire. He has 

testified to the Banking Committee in the past, and we welcome 

you back to the Committee. 

Michael Peninger is testifying on behalf of the American Council 

of Life Insurers and serves as President and CEO of Assurant Employee Benefits Company, a position he has held since 1999. He 

joined that company in 1985 as a corporate actuary and has held 

various senior positions within the company. 

I am going to mispronounce this. I want you to pronounce your 

last name, Jamie. 

Mr. VEGHTE. Veghte. 

Chairman DODD. Veghte. Jamie Veghte is testifying on behalf of 

the Reinsurance Association of America. He is the Chief Executive 

Officer of XL Reinsurance America, Inc., based in Stamford, Connecticut. Mr. Veghte was appointed CEO of the company in 2004, 

Chief Executive of Reinsurance General Operations in 2006, holds 

these positions concurrently. 

Michael McRaith is the Director of the Division of Insurance for 

the Illinois Department of Financial and Professional Regulation. 

He is testifying today for the National Association of Insurance 

Commissioners. Mr. McRaith represents the State of Illinois with 

the NAIC and serves on that organization’s Property and Casualty 

Insurance Committee, is on the Reinsurance Task Force, and we 

welcome you here today. Thank you for being with us. 

Travis Plunkett, an old friend we have had here many times, is 

the Legislative Director for the Consumer Federation of America. 

The Consumer Federation is a nonprofit association of 300 organizations and an advocacy, research, and service organization, and a 

regular witness, I might add, before this Committee. 

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Arthur Coppola is the President and CEO of the Macerich—is 

that how you pronounce that? 

Mr. COPPOLA. Macerich. 

Chairman DODD. The Macerich Company, and is here on behalf 

of the Coalition to Insure Against Terrorism. He has over 30 years 

of experience in the shopping center industry, all of which has been 

with his company. Mr. Coppola is a lawyer and a CPA and Chair 

of the Board of Governors of the National Association of Real Investment Trusts. We welcome you here today as well. 

John Lieber is the Senior Vice President of the World Trade Center Properties and is responsible for managing the organization’s 

efforts to rebuild the World Trade Center site. From 1994 to 1998, 

Mr. Lieber served with the U.S. Department of Transportation, 

first as the Deputy Assistant Secretary for Policy and later rising 

to Acting Assistant Secretary. 

And, last, Don Bailey here, who is the Chief Executive Officer of 

Willis North America, and he is testifying today on behalf of the 

Council of Insurance Agents and Brokers. Mr. Bailey joined Willis 

in March of 2003 to lead the firm’s North American Executive Risk 

practice and, prior to joining Willis, served as senior vice president 

and chief underwriting officer of the specialty risk lines for the Alliance Insurance Corporation in Chicago. 

That is a long list of witnesses. I see my colleague from New 

York is here. Senator Schumer, do you want to make any opening 

comments? 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman, and I apologize. 

We had a JEC hearing, and I just got here. 

I would just make three points, and obviously I have real concern 

about this issue because it affects the city of New York probably 

more than any other. 

First, it is time for a permanent solution. We keep coming back 

and back and back. It discombobulates the markets. It leaves 

things hanging in doubt. Now is the time, if ever, to really make 

this permanent, if we can, Mr. Chairman. 

Second, I hope we will make an effort to include nuclear, biological, chemical, and radiological coverage available. In New York 

that is a worry. In larger cities that is a worry. And if we are going 

to do this, we ought to do the whole thing. 

And, finally, we ought to act swiftly. Right now contracts are 

being signed. When people think that we might not extend terrorism insurance or it would not affect them, it raises the cost of 

building at worst—or at the least, and at worst it prevents projects 

from not going forward in terms of jobs and growth and everything 

else. 

And so this is something, I know, Mr. Chairman, you have 

worked long and hard on. We have worked together on this over 

the years. It is sort of like squeezing a little bit of toothpaste out 

of the tube. Every time you get a little bit, a little bit, a little bit. 

I think now the time has changed. With the change in the Congress, I think we are going to find less of the ideological opposition 

to this program that seemed to me to be based on sort of how many 

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angels can dance on the head of a pin instead of realities on the 

ground. And I hope we can move it quickly. 

Thanks, Mr. Chairman. 

Mr. Clarke, welcome. Delighted to have you here. 

By the way, all of your statements and supporting materials will 

be included in the record. I want you to know that, and that is true 

of my colleagues as well, any additional documents or statements 

they want to be included. And I am going to have a light on here, 

a clock on here. I am not so rigid about it, but try and keep an eye 

on it so we can move through the testimony and get to questions 

as well. 

Thank you. 

STATEMENT OF CHARLES CLARKE, VICE CHAIRMAN, THE 

TRAVELERS COMPANIES, INC., ON BEHALF OF THE AMERICAN INSURANCE ASSOCIATION 

Mr. CLARKE. Good morning, Chairman Dodd. 

Chairman DODD. By the way, all of your statements and supporting materials will be included in the record. I want you to 

know that. 

It is true of my colleagues, as well, any additional documents or 

statements they want to be included. 

I am going to have a light on here, a clock on here. I am not so 

rigid about it, but try and keep an eye on it so we can move 

through the testimony and get to questions, as well. 

Thank you. 

Mr. CLARKE. Good morning, Chairman Dodd, ranking member 

Shelby, and members of the committee. 

As the Chairman said, my name is Chuck Clarke. I am Vice 

Chairman of Travelers. I really am an underwriter with a big title. 

The red umbrella and I started together in the company about 

50 years ago and now, as you know, we are back together. The 

Chairman predicted this a couple of years ago. Thank you. 

Thank you for the opportunity to testify on behalf of the American Insurance Association. I would like to express my appreciation 

for the leadership shown by this committee, and Chairman Dodd 

in particular, in recognizing the importance of terrorism insurance 

to our national security and economy, and for supporting enactment and extension of the TRIA program. 

Since its enactment in 2002, TRIA has achieved most of its goals. 

It has made terrorism insurance more available and the cost has 

dropped for most policyholders. However, it has not made protection from CNBR events readily available for most of our customers 

and that is a challenge we still face together. 

In the past, AIA has testified about the factors that make terrorism an uninsurable risk. Rather than repeating that past testimony, I would like to discuss some themes arising from the President’s Working Group report and offer some suggestions for framing TRIA extension legislation. 

The PWG report looks at the markets for CNBR terrorism coverage and confirms the past, present and future actions from any 

private market. The reasons are well understood by insurers who 

are trying to grapple with this issue on a daily basis, like myself. 

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First, the loss estimates are staggering, exceeding $700 billion in 

the case of a nuclear attack in New York City. 

Second, insurers have almost no ability to spread CNBR risk to 

reinsurers or the capital markets. Nobody wants it. 

Third, CNBR losses just simply and unequivocally threaten the 

solvency of insurance in the absence of a Federal program. 

The PWG report also examines the markets for conventional terrorism. Here, however, the practical realities that insurers face are 

at odds with some of the economic theories set forth in the report. 

First, the report is correct in that improvements in insurer modeling are helping insurers to estimate their aggregate loss accumulations at specific locations. But that does little to increase overall 

insurance capacity. The modeling is in its infancy and does little 

to reduce concerns. 

Second, TRIA has not reduced the demand for private reinsurance. In fact, demand far outstrips supply. 

Third, increases in policyholder’s surplus augment financial capacity but do not affect or offset the need for TRIA. Removing the 

backstop or raising retentions would impair solvency. 

Recognizing that CNBR terrorism is uninsurable in the private 

market, we believe that Congress should consider recalibrating the 

current TRIA backstop to provide increased Federal financial participation in the event of such an attack. 

With regard to conventional terrorism, we believe that the current backstop has worked and should remain in place. At the current industry retention, which many of you know is $35 billion 

today, the TRIA backstop would be accessed only in the event of 

a truly catastrophic conventional attack like a swarm or other multiple venue attack, that would exceed the dimensions of the 9/11 

strike. 

Experience has shown that the distinction between foreign and 

domestic terrorism is artificial, impractical and meaningless from 

an economic perspective. 

Additionally, the State regulatory system poses significant challenges in managing this risk. We believe that State regulation of 

terrorism insurance, rates and forms that can undermine the program’s basic objectives should be preempted. 

In summary, we continue to need your help in doing what we 

just can’t do by ourselves. Our business is based on dealing with 

random accidents, not intentional catastrophic injury. We are getting better at protecting ourselves from the potential of conventional terrorism but it is simply impossible to deal with a potential 

CNBR event without more of your help. 

Unfortunately, one way or the other, you are the ultimate underwriter for the event we hope never happens. 

Finally, we strongly believe that the program should be made 

permanent and we look forward to working with you to address 

these important concepts. 

Thank you. 

Chairman DODD. Thank you very, very much. It is very, very 

helpful. 

Mr. Minkler, thank you again for being with us. 

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STATEMENT OF THOMAS MINKLER, PRESIDENT, CLARKMORTENSON AGENCY, INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA, 

INC. 

Mr. MINKLER. Thank you and good morning, Chairman Dodd and 

ranking member Shelby, and members of the committee. 

My name is Tom Minkler and I am pleased to be here today on 

behalf of the Independent Insurance Agents and Brokers of America to present our association’s perspective on terrorism insurance. 

I am the President of the Clark-Mortenson Agency, 

headquartered in Keene, New Hampshire, a regional insurance 

agency with eight locations and 55 employees in New Hampshire 

and Vermont. I also serve as the Chairman of IIABA’s Government 

Affairs Committee. 

I would like to begin by complimenting this committee and Congress for passing TRIA in 2002 and extending it in 2005. The Federal backstop created by these laws has worked well. It has insured 

that terrorism insurance is available and more affordable and has 

allowed businesses to continue operating and growing at virtually 

no cost to the Federal Government. 

On behalf of IIABA and our more than 300,000 agents, brokers 

and their employees nationwide, I also want to applaud you for 

holding today’s hearings to examine the future of TRIA. There is 

still no reason to believe that terrorism threat is on the decline or 

that the private passenger insurance market alone can adequately 

provide coverage. Therefore, we encourage Congress to develop a 

long-term solution for terrorism insurance that enables the private 

sector to serve consumers. 

The original enactment of TRIA and its extension have been successful in stabilizing the insurance marketplace and have helped 

eliminate the market disruptions and uncertainties that were witnessed in the immediate wake of September 11th. As a result of 

the enactment of TRIA and its extension, our members are currently able to offer consumers options with respect to terrorism coverage. 

Any analysis of long-term availability of terrorism insurance 

must acknowledge the unique nature of terrorism risk. Terrorist 

acts are nearly impossible to predict because they are intentional 

acts committed by those who wish to attack our country, our institutions, our livelihoods, and our sense of security. Given the unique 

nature of terrorism risk, the insurance market has proven unable 

to make meaningful assessments and judgments about possible terrorist events. 

Additionally, although potential terrorism losses have been estimated in the hundreds of billions of dollars, the current reinsurance capacity is only estimated at $6 billion to $8 billion. Despite 

the warnings of experts, a specific plan for developing a private reinsurance mechanism to spread catastrophic risk from terrorism 

has yet to emerge. 

Specifically, IIABA believes that a private/public partnership remains essential to the challenge of making terrorism risk insurance 

available after the expiration of the Act and at the end of the year. 

It would take decades for the insurance industry to close the gap 

between the current reinsurance capacity and potentially hundreds 

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of billions of dollars in losses from a terrorist attack. As a result, 

public participation is necessary to encourage private markets to 

get in and stay in the business of insuring terrorism risk. 

Without some form of meaningful solution, terrorism coverage 

will be extremely difficult if not impossible for most to obtain after 

December 31st of this year. Such an outcome would be especially 

troubling for small and mid-sized businesses which are already 

challenged by the current environment and are not in a position to 

self-insure. 

While our members remain open to Federal intervention—opposed to Federal intervention in the insurance market in general, 

they nevertheless acknowledge the terrorism risk insurance coverage currently available to the policyholders they serve would not 

exist without TRIA. This is a clear case of marketplace failure. And 

in those rare instances, limited Federal involvement in a reinsurance capacity is warranted. 

If TRIA is not extended, based on my experience from 2005, I 

would fully expect my business customers to receive notices of nonrenewal for their terrorism insurance coverages beginning in January 2008. Federal legislation is necessary to ensure that policyholders continue to have access to such coverage. 

I would like to stress that the interest in and the need for terrorism insurance backstop is not confined solely to large urban 

areas or to large businesses. IIABA represents agents and brokers 

selling coverages to consumers across the country. Our collective 

experience shows that terrorism insurance coverage is not just a 

big city or big business problem. It is truly a national issue. 

In fact, in the area that I do business in, which is primarily New 

Hampshire and Vermont, at least 70 percent of the business customers are purchasing terrorism insurance. 

Briefly, I also wanted to say that IIABA also believes that any 

long-term solution to protect the Nation’s economy in the face of 

substantial terrorism losses must address the potential losses from 

nuclear, biological, chemical and radiological events. Although 

NBCR losses are perhaps the most catastrophic types of terrorist 

attacks, coverage for these types of losses is currently excluded 

from most existing terrorism insurance coverage. 

The IIABA believes and always has supported the mandatory 

availability of insurance coverage for both conventional and NBCR 

losses, and we still do. 

In conclusion, the IIABA applauds Congress for not ending TRIA 

abruptly in 2005 and for passing a 2-year extension. IIABA members, along with many in the insurer and policyholder community, 

recognize that we must find a long-term solution to our Nation’s 

terrorism insurance problem and are committed to this process. 

We look forward to working with the Congress in this matter 

that is crucial to our country’s economy and security. 

Thank you. 

Chairman DODD. Thank you very much. 

Mr. Peninger. 

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STATEMENT OF MICHAEL J. PENINGER, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, ASSURANT EMPLOYEE BENEFITS, ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS 

Mr. PENINGER. Thank you, Chairman Dodd, ranking member 

Shelby, and members of the committee. 

My name is Mike Peninger and I am President and CEO of 

Assurant Employee Benefits, an operating division of Assurant, 

Inc., a premier provider of specialized insurance products, including 

group life insurance. 

I am here today on behalf of the ACLI. The ACLI is the primary 

trade association of the life insurance industry, representing 373 

member companies that account for 93 percent of the industry’s 

total assets in the United States. 

I would like to thank the committee for holding this hearing on 

the Terrorism Risk Insurance Program. While much of the ongoing 

discussion on extending TRIA has focused on property and casualty 

insurance, it is also important to discuss how this issue affects the 

life insurance industry, particularly with regard to group life insurance. While we certainly agree that there needs to be adequate terrorism insurance coverage for buildings, we also believe that the 

people who work or reside inside those buildings should be adequately covered. 

If Congress decides to extent TRIA, the ACLI and I encourage 

you and your committee to add group life insurance as a covered 

line, as the House did in the 109th Congress. The NAIC has also 

adopted a resolution in support of group life insurance. 

Group life insurance is a critical component of standard employee 

benefit packages. For millions of Americans, especially lower income workers, it is the only life insurance that their families have. 

In 2005, there were about 167 million group certificate holders 

with an average coverage amount of $49,500. 

Due to the nature of the coverage, group life policies have high 

concentrations of risk. Members of an insured group are often gathered in single locations and they obviously live near their workplaces. A single catastrophic event could cause many or all of them 

to die at a single time. 

For example, if a terrorist attack were to kill 20,000 insured individuals, group life insurers could collectively be liable for almost $1 

billion in death claims. If 1 million people were to perish, potential 

claims would increase to almost $50 billion. 

While these death totals and claim amounts may sound dramatic, unfortunately they are not inconceivable, especially of a nuclear, biological, chemical or radiological attach were to strike in a 

densely populated area such as New York, Washington, or Chicago. 

The amount of loss that a particular group insurer would incur 

would depend on many factors, including the amount of catastrophic insurance it has. 

While the life insurance industry as a whole would be able to absorb tens of billions of dollars in death claims resulting from a catastrophic attack, those insurers that receive an unexpectedly high 

number of death claims could be forced into insolvency. Such insolvencies would impact payments to beneficiaries at their time of 

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need. It could also affect the payments of benefits to all the policyholders of the insolvent companies, not just the life policy holders. 

Group life policies are designed to provide simple, affordable protection for average Americans. They are not designed or priced to 

account for the immediate deaths of tens of thousands of people 

from a terrorist attack. 

Group life insurers could, in theory, protect themselves from the 

terrorism risk either by excluding coverage for deaths due to terrorism or by purchasing catastrophic reinsurance protection. However, neither Assurant nor the ACLI are aware of any States, except for Kansas and North Carolina under very limited circumstances, that allow the use of terrorism exclusions by life insurers. Nor do we believe that it is good business or sound public policy to exclude coverage for deaths due to a catastrophic event. 

Since exclusion are therefore not a viable solution, insurers must 

turn to reinsurance for protection. Unfortunately, such coverage 

continues to be unavailable in sufficient amounts. While such reinsurance has become slightly more available since 9/11, it comes 

with higher deductibles, various exclusions and most importantly, 

with overall coverage limits that are substantially lower than were 

available prior to 9/11. 

Without adequate catastrophic reinsurance, many group life insurers risk financial ruin from a significant terrorist attack. We believe that catastrophic reinsurance would become more available of 

group life were included in a TRIA extension. This additional reinsurance capacity would significantly reduce the risk of insolvency 

that many group insurers face in the event of a large-scale attack. 

If TRIA is extended again and group life is included, we urge 

that separate recoupment mechanisms be created for P&C and 

group life insurers. Recoupment of amounts paid by the Treasury 

for losses relating to P&C insurance should be made from P&C insurers. Similarly, recoupment for losses relating to group life insurance should only be made by group life insurers. 

We look forward to working with your committee and others in 

Congress, at Treasury, and in the Administration to ensure that 

group life remains available to the millions of Americans who depend on it and that this vital protection is there when it is needed 

most. 

Thank you for allowing me the opportunity to express our views 

on this very important matter. 

Chairman DODD. Thank you very much. 

Mr. Veghte. 

STATEMENT OF JAMES H. VEGHTE, EXECUTIVE VICE PRESIDENT/CHIEF EXECUTIVE OFFICER OF REINSURANCE GENERAL OPERATIONS AND CHIEF EXECUTIVE OFFICER OF XL 

REINSURANCE AMERICA, INC., ON BEHALF OF THE REINSURANCE ASSOCIATION OF AMERICA 

Mr. VEGHTE. Good morning, Chairman Dodd, ranking member 

Shelby and distinguished members of this committee. My name is 

Jamie Veghte and I am Chief Executive Officer of XL Reinsurance 

America, Incorporated, headquartered in Stamford, Connecticut. I 

will be testifying on behalf of the Reinsurance Association of America. 

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I want to thank Chairman Dodd and many members of this committee for the leadership shown on the terrorism insurance issue. 

Your role has been critical to the adoption and continuation of the 

successful TRIA program. 

The reinsurance industry appreciates the hard work and support 

you have provided on this most important issue. It is important 

that the committee understand that XL Re and the RAA strongly 

supported the adoption of the Terrorism Risk Insurance Act in 

2002 and its extension in 2005. 

We believe the program has worked well to fill a vacuum in reinsurance capacity for this risk and help bring stability to the insurance marketplace and, indeed, the economy as a whole. 

I would like to address two important questions policymakers 

have posed as it relates to consideration of a long-term program. 

One, has the TRIA program infringed on the development of the 

private reinsurance market? And second, what is the current status 

of the private reinsurance terrorism market? 

Since the terrorist attacks of 2001, the global reinsurance industry has committed substantial resources and capital to develop a 

better understanding of terrorism risk. Despite these considerable 

efforts, the basic facts have not changed. Terrorism poses great 

challenges as an insurance risk. Unlike natural catastrophe exposures, where the reinsurance industry has models and underwriting expertise, the U.S. insurance reinsurance industry cannot 

adequately underwrite and model the scale and frequency of potential future terrorist attacks. 

Despite the addition of considerable capital in the reinsurance market in recent years, over $32 billion since Hurricane Katrina, 

little of that has been deployed to terrorism risk. Accordingly, the 

insurance and reinsurance industry cannot provide significant terrorism coverage for this country without a long-term Federal role 

in terrorism reinsurance. 

The TRIA program has not infringed on the development of a private reinsurance market. In fact, the opposite is true. Primary insurers seek to buy private reinsurance to help them reduce the 

large exposure they face for retention and loss-sharing provisions 

under the program. The large retention requirements under TRIA, 

estimated at $35 billion industry-wide, has left plenty of room for 

the private reinsurance market to provide capacity under the program. By establishing definitive loss parameters, TRIA has provided the defined layer for reinsurers to participate in sharing the 

retained risk primary companies face. 

Even with this large window to provide capacity, reinsurers have 

been willing to put only limited capital at risk to manage terrorrelated losses. 

To the second question, overall the RAA estimates the global terrorism reinsurance capacity written in the United States for 2007 

at about $6 billion to $8 billion with TRIA certified stand-alone 

treaty reinsurance. Additionally, there appears to be no appetite in 

the capital markets to provide terrorism risk through catastrophe 

bonds or other financing products. 

It’s also important to emphasize that there’s very little reinsurance appetite in nuclear, radiological, biological and chemical risk. 

According to the RAA survey of reinsurance underwriters and bromstockstill on DSKH9S0YB1PROD with HEARING

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kers, NRBC capacity is estimated to be 15 to 20 percent of the terrorism risk capacity I cited a minute ago. When NRBC is available, 

pricing for coverage is at a significant premium and coverage 

amounts restricted. 

Some insurers have been able to add terrorism peril to their 

worker’s comp reinsurance program, but this coverage would also 

typically exclude NRBC losses. 

Due to the nature of the terrorism peril, the RAA believes that 

the private market mechanisms are insufficient alone to spread the 

risk of catastrophic terrorism loss. Since reinsurance is not covered 

under the TRIA program, the RAA chooses not to independently 

advocate suggested change or solutions for a Federal program. 

The RAA has a close working relationships with the direct insurance community and will continue to support their efforts for a 

long-term solution. 

In conclusion, without some form of a long-term Federal backstop, we would expect less coverage available at the policyholder 

level, increased prices for terrorism coverage, and more limited reinsurance capacity. 

The RAA looks forward to working with the committee as it considers legislation. Thank you very much for the high honor of appearing before this committee. 

Chairman DODD. Thank you very much, Mr. Veghte. 

Mr.—is it McRaith? Did I pronounce that correctly? 

Mr. MCRAITH. Yes, you did, McRaith. 

Chairman DODD. Thank you. 

STATEMENT OF MICHAEL McRAITH, DIRECTOR, ILLINOIS 

STATE DIVISION OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. MCRAITH. Chairman Dodd, ranking member Shelby, members of the committee, thank you for inviting me to testify today. 

I am Michael McRaith, Director of Insurance for the State of Illinois, and I speak to you today on behalf of the National Association 

of Insurance Commissioners. 

My Chicago office is in a landmark building visited by thousands 

of tourists above the main switching station for hundreds of thousands of daily subway commuters, including those taking the El to 

O’Hare and Midway Airports. Within a mile are five of the Nation’s 

10 largest buildings, 10 tallest buildings, the world’s premier commodities trading centers, and Lake Michigan, one of the Great 

Lakes that comprise 84 percent of all North American fresh water. 

TRIA and its extension ensure the affordability and availability 

of terrorism insurance. The current program should not expire 

without renewal of an appropriate Federal backstop. 

While some advocate for you to deregulate the insurance industry through a so-called ‘‘Federal charter’’, this Federal backstop illustrates when Federal support for a State-regulated private insurance market provides real value for consumers, your constituents. 

The extension quickly approaches its expiration date but the 

NAIC remains convinced that a Federal backstop is an essential 

platform for our national economy. The U.S. economy remains vulnerable to terrorist attack and requires this backstop, in the absence of which terrorism insurance will become unavailable and 

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unaffordable, thereafter causing the market disruptions and economic uncertainty seen in 9/11’s aftermath. 

By requiring insurers, through the make available mechanism, to 

offer terrorism coverage, the Federal backstop has been successful 

in bringing marketplace confidence and stability. The President’s 

Working Group reported, as has been stated already, that the terrorism insurance market has grown to a take-up rate of over 60 

percent. 

Important urban markets demand terrorism insurance. And in 

the absence of private market innovation, available and affordable 

terrorism insurance depends upon a Federal backstop. Insurers 

need to understand frequency, severity and loss costs in order to 

price and offer insurance. Terrorist events cannot be predicted, either in approximate time, location, or level of tragic consequence. 

This reality, coupled with the geographic concentration of risk, 

makes terrorism extremely difficult to insure. 

A Federal backstop obviously cannot impact frequency but it does 

cap severity, giving insurers the knowledge to price and offer the 

coverage and not risk insolvency. 9/11, one of the most costly insured events ever, was carried out by a handful of men. We cannot 

choose to be naive and ignore the potential for even greater financial loss with another event. 

Actuaries predict that a nuclear, biological, chemical or radio- logical event in Manhattan could result in as much as $778 billion 

in insured losses. Total capital and surplus available in the entire 

property and casualty market is roughly $427 billion, half of which 

is available for commercial lines and a fraction of which is available to any one company. 

The private market lacks the wherewithal to survive the catastrophic risk of terrorism and to simultaneously cover all other 

losses without a Federal backstop. As Congress and this committee 

evaluate alternatives, we stress the following priorities: the duration of any program should allow for sustained stability that reflects the commercial insurance cycle. 

Second, any program should avoid the fictional distinction between domestic and foreign acts of terrorism. 

Third, any program should include coverage for group life insurance due to the concentration of risk and prospective insolvency. 

Four, any program should consider inclusion of NBCR events at 

a level that leverages the private market strength against the challenge of insuring those events. 

And finally, if you consider a shift to total private market responsibility, we do recommend amendment to the tax code to require 

companies to reserve for catastrophic events on a tax-deferred 

basis. 

We ask that you act to ensure this essential partnership between 

the Federal Government and the private market is set before the 

expiration of the current program. 

The NAIC stands with this committee and with Congress in your 

effort to develop and support that partnership. I pledge the NAIC’s 

support for the constructive process that you begin today. 

Thank you for your attention. 

Chairman DODD. Excellent testimony, Mr. McRaith. Thank you 

very, very much. 

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Mr. Plunkett, welcome again. 

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE 

DIRECTOR, CONSUMER FEDERATION OF AMERICA 

Mr. PLUNKETT. Thank you, Chairman Dodd, Senator Shelby, 

members of the committee. My name is Travis Plunkett. I am the 

Legislative Director of the Consumer Federation of America. 

On behalf of myself and our Director of Insurance, Bob Hunter, 

I appreciate the invitation to appear before you today to examine 

the temporary Terrorism Risk Insurance Act. 

In the wake of the horrific terrorist attacks of September 11th, 

CFA supported the creation of a broad Federal insurance backstop. 

We changed our views, however, to support much narrower Federal 

assistance when it became clear that during the year before TRIA 

was enacted, that the lack of Federal backup had not caused the 

crippling coverage gaps and economic disruption feared by many 

and predicted by the insurance industry. 

In fact, as I listen to the arguments of insurers for the expansion 

and permanent extension of a temporary program more than 5 

years after September 11th, I am struck by how little real acknowledgment there is of the truly dramatic improvements that have occurred in the insurance marketplace since the attacks. 

In fact, there is very strong evidence that insurers no longer 

need TRIA subsidies to provide adequate terrorism capacity in all 

but the most extreme cases. NBCR coverage has been mentioned 

here, and we agree. That is an extreme case. 

The property and casualty industry’s three most profitable years in history were 2004, 2005 and 2006, with profits in excess of $157 

billion, despite significant hurricane losses. Retained earnings or 

surplus for the industry stood at just over $600 billion at the end 

of last year. The very significant $12.2 billion in after tax losses experienced by insurers after September 11th amounts to about 2 

percent of this unprecedented surplus. 

As the Department of Treasury has reported, terrorism risk insurance is now much more available and affordable than after September 11th even though, as we have heard, insurer retentions 

have increased substantially and Federal assistance has declined. 

In fact, policyholders have enjoyed deep premium cuts in recent 

years in all insurance lines, which frees up money for businesses 

to pay for terror coverage. 

As you have heard, the take-up rate has increased substantially. 

The evidence is very clear that the TRIA program, as currently 

structured, is standing in the way of the development of a more vibrant private market for terrorism coverage. The Department of 

Treasury, for instance, has reported that although the amount of 

reinsurance available for terrorism has increased since September 

11th, federally subsidized reinsurance has depressed the demand 

for private reinsurance. Insurers who have consistently come to 

Congress and said that they cannot offer more terror coverage because of a dearth of reinsurance capacity need to acknowledge that 

it is the TRIA program itself that has helped to keep demands, and 

thus capacity, low. 

We have several recommendations for adapting the TRIA program, not ending it but adapting it, to these new market realities. 

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First, convert TRIA to a program that covers truly catastrophic terrorism events. As you have heard, there is very little coverage for 

chemical, nuclear, biological and radiation events, or for that matter for truly large-scale attacks of over $100 billion. In our written 

testimony, we lay out a detailed plan to cover all losses of between 

$100 billion and $200 billion, including those resulting form CNBR 

attacks. 

Covering losses of over $100 billion—excuse me. Covering losses 

of under $100 billion is clearly within the financial grasp of property casualty insurers, who would be able to write off approximately $35 billion of the $100 billion in losses and who, as you 

have already heard, are responsible for over $30 billion in retentions under the current program. 

Second, if TRIA is renewed, we urge you to end the practice of 

providing free reinsurance to an industry that can afford to pay for 

it. We estimate the taxpayers will have provided a subsidy for this 

reinsurance of at least $3.7 billion by the end of the year. As the 

Congressional Budget Office has noted, requiring insurers to pay 

premiums for this coverage, premiums that are slightly higher than 

are actuarially estimated, will encourage private insurers to quickly compete by offering lower rates. It will also encourage loss mitigation. 

Third, we strongly urge you not to expand the lines of insurance 

covered by the programs, especially to group life. There is no meaningful evidence that justifies expanding TRIA to cover group life insurance, which is why the Treasury Department has twice rejected 

this idea. Treasury pointed out that group life coverage has been 

and is expected to continue to be widely available at rates that 

have been declining, despite the lack of TRIA coverage. This is because the market is so competitive. 

In fact, we urge you to carefully consider reducing the lines of 

insurance covered by TRIA, for which there would likely be relatively few terror losses or low aggregate risk exposure. Candidates 

for such a reduction would include fidelity, boiler and machinery 

lines, and general liability. 

Finally, if you do decide to renew TRIA, we strongly recommend 

that you keep the program temporary. Extending the program permanently or for more than 5 years would freeze the program in 

time, inhibiting the further ability of the private market to expand 

and making it very difficult, if not impossible, for Congress to adjust the program as market conditions change. We think this would 

be a significant error. 

If we have learned anything about terrorism insurance since September 11th, it is that developments in the marketplace that were 

once thought to be highly unlikely can occur with startling speed. 

For example, very few people would have thought, in the wake of 

the significant terrorism losses incurred on September 11th, that 

the property casualty insurance industry would develop into a financial tiger, with record profits and surpluses and an enormous 

financial capacity to handle terrorism losses. 

Thank you very much. 

Chairman DODD. Thank you very much. 

Mr. Coppola. 

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STATEMENT OF ARTHUR M. COPPOLA, PRESIDENT AND CEO, 

MACERICH COMPANY, ON BEHALF OF THE COALITION TO 

INSURE AGAINST TERRORISM 

Mr. COPPOLA. Good morning, Chairman Dodd, ranking member 

Senator Shelby, and members of the committee. Thank you very 

much for allowing me to testify today. 

My name is Arthur Coppola and I am President and CEO of the 

Macerich Company, one of the Nation’s largest retail real estate investment trusts. We own and operate major retail centers in many 

of your home States, including Tysons Corner here locally. 

I also serve as the Chair of the National Association of Real Estate Investment Trusts, NAREIT. I am on the board of the Real Estate Roundtable, as well as a member of the International Council 

of Shopping Centers. 

Today I am here to testify on behalf of CIAT, the Coalition to Insure Against Terrorism. The diverse CIAT membership represents 

virtually ever sector of the U.S. economy. CIAT is the true consumer voice on terrorism risk insurance, as we are comprised of 

the principal policyholders of commercial property and casualty 

lines in the United States. It is from this perspective that we offer 

our testimony today. 

We are gratified that you have so clearly made this issue a priority by scheduling this hearing as one of the committee’s first 

items of business in the year. We hope that this hearing will be followed promptly with an introduction and passage of a bill that will 

ensure the modernization and the seamless continuation of the terrorism insurance program. 

There is no question that TRIA accomplished one of its main objectives, which was to stabilize the U.S. economy following 9/11. 

TRIA and its extension in 2005 TRIA and its extension in 2005 

were part of a series of measures that Congress passed to protect 

the U.S. economy from terrorism threats and continues today to be 

an integral part of our homeland security strategy. 

For example, the U.S. airlines today are directly insured by the 

Department of Transportation for both terrorism and war risk. The 

Federal Government, through the Overseas Private Investment 

Corporation, OPIC, also directly insures U.S. investors overseas for 

both terrorism and political risk outside the U.S. 

It would ironic and senseless of TRIA, which is the only similar 

protection of the domestic economy, and which unlike the DOT and 

OPIC programs is not a directly liability to the Federal Government, were allowed to expire or even linger in limbo throughout 

the remainder of this year. 

Terrorism is the major threat facing our Nation today. We hear 

about it on a daily basis from the Administration, our national security team, and from almost every corner of Capitol Hill. 

The market conditions that necessitated TRIA and then its extension have not gone away. Primary insurers remain largely 

averse to exposing themselves to potentially catastrophic terrorism 

losses without adequate reinsurance and the private reinsurance 

market provides only a fraction of the capacity needed. 

At least 14 other major industrial nations have recognized that 

the private markets are unable to effectively manage terrorism risk 

and have adopted permanent national programs. The U.S. market 

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is no different. Terrorism risk is a national problem that requires 

a Federal solution. 

We believe that the Federal role should focus on what the private 

markets have been unwilling or unable to do, enabling policyholders to purchase insurance for the most catastrophic conventional terrorism risks and ensuring adequate capacity in high-risk 

urban areas, and providing meaningful insurance for nuclear, biological, chemical and radiological NBCR risks. 

The CIAT proposal seeks to minimize over time the role of the 

Federal Government for conventional terrorism, but also to ensure 

that NBCR risks will be covered and that the Federal Government 

will have an insurance mechanism in place so that the Nation can 

more easily recover from a truly catastrophic attack, whether by 

conventional or unconventional terrorism. 

For risk of conventional terrorism attacks, the CIAT proposal 

would leave in place the TRIA backstop with the insurer 

deductibles, industry retention, and program trigger, all maintained at no higher than their 2007 levels. This ensures that policyholders will continue to have access to coverage through the 

make available provision. 

CIAT also suggests the committee consideration of a privately 

funded terrorism risk trust fund that would be maintained by the 

Treasury and used to help cover a portion of the Federal share of 

insured losses under the TRIA program. We believe that over time 

this trust fund will accumulate enough capital through pre-event 

surcharges and assessments that the likelihood of taxpayer exposure to terrorism risk will be limited to only the most extreme 

events. 

NBCR terrorism risk is a different matter, however. 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. The GAO, the Treasury Department, and the 

President’s Working Group, have all recognized that the market 

simply cannot price the risks associated with NBCR perils. 

Accordingly, our proposal addresses this by adding NBCR perils 

to the make available requirement under TRIA and calling for 

lower insurer deductibles and copays with respect to NBCR risks. 

The proposal would also remove the annual $100 billion program 

cap to clarify that insurers are not liable for truly catastrophic attack, whether NBCR or conventional. 

CIAT urges removal of the distinction between foreign and domestic terrorism in the statute’s definition of acts of terrorism. As 

the 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. 

Finally, in order to enhance the stability of our financial markets, the modernized program will be made permanent or will at 

least be in place until Congress declares that terrorism is no longer 

a risk. 

In all, we believe that the CIAT modernization principles for 

TRIA are fair and we urge the committee and Congress to incorporate these features into the legislation it adopts this year. 

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I thank you very much for the opportunity to testify at this very 

important hearing. 

Chairman DODD. Thank you very much. 

Mr. Lieber. 

STATEMENT OF JANNO LIEBER, SENIOR VICE PRESIDENT, 

WORLD TRADE CENTER PROPERTIES 

Mr. LIEBER. Good morning. Chairman Dodd, Senator Shelby, 

members of the committee, I am Janno Lieber, Senior Vice President of Silverstein Properties where I have responsibility for overseeing the World Trade Center redevelopment. 

I want to thank you for the opportunity to participate in this important hearing. 

As most of you know, the Silverstein organization leased the 

commercial office portions of the World Trade Center just 6 weeks 

before 9/11. Today, after several years of planning and extensive 

public dialog, all parties, including the State of New York, the 

State of New Jersey, the city of New York, the Port Authority, are 

united in the vision of what will be built at the World Trade Center, four world class skyscrapers designed by renowned architects, 

new mass transit facilities, a performing arts center, and most important, the 9/11 memorial to commemorate those lost on those terrible day. 

In order to accomplish this, of course, we need to do some very 

extensive financing which will require us to obtain terrorism insurance. The most important thing that Congress can do to assure the 

availability of terrorism insurance for projects in high-risk, highdensity areas like lower Manhattan is to have a permanent TRIA 

program. 

A long-term program is necessitated by the interplay between insurance, financing, contracting, and design in these kinds of largescale projects. Large scale developments can take a very long time 

from start to finish: three to 5 years for design, planning, and approvals, several years of construction, then several years of leaseup following. 

TRIA needs to be tailored to match the timelines that the construction industry, lenders and insurers are looking at when they 

make their decisions about whether to go forward with these kinds 

of projects. The failure to do so will impede new construction. And 

a short-term renewal just will not solve the problem. 

Further, we do need, if the standard that you set, Mr. Chairman, 

in your remarks, the certainty of the ability to obtain insurance is 

to be met, we need to know that the Federal backstop is going to 

be there. Because lenders are making their decisions, in part, looking at what their risk is of the circumstances of insurance changing. 

Often today, most large loans are securitized in order to create 

bonds that are purchased by institutional investors. Lenders often 

do not hold the loans that they originate, but sell off a portion of 

the loans for regulatory or liquidity reasons. 

In order to receive investment grade ratings from rating agencies, which are required to get investors to purchase the bonds, the 

underlying collateral has to be secured. The lack of access to terrorism coverage may impact on a project’s ability to obtain those 

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kinds of investment grade ratings, and that is especially true of 

projects in these types of concentrated, high-risk areas like lower 

Manhattan. 

Another point that I wanted to take up with you briefly today is 

that—and this is the species of the point that Senator Bennett 

made in his opening remark—is that the risk/reward is—although 

TRIA has been a success across the board, clearly the risk/reward 

is not working for every area. And lower Manhattan and certain 

high-risk areas are in that category. A major challenge faced by 

projects in these kinds of areas is the shortage of capacity which 

is prevailing today. 

The World Trade Center rebuilding is going to cost something in the range of $13 billion to $15 billion in total. But according to 

leading insurance consultants and brokers in New York City, who 

we have consulted extensively, even with the current TRIA program in place, as is, there is a shortfall. There is currently less 

than $750 million total worth of coverage available to the entire 

lower Manhattan market. 

And I should add, there is really no viable alternative to private 

insurance at all. In other words, even with TRIA, we are not meeting the test that, Chairman, you and Senator Shelby said in your 

opening remarks, which is availability, affordability and stability 

for these kinds of areas. 

We strongly believe that a TRIA extension ought to address the 

capacity problems in high-risk, high-density areas and other types 

of areas where there is a maximum aggregation of risk and of 

value. Today you are hearing from Mr. Coppola of the CIAT Coalition, and others testifying about addressing the problem in the current program with respect to the foreign versus domestic distinction, and the NBCR issue. These general fixes to TRIA are badly 

needed in order to free up capacity for terrorism insurance. 

However, even if these changes are made, there will still be questions about whether they will be sufficient to attract more capacity 

to high-risk areas like lower Manhattan. Therefore, we are suggesting that consideration be given to some additional actions, for 

example perhaps adjusting retentions or the current $100 million 

TRIA program trigger. We are not wedded to any particular solution but we ask the creativity and leadership of the committee in 

helping us in other areas like lower Manhattan to address the capacity shortfall. 

Finally, there is one other step that Congress can take to free up 

terrorism insurance for these kinds of areas, and that is to clarify 

the scope of TRIA coverage to make it absolutely clear that the 

TRIA backstop applies to all proximate consequences of the terrorist attack, including a fire or collapse following the attack. There 

is currently some uncertainty in the marketplace about that, and 

it causes terrorism risk to bleed into other insurances. And therefore, you absorb capacity that otherwise should be made available 

in areas like lower Manhattan. 

So I thank you for the opportunity to appear before you today. 

The TRIA program has been a success. It ought to be made permanent. 

I just want to emphasize again that even with the fantastic program you have put in place, it would not be possible at the present 

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time to adequately insure even one of the office buildings that are 

being built at the World Trade Center, let alone everything that his 

happening in lower Manhattan. So we would like to work with you 

to address that dysfunction in the market. 

Thank you. 

Chairman DODD. Thank you very, very much. 

I want to congratulate you and others who have worked very, 

very hard over the last number of years in putting this project together. We have all watched it, obviously, Bob Menendez obviously 

very directly, and Chuck Schumer obviously very involved in this. 

It has not been easy. But you have done a good job so I commend 

you. The Silverstein Group deserves a lot of credit for doing that. 

Mr. LIEBER. Thank you so much, Mr. Chairman. 

Chairman DODD. Mr. Bailey. 

STATEMENT OF DON BAILEY, CEO, WILLIS NORTH AMERICA, 

ON BEHALF OF THE COUNCIL OF INSURANCE AGENTS AND 

BROKERS 

Mr. BAILEY. Good morning, Chairman Dodd and ranking member 

Shelby. My name is Don Bailey. I am the CEO of Willis North 

America, a unit of Willis Group, a global insurance broker. 

It is a distinct pleasure and honor for me to join you this morning. 

Willis works with corporations, public entities and institutions 

around the world on all matters of commercial insurance, reinsurance, risk management, financial and human resource consulting. 

In addition to representing Willis today, I am also speaking this 

morning on behalf of the Council of Insurance Agents and Brokers. 

The Council represents the Nation’s leading commercial property 

and casualty insurance agencies and brokerage firms. 

With our North American headquarters located in lower Manhattan, not far from where the World Trade Center used to stand, we 

experienced firsthand the devastation wrought on New York City 

by the events of September 11th, 2001. Since that time, we in the 

United States have been fortunate that we have not experienced 

another terrorist attack on our soil. However, if you look to London, 

Madrid and other locations around the world, I think we can all 

agree that terrorism is a permanent problem for which we need a 

permanent solution. 

Regrettably, the question of another terrorist attack here in the 

U.S. is a matter of when and not if. We thank the committee for 

convening this hearing to explore the long-term solutions to terrorism risk insurance. 

Prior to September 11th, terrorism insurance was readily available. It was offered as an add-on to many policies at a very modest 

price because the threat of loss was perceived to be low. Clearly, 

after September 11, the paradigm shifted quite significantly and 

terrorism insurance was almost entirely unavailable. And the small 

amount that was available was prohibitively expensive. 

Planes did not take off. Many constructionsites, as was just detailed, in what were now perceived to be high-risk zones, fell silent. 

And commerce in many cities came to a complete halt. 

Congress, realizing the dire need, acted quickly by passing TRIA 

and subsequently the extension to provide available and affordable 

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terrorism capacity for U.S.-based risk. The program has also allowed the private market to progressively increase its role in covering terrorism risks. 

The Federal funds provided by the TRIA backstop have never 

been tapped. Not one taxpayer dollar has been spent on claims. But 

the program has been an unqualified success in stabilizing the insurance markets and allowing insurers to provide much-needed terrorism coverage at affordable prices. 

Policyholders, the business of our economy, have not had to deal 

with extremely high and volatile terrorism insurance costs and 

have been able to budget for their business plans. 

For many commercial policyholders, obtaining terrorism coverage 

means more than just piece of mind. It is essential to doing business. It may be required, sometimes by State laws and regulations, 

and often by contract, to obtain a mortgage, for financing of new 

construction, for the expansion of business or for a new entrepreneurial venture. 

Some suggest that the private market can handle these losses. Consider: estimates indicate that there is only about $6 billion to 

$8 billion in global terrorism reinsurance capacity available. But 

terrorism losses from a single attack could reach $100 billion. Industry numbers indicate that there is a $1 billion to $2 billion in 

capacity available for nuclear, biological, chemical and radiological 

coverage. Yet the American Academy of Actuaries modeled the impact of a medium-sized nuclear, biological, chemical or radiological 

attack on New York City and put the losses at $450 billion. 

Clearly, there is simply not enough February 28, 2007 capacity 

in the private market to cover losses due to terrorism. And the limits of such an attack are bound only by the imagination of terrorists whose thought processes are beyond the scope of models and 

calculations. 

Some contend that dealing with the risk of terrorism insurance 

is a matter for the industry to handle on its own. Collect the premiums, assume the risk of potential losses as they do with other 

categories of risk. But consider that a terrorist attack is not perpetrated against a company or a building. The terrorists who flew 

planes into the World Trade Center and the Pentagon, and the 

plane that crashed in the Pennsylvania field, were attacking our 

country. 

Could you imagine a scenario where the Federal Government 

knew an attack was going to happen and did not take the steps to 

either prevent it or to at least prepare for the aftermath? I suggest 

that not developing a long-term terrorism risk insurance program 

would be just that. 

The objectives of TRIA are clear: harness private industry capacity to directly contribute to terrorism-related losses, deliver Federal 

assistance in a fair and efficient manner, and repay the Government for any outlays. 

Because of TRIA, the terrorism insurance market has been largely stabilized, terrorism coverage has been steadily expanding, and 

the price of coverage has become more affordable. Now is decidedly 

not the time for the Federal Government to withdraw its involvement in the terrorism insurance market. The terrorism threats facing our country remain significant, unpredictable, our reinsurance 

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industry still lacks sufficient capacity to address terrorism risks on 

its own, and the primary insurers are still not willing to expose 

themselves to enormous terrorism risks without charging prohibitively high prices. 

Allowing TRIA to expire at this time will certainly cripple, if not 

completely paralyze, a significant portion of our economy. We must 

all work to keep that from happening. TRIA is not about protecting 

the balance sheet of insurers and brokers. It is about protecting 

commercial policyholders and creating and sustaining a national 

economy that encourages investment and development. 

This is a matter that far transcends the insurance industry. It 

is a matter of our national economic security. 

I thank the committee for your time this morning. 

Chairman DODD. Let me thank all of you again. This is, I know, 

a real crowd. Senator Bunning, while walking out, said he thought 

this may be a record number of witnesses this Committee has had 

at one panel here at any given time. And I thank you for your patience and for being a part of this. 

I am going to put a clock on ourselves for about 7 minutes here 

with Senator Shelby, myself, and my colleagues who are still here, 

and I am going to open up the record as well for the next several 

days for questions from members who were here or who did not 

make it here this morning but have an interest in the subject matter as well and ask you to respond to those questions in a timely 

fashion, if you would. 

Let me just say at the outset to all of you here, I speak for myself 

at this point here. I wish we were not here talking about this, quite 

candidly. I mean, I would love to think the idea would be that actually a market would develop these products. There is no appetite 

that I know of from my colleagues for coming up with a program 

here to deal with this. There may be some, but I do not know of 

anyone who would opt for this option. The ideal option is, of course, 

to have the market produce a product that was available, affordable, that did not require any Federal intervention here at all. That 

is the ideal situation. It is what has happened in most areas. But 

I think all of you, one way or the other, including Mr. Plunkett and 

others, have pointed out that we are dealing with some very unique 

situations and growing problems. 

I was looking at the numbers here. We have had actually -yes, 

here it is. The terrorist attacks worldwide have increased fourfold 

in the last year alone. We have a tendency—because we have been 

fortunate in this country not to be affected by it, there is sort of 

a distanced approach to this thing. But from 2004 to 2005, more 

than 14,500 people, noncombatants, have died as a result of terrorist attacks worldwide. According to the National Counterterrorism Center, 2005 was the first year in which the number of terrorist attacks worldwide exceeded 10,000—the number of attacks, 

10,000. So the problem is growing, and obviously a lot of means are 

being taken to try and minimize this. And it is a major challenge 

for all of us to deal with this. 

But it is very, very important that people understand that 

some—one of you said it. I think each one of you said here that this 

is not a question of if but when. That is the reality here. None of 

us want to say that, but the reality is we know, given the nature 

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of our country, the openness of our society in many ways, that it 

is going to happen. And to say otherwise is to be terribly naive 

about this. So we need to do everything possible, obviously—in fact, 

we are debating today, I think, on the floor of the U.S. Senate 

measures we can take. Many of us here have fought very hard for 

the first responder records over the last 2 years to do everything 

possible, to the transit security issue, which this Committee dealt 

with here a few weeks ago and marked up a bill unanimously here 

to deal with investing more given the London and Madrid experiences. 

So we have a lot of things we have to do here to deal with this 

issue—this is one of them here—in terms of how we minimize the 

kind of impacts economically to our country. 

Again, I remember Senator Bennett and I working on the Y2K 

issue a number of years ago in anticipation of the problem of the 

computer glitches that occurred. We did not have any major problems, but I remember Alan Greenspan testifying before this Committee that, as a result of our work, a lot of efforts were made by 

the private sector to upgrade their information technology systems; 

and as a result, while we did not have major glitches here, we took 

steps to hedge against the possibility of having major disruptions 

occur economically. 

So the purpose of these hearings is to look at an option here. And 

I am not overly enthusiastic about some absolutely permanent program here. I want one long enough here that gives us a chance to 

take a look at this and to make sure we are not back here every 

2 years. I cannot come back here and Dick Shelby and I year after 

year coming back and trying to rewrite a bill again and getting 533 

other Members of Congress and the administration to go along 

with this. It just does not make a lot of sense for us to do it. Clearly, this is a problem that we had hoped after 2002 would begin to 

emerge, that the ideal situation was that a market would begin to 

develop here and that the need for any extension—I remember 

making the case I did not think we would have to come back. Of 

course, we did in 2005. 

So we are here for those reasons, and I have just a couple of 

questions I want to raise with you about—and I will ask Mr. 

Coppola and Mr. Lieber, although the rest of you jump in if you 

want, if you feel compelled to talk about these things. I think it 

may have been Jack Reed, maybe Chuck Schumer, who raised the 

issue here earlier. We are hearing a lot of reports about global competitiveness in financial services, and one of the concerns is, of 

course, what is going on in the London markets and so forth. 

One of the worries I have here is that if we—given the fact that 

the U.K. and Germany and France and others have come up with 

their own ideas on how to have a permanent program to hedge 

against terrorist attacks from an economic standpoint and the fact 

that we have not done that yet here, is there any danger in your 

mind that some of these projects we are talking about here could 

end up going offshore where there is a more reliable system in 

place to deal with these risks as they emerge? Is that a legitimate 

concern for the Committee to raise here with this issue? 

Mr. LIEBER. Well, thinking about how this works in New York, 

if we cannot build the real estate that will hold onto the first-class 

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jobs that you are talking about, the high-value-added securities industry type jobs, because they want new—they need first-class new 

real estate. If we cannot build that, those very large projects, those 

very complex projects of the kind I was referring to, and in these 

densely populated areas, they will be built elsewhere. It is a fair 

question that you have raised, Senator Dodd, about where they will 

be built. Whether they would be built abroad I think is a very fair 

question in light of some of the other dynamics that you have identified in the market encouraging those types of companies to relocate operations abroad. 

Mr. COPPOLA. Certainly in the area of global financial services, 

that is definitely a possibility. Separate from the terrorism issue, 

it has already happened in places like Canary Wharf, where many 

of the global firms have decided to locate. And were they to have 

the opportunity or the desire to do that here in the U.S. and should 

developers not be able to build because of a lack of proper insurance, then clearly they will land in other countries if need be. 

Chairman DODD. So you believe that is a legitimate issue. 

Mr. COPPOLA. It could be, yes. 

Chairman DODD. And you have alluded, Mr. Lieber—all of us 

have noted here over the last 5 or 6 years some 300,000 manufacturing jobs in this country have disappeared. I would point out a 

million of those in the defense production areas. But, clearly, as 

you start talking about it, this becomes a ripple effect and people 

begin to look elsewhere. Then, obviously, the effects on manufacturing jobs and construction jobs would also be certainly a casualty 

of this process. 

Mr. COPPOLA. Yes. You know, 6 years ago seems like a long time 

ago, but we cannot forget that in the 14 months following 9/11, it 

is estimated $15 billion of new construction was put on hold or canceled and some 300,000 construction jobs were displaced. While in 

most cities in any corner that we look, we see construction cranes 

today and so we may feel complacent, if terrorism insurance were 

not to be made available, those construction cranes would begin to 

disappear, and there is no question about that. 

Chairman DODD. Does anyone else want to comment on this at 

all, this specific question? 

Mr. PLUNKETT. Senator, I would just add that the Treasury Department’s 2005 report is one area—this question of construction is 

one area of where the broader Treasury view of the market would 

disagree with what you just heard. There was considerable concern 

at the time that TRIA was initially enacted that construction would 

be affected. I remember the President talking about let’s put the 

hard hats back to work. But in looking at the marketplace retroactively and in talking about the effect of the lack of terrorism coverage on construction, Treasury concluded that there was not a significant impact. 

So I think it is important to keep in mind that Treasury, at least, 

has done broad reviews of the entire marketplace and is in a better 

position than any of us in most cases to draw conclusions about 

these questions. 

Chairman DODD. I am glad to see the Consumer Federation of 

America embracing the Treasury these days here. 

[Laughter.] 

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It has been a strong advocate of the TRIA program, of course, 

over the years. 

Yes, Mr. Coppola 

Mr. COPPOLA. If I might just add one thing, I cannot speak for Treasury, but I can speak for myself. And we had a $300 million 

expansion of a major retail center in New York City, in Queens, 

that was scheduled to break ground in early 2002. And we waited 

for TRIA to ultimately get put into place because we knew that we 

would not be able to obtain the proper construction and permanent 

financing. And had it not been put into place, we would not have 

started that job, and we would not have completed that major $300 

million expansion. 

So speaking from my own personal experience, I can assure you 

it is a big factor. 

Chairman DODD. Thank you. 

Did you want to say something? 

Mr. MCRAITH. One other angle to the question about construction, Mr. Chairman, is that every construction project requires 

workers’ compensation insurance. There are no exclusions from 

workers’ compensation insurance. To the extent that one insurer 

has to be more invested in one project than another, workers’ compensation will not be available—insurance will not be available for 

another project. 

Chairman DODD. That is a good point. This is Mr. McRaith, by 

the way, for the record—I appreciate that—for the Insurance Commissioners. 

Senator Shelby. 

Senator SHELBY. It was kind of interesting, the question Senator 

Dodd asked and the one several of you picked up on. But I personally believe that maybe Sarbanes-Oxley is running some jobs to 

London, but I am not sure that it is a lack of building in New York 

or elsewhere is. I agree with Mr. Plunkett on that. 

Mr. Plunkett, I also believe that if Treasury and Consumer Federation of America are together, Treasury must be doing something. 

Mr. PLUNKETT. They sure are, Senator. 

Senator SHELBY. I think that is a good sign. 

Mr. PLUNKETT, I want to ask you three quick questions. 

First, is group life widely available in the private market? 

Mr. PLUNKETT. Yes, sir. 

Senator SHELBY. Second, is group life presently offered at affordable rates, falling rates? 

Mr. PLUNKETT. It is, yes. And there was—— 

Senator SHELBY. Third, can life insurers obtain reinsurance for 

group life? 

Mr. PLUNKETT. Well, the Treasury report says that reinsurance 

capacity is growing. It also said, Senator, that life insurers have 

fallen behind their property casualty colleagues in modeling risk, 

that they are not as aggressively improving their risk modeling as 

property casualty insurers. 

Senator SHELBY. Mr. Clarke, since the passage of TRIA, the insurer deductible has increased from 7 percent to 20 percent. During 

that same period, take-up rates for terrorism insurance have risen 

substantially, according to the President’s Working Group. These 

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facts suggest that increasing the insurer deductible had little impact on the willingness of insurers to underwrite terrorism insurance because they had the big risk on behalf of the Government. 

Accordingly, should the insurer deductible be increased further 

in order to create additional room for the private market to grow? 

And if the purpose of TRIA is to provide a backstop for only those 

risks insurance companies are unable to handle, shouldn’t the insurer deductible be as high as possible as long as the market 

worked? 

Mr. CLARKE. It is interesting. Some of the reason why the rates 

have come down as the deductible has gone up—we have personally in Travelers a $2.2 billion deductible. What happens as we retain risk within the deductible, we are not in the business of selling 

terror insurance. We are in the business of protecting ourselves 

against it. So if we write the whole—— 

Senator SHELBY. You are managing risk, are you not? That is 

what you are into. 

Mr. CLARKE. We manage risk. 

Senator SHELBY. You insure it, but you do this by managing it 

the best you can based on your experience and your model. 

Mr. CLARKE. Well, we manage the whole account, the whole risk, 

and if terrorism is in there, we then protect ourselves by whatever 

model we have. But we basically charge almost nothing for terrorism. In fact, if somebody—I would give back the last 5 years at 

a multiple if someone would relieve us of this responsibility. 

Senator SHELBY. Say again explicitly why do you charge very little, if anything, for the terrorist risk? 

Mr. CLARKE. I cannot get—— 

Senator SHELBY. It is because the Government backs up the big 

risk. Is that correct? 

Mr. CLARKE. No. It is my retention—— 

Senator SHELBY. It is? 

Mr. CLARKE. It is my $2 billion. 

Senator SHELBY. Well, what about the Government’s risk? That 

is what you want out there. That is what has worked. That is what 

has caused the—that is why this program has worked, I believe. 

Mr. CLARKE. If you would like us to pay more or pay for the reinsurance, it will just detract from what we will take. 

Senator SHELBY. Well, I am not interested in wanting you to do 

anything except I want the insurance market to work. 

Mr. Plunkett, would you please comment on the importance of 

keeping TRIA a truly temporary program as opposed to making it 

permanent? 

Mr. PLUNKETT. Senator Shelby, I think the main issue here is 

what I raised in my testimony, that adjustments to the program 

would be very difficult politically to make as the market changes. 

We are not calling for a 2-year extension or a 3-year extension, but 

we think 4 or 5 years would give the program some continuity, but 

give you adequate time to also make changes, if necessary. 

Senator SHELBY. Thank you. 

Mr. Peninger, in its report to this Committee last year, the President’s Working Group found that, despite not being covered by 

TRIA, group life insurance was available in the private market and 

that prices for group life have generally declined since September 

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11, 2001. Mr. Plunkett just echoed these findings on the availability and the affordability of group life. 

In the absence of any evidence of market failure in the group life 

market, it appears that your proposal to have group life covered by 

TRIA is another example of an insurance company seeking to reap 

the profits of insurance while transferring the losses ultimately to 

the taxpayer. 

Would you comment on that? 

Mr. PENINGER. I can make a few comments, Senator. 

First, I guess I do not believe that—our experience at Assurant— 

and that is what I can speak most credibly to—is that catastrophe 

reinsurance is not, in fact, available. We have scoured the market 

every year since 9/11. We have been unable to get catastrophe protection in anywhere near the limits that we had prior to 9/11. So 

I think to say it is available in the market is in our experience 

false. 

I would also say that we cannot use exclusions to protect ourselves against deaths due to terrorist events. And if you say we 

should just exit the business, I would say that it is very difficult 

to exit one of the most highly desired benefits markets in a coverage that for millions of Americans it is their only means of protection. 

So I think right now, we are in a situation where in the event 

of a major catastrophe, group insurers will potentially fail, and you 

will have to deal with chaos after the fact. 

Senator SHELBY. Mr. Clarke, in your testimony you indicated 

that TRIA has achieved its goals by making terrorism risk insurance widely available and help stabilize the market for terrorism 

risk insurance. Based on your testimony, is it fair to conclude that 

you believe that both the program’s insurer deductible and insurance marketplace aggregate retention amount are set appropriately? The system seems to be working under this. 

Mr. CLARKE. For everything except NBCR. 

Senator SHELBY. Except what? 

Mr. CLARKE. The nuclear—— 

Senator SHELBY. OK. 

Mr. Chairman, thank you. 

Chairman DODD. Thank you. 

Senator Menendez. 

Senator SHELBY. Mr. Chairman, could I ask, I have several more 

questions that I would like to submit for the record in the interest 

of time. 

Chairman DODD. The record will remain open. 

Senator SHELBY. Thank you very much. 

Chairman DODD. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. I am going to 

have to preside, so I just want to get one question out there, the 

core of the differences. I am normally with Mr. Plunkett and not 

the Treasury Department, so I find it interesting today, I am not 

with him today. 

But I want to ask you all to—or those of you—some of you to 

comment on the core of what I understand his statement is, which 

is that the TRIA program as currently structured is standing in the 

way of development of a more vibrant private market for terrorism 

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coverage that would have the capacity to handle all but the most 

catastrophic attacks; and, second, that you have heard the Treasury Department referred to here several times has, in essence, said 

that federally subsidized reinsurance has depressed the demand for 

private reinsurance. 

What is wrong about that statement? Is there something underpinning it that is missing? 

Mr. VEGHTE. As a reinsurer, if I may comment, it has not depressed demand for reinsurance. We—— 

Chairman DODD. Could you speak up, Mr. Veghte? It is a little 

hard—— 

Mr. VEGHTE. We are often asked to provide private reinsurance 

for terrorism. The difficulty in underwriting it as opposed to, say, 

a natural catastrophe, the analytics, the predictability of severity 

and frequency just simply does not allow us to provide the same 

leverage off of our balance sheet. Providing capacity for a risk such 

as terrorism—which is virtually impossible to model from a frequency perspective. We are making some progress on the severity 

side, but it is a much different dynamic to underwrite. 

Senator MENENDEZ. So it is the frequency versus severity? 

Mr. VEGHTE. It is both. It is both. 

Senator MENENDEZ. Both. 

Mr. VEGHTE. But, clearly, if terrorism exposure was sort of 

blended into natural catastrophe reinsurance, nat-cat reinsurance 

for States such as Florida would actually be constricted because the 

reinsurance industry would have to reduce their limits because of 

the uncertainty of the terrorism risk embedded in the private reinsurance market. 

Senator MENENDEZ. Mr. Plunkett, what do you say about the 

GAO’s report last year that said the risks from nuclear, radiological, biological, and chemical threats are distinctly different from 

those hazards that are predictable, measurable in dollar terms, 

random, and unlikely to result in catastrophic losses for an insurer. 

Given those challenges, the GAO found that, ‘‘Any purely marketdriven expansion of coverage for these specialized terrorism risks 

is highly unlikely to be seen in the foreseeable future.’’ 

Mr. PLUNKETT. Senator, we agree with the GAO, and others have 

made the same observation. That is why we proposed a higher-level 

program that would cover nuclear, biological, chemical, and radiation attacks. And we think it is one of the parts of the market 

that is not yet working. 

Senator MENENDEZ. And if that were to be the coverage, then 

what would be the problem for those of you who are involved in the 

insurance, if that were to be the coverage? For those of you who 

are insurers, what would then be the issue? If you were to concentrate it, as Mr. Plunkett suggests, would that still meet the 

market’s challenges? 

Mr. VEGHTE. I would suggest there would still be a major 

amount of uncertainty as to the precise exposure to non-NBCR 

and, therefore, still make underwriting the risk very difficult, and 

potentially contract capacity in the non-terrorism exposures. 

Senator MENENDEZ. One last question. Mr. Lieber, even as we 

talk about having reauthorization of a Federal program, aren’t 

there some challenges on the private existing insurers today? I 

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have been following the problems of the former World Trade Center 

insurers, and aren’t there those who seek to walk away even from 

the existing insurance? 

Mr. LIEBER. Yes, and this is—you are right—a separate issue. 

We have to obtain financing to rebuild, and the TRIA program and 

Federal terrorism insurance are essential to that. Separately, we 

do have to resolve the outstanding claims with the insurance companies who provided coverage on the World Trade Center, and 

after two jury verdicts affirmed by the U.S. Court of Appeals, some 

of them are still unwilling to make good on that. 

So while we are thrilled to be at the same table on the same side 

of an issue with our friends in the insurance industry on TRIA, obviously, to make sure the World Trade Center is rebuilt, we are 

going to have to resolve those disputes as well and make sure we 

collect them from our friends in the insurance industry. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Menendez. 

Let me just raise a couple more questions, if I can here. I want 

to come back to the group life issue that was raised by Senator 

Shelby and others here as well. Let me ask you, Mr. McRaith, to 

comment on this as an Insurance Commissioner and looking at 

these questions. How do you answer the criticism that since most, 

if not all, group life policies currently cover terrorism losses, that 

seemingly the capacity already exists to cover those losses? 

Mr. MCRAITH. As insurance regulators, Mr. Chairman, our priority concern is that the promises made to the consumers are kept. 

The primary obligation we have to fulfill that responsibility is to 

ensure that—to examine and regulate companies for solvency. 

If, for example, one company in a group life policy had 1,000 participants in one location, they would normally expect three to four 

people to die during the course of a year. When that same company 

has—that site is the location or the target of a terrorist attack, you 

can lose 1,000 people, hypothetically, in one event on 1 day. And 

at the same time, all the other policyholders of that company 

around the country are still dying at their normal rates. Solvency 

is the issue, and that is why we encourage consideration of group 

life in the renewal or extension of the current TRIA. 

Mr. PENINGER. Senator, could I add to that? 

Chairman DODD. Certainly. 

Mr. PENINGER. My company in the early 1990’s happened to insure Cantor Fitzgerald. We did not have them insured at the time 

of the attack, but that company cost their insurer $700 million due 

to 9/11, at which they had full catastrophe reinsurance protection. 

That would not be available for them today, so I think that speaks 

to the solvency risk. 

Mr. PLUNKETT. Senator, I would like to say that our Insurance 

Director, Bob Hunter, recommended to the NAIC shortly after 9/11 

that the NAIC push group life insurers in the direction of cross-insurance. When you have these highly concentrated risks in distinct 

geographic areas, he recommended that group life insurers use 

cross-insurance mechanisms similar to what are sometimes used in 

the property casualty area to cross-insure each other, a building in 

San Francisco cross-insuring with a building in New York, so to 

speak, to deal with the unique aspect of aggregate risk that we are 

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talking about here. To the best of our knowledge, not much has 

been done here by group life insurers. 

Chairman DODD. What is your reaction to that, Mr. Peninger? 

Mr. PENINGER. There has been some talk about that. It is a very 

complicated problem. I will not say it is impossible, but I think you 

have to have mechanisms for ranking the risk of various areas. 

There are just lots of factors that would go into that. It sounds 

great in theory. I think the devil is definitely in the details on that. 

Chairman DODD. Do you agree with that, Mr. McRaith? 

Mr. MCRAITH. Absolutely, Mr. Chairman. We certainly respect 

the opinions of the Consumer Federation, and they often make valuable points. That is not one, however, that is valuable beyond a 

hypothetical discussion. 

Chairman DODD. Yes. Let me come back to a question. Senator 

Bunning raised this in his opening comments, and Senator Menendez talked about it. It is the capacity issue, and I am trying to 

project ahead in questions that my colleagues will have and others 

will have about this. It is maybe not a sophisticated question in 

your minds, but one that I can see them raising all the time. You 

know, this is a very talented and creative industry, the insurance 

industry, and it has been able to model in all sorts of areas to be 

able to assess risk and to make judgments about it, and in a very 

sophisticated economy. 

Now, obviously, I think all of us understand with terrorist attacks we are dealing with a unique feature here, but let me raise 

this. A study conducted by the Treasury Department in 2005 found 

that 50 percent of the insurers surveyed would cease providing terrorism risk insurance if TRIA expired. They would cease it, 50 percent said that they would. 

The Marsh report found—I am quoting them here—‘‘If TRIA is 

not renewed or if there is no permanent solution in place, the 

stand-alone insurance market is unlikely to have sufficient capacity 

to meet demand.’’ 

I have basic questions, and I will ask who may be the most competent to address it. How much capacity is currently available in 

the private sector? And how has that capacity changed over the 

last few years? And what are the factors limiting—and this is the 

question—the private sector from expanding that capacity? 

First of all, does someone have the answer to that first question 

on how much—— 

Mr. MCRAITH. Our estimates, Mr. Chairman, are that the entire 

property casualty industry has a capacity of about $427 billion. Approximately one-half of that is for commercial lines. 

Chairman DODD. You mentioned this earlier. 

Mr. MCRAITH. Right. And each company is some fraction of that. 

Chairman DODD. OK. Well, give me some of the factors, again, 

this limiting capacity issue here, and the response to the question 

of why can’t the industry begin to address and deal with this question of capacity. 

Mr. BAILEY. Mr. Chairman, maybe I can jump in on a little bit 

of this. The whole concept—and I have listened to some of it—of 

a private solution is a complicated one for a lot of reasons. Our industry has not done, frankly, a lot of mundane things well. Masmstockstill on DSKH9S0YB1PROD with HEARING

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tering just the art of getting an accurate policy issued is not something that we would put in the to-do list at this point. 

The extraordinary at that it would require, the effort that it 

would require for all of these parties to come together to create a 

private solution that was effective in every aspect is just impractical. It would be a big bet for us to say let’s shut down TRIA and 

hope that everybody will come together, the private sector, and 

come up with a reasonable solution. And given what is at risk, it 

is just not a bet we should make. 

Mr. PLUNKETT. Mr. Chairman, couldn’t Congress facilitate such 

a private solution? We recommend as part of our higher-level TRIA 

proposal that, under the NAIC’s direction, Congress facilitate the 

construction of a private pool at lower levels of losses, under $100 

billion. That is an approach, if done fairly, that could involve a 

public-private partnership with Congress merely facilitating, allowing, encouraging, and mandating that NAIC do it under certain 

specific conditions. 

Chairman DODD. It is a thought. Well, listen, thank you all very 

much. We are going to try and move on this. And I am pleased to 

see even—and I thank you, Mr. Plunkett, as well here—that the 

need for some continuations here may differ on—and obviously you 

do on the length and some of the areas we cover, but my sense is 

here that there is a general consensus we cannot let this—the option of doing nothing is really not acceptable. I think, Mr. Plunkett, 

you would agree with that. I am trying to get your attention, Mr. 

Plunkett. 

Mr. PLUNKETT. Oh. Excuse me. Pardon me. 

Chairman DODD. Doing nothing is not an option. 

Mr. PLUNKETT. We agree. 

Chairman DODD. All right. And so what we need to try to pull 

together is—if we cannot—what I do not want to have happen is 

us to get into next fall, late fall, with this clock ticking on us here. 

So I am going to try and urge my colleagues here on the Committee 

to come up with some proposals on this and then move the process 

so we get some clarity on this, and earlier, rather than waiting 

later, when I think the clock can become a tremendous disadvantage with people who just want to be obstructionist for the sake of 

being obstructionist. 

Senator Reed has, I know, indicated—I don’t want to try and 

speak for him here, but a strong interest in the subject matter as 

well, and I am very appreciative of his concerned about this. So we 

will be trying to move as quickly as we can here, but listening to 

people and trying to package something together. 

I want to say how grateful I am to Senator Shelby. He and I differ on this issue to some degree, but he has been very cooperative 

in the past in trying to work on something here that will allow us 

to build a consensus here that will work. 

So I am grateful to him for his cooperation, and I am thankful 

to my colleagues here who showed up today as expressing their interest in the subject matter. It is very important, and I am very 

grateful to all of you who bring a wealth of knowledge to this, and 

understanding. It has been very helpful to hear your testimony 

here this morning. 

This Committee will stand adjourned. 

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[Whereupon, at 12:40 p.m., the hearing was adjourned.] 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI 

FROM CHARLES CLARKE 

Q.1. Access and affordability of terrorism risk insurance has improved since 2001, and since TRIA’s reauthorization in 2005. This 

has happened even as the TRIA program has been scaled back significantly. Do you forecast this trend continuing under current 

market conditions? 

A.1. While the data show that access and affordability for terrorism 

insurance have improved since TRIA was enacted in late 2002, and 

that the federal legislation has had a stabilizing effect on the market, this was not the case during the period following September 

11, 2001, and the passage of TRIA. Equally important, without a 

federal program that continues to fulfill these goals, there are predictions that market conditions would return to those that commercial insurance consumers saw post-September 11 and pre-TRIA. 

For example, according to the American Academy of Actuaries, 

‘‘without a federal backstop, there will be a long-term, rather than 

just an immediate negative effect where there will be higher prices, 

decreased availability, and lower take-up rates.’’ 

On the other hand, with federal legislation in place, we have 

seen the types of market improvement that you describe. The most 

recent (July 2006) ‘‘Marketwatch’’ report by Marsh indicates that 

the percentage of companies buying terrorism insurance covering 

property risks has increased consistently since TRIA was enacted, 

reaching nearly 60 percent as of mid-2006. The Council of Insurance Agents and Brokers’ most recent ‘‘Market Survey’’ (covering 

the fourth quarter 2006) indicates that terrorism premium rates 

are stable for most policyholders. These market data are an indication that TRIA and the TRIA Extension Act are working effectively 

to achieve the goal of a stable insurance market despite the ongoing difficulties of managing terrorism risk. 

Although the TRIA Extension Act requires private insurers to assume a significant amount of terrorism risk through per company 

retentions, quota shares, and the removal of several commercial 

lines from the program, the presence of the federal backstop puts 

a box around the volatility associated with terrorism risk and 

therefore facilitates both the availability and affordability of coverage. 

Many insurers—particularly those with large, diversified client 

portfolios—manage their terrorism accumulations to a level that is 

significantly less than their very substantial retentions. This may 

be why scaling back the program, as was done in the TRIA Extension Act, did not change the market dynamic significantly. 

Removing the backstop or further increasing retentions, however, 

could have a more adverse impact, and undermine the legislative 

goal of stability achieved under TRIA and its successor. The current TRIA retention levels are already so high that they preclude 

meaningful backstop protection for some insurers, while for others, 

the program functions as more of a solvency protection mechanism 

than an underwriting tool. However, if retentions are raised further or the program is scaled back to the extent that it ceases to 

perform even this vital solvency role, regulators and rating agencies may step in to limit exposure levels. As noted, this could lead 

to market conditions akin to those we saw between September 11, 

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2001, and the statute’s enactment in November 2002, and the longterm negative effects described by the American Academy of Actuaries. 

Q.1.a. Is the goal of the insurance industry to operate in a market 

without a TRIA program? Should it be their goal? 

A.1.a. The insurance industry’s goal is to manage terrorism insurance as efficiently and effectively as possible, given myriad factors 

that make this an uninsurable risk, particularly for chemical, nuclear, biological, and radiological (CNBR) attacks. Right now, and 

for the foreseeable future, there is no way to change the characteristics of terrorism risk to ‘‘make’’ it insurable and much of the information necessary to assess the frequency of acts of terrorism understandably lies solely in the hands of the federal government. 

Therefore, the government is a necessary partner in managing our 

Nation’s exposure to terrorism. 

Nonetheless, the industry is doing everything it possibly can in 

the private market to enhance its understanding of this risk and 

to assess the probability and severity of another attack or series of 

attacks on U.S. soil. Improvements to computer-based modeling are 

an example of what private insurers are doing to assess and manage their exposure both at individual locations and for aggregates 

of exposures. However, the models do not quantify the likelihood of 

a terrorist attack or provide insurers with any additional capacity 

to insure terrorism risk. In fact, by helping insurers to allocate capacity more efficiently, they actually may reduce the amount of 

coverage provided by individual insurers in perceived high-risk or 

high-density locations in the absence of federal involvement in the 

management of this risk, or as the federal program becomes only 

a solvency protection mechanism. 

Additionally, the high degree of state regulatory restrictions and 

the resulting lack of free market is a further impediment to insurers’ ability to operate without a federal backstop. These price and 

product controls impede insurers’ ability to price terrorism adequately and therefore restrict the supply of insurance that they are 

able to make available, consistent with sound financial management, a situation that would be exacerbated were TRIA to expire. 

Thus, if Congress’s goal is to stabilize and, hopefully, improve the 

availability and affordability of terrorism insurance, then a meaningful federal program must be continued. We also strongly support 

preemption of state rate and form regulation. 

Q.1.b. What is your reaction to the CBO statement that a long 

term program would contribute to marketplace distortions? 

A.1.b. We disagree strongly with the Congressional Budget Office’s 

(‘‘CBO’s’’) statement, taken from a January 2005 Report (‘‘Federal 

Terrorism Reinsurance: An Update’’), that a long term program 

would contribute to marketplace distortions. The industry retention 

under the TRIA Extension Act, estimated at $35 billion in 2007, allows private reinsurers ample opportunity to play a significant role 

in taking on and managing terrorism risk. Yet, since CBO made 

those statements, there have been only incremental increases in 

the amount of private sector terrorism reinsurance capacity. According to Mr. Veghte’s testimony at the hearing, there is currently 

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about $6–8 billion in private sector terrorism reinsurance capacity, 

about the same as a year ago. 

Reinsurers view this risk much the same way that primary insurers do. As a result, they are reluctant to take on more risk than 

is prudent. The one important distinction between primary insurers and reinsurers is that reinsurers do not operate under government price controls and are able to charge free-market, competitive 

rates for reinsurance. The current regulatory differences between 

the primary and reinsurance markets mean that the premiums 

that reinsurers require from primary insurers often exceed the 

amount of terrorism premium that primary insurers are able to obtain from policyholders, due to these state rate regulatory restrictions and the policyholders’ interest in purchasing coverage required to be made available under TRIA. According to the PWG, 

a little less than $1 billion in primary terrorism insurance premiums is collected annually. Virtually all of this is being used to 

fund the $6–8 billion private reinsurance layer, and many carriers 

are self-insuring their retentions by exposing more of their capital 

to risk. TRIA is not distorting the market; rather, it is allowing it 

to function in a manner that addresses fundamental economic realities facing insurers and policyholders. 

Q.2. Accurate risk modeling is key to increasing the availability of 

insurance. Mr. Veghte discusses risk modeling in his testimony. 

Like other catastrophic events, terrorist attacks are unexpected, 

unpredictable, and carry a large potential for destruction. What 

makes terrorism risk impossible to model where other catastrophic 

events can be modeled with a certain degree of accuracy? 

A.2. While both natural catastrophes and terrorism are capable of 

causing extreme loss, they are fundamentally different from an insurability perspective. For terrorism, private sector reinsurance or 

other risk-sharing capital remains woefully inadequate and shows 

no signs of robust growth in the near future. This is a strong indicator that the capital markets have reached the same conclusions 

about the private insurability of terrorism risk. Moreover, there is 

no reliable method for determining the likelihood of a terrorist attack (event frequency) within the United States, a critical component in determining the insurability of a risk. This is complicated 

by the fact that terrorism is a deliberate act committed by individuals bent on doing the worst possible harm. Additionally, the interdependence of terrorism risk also limits the potential effectiveness 

of mitigation. Finally, for national security reasons, vital information necessary to assess the terrorism threat is strictly classified 

and unavailable to insurers as they attempt to manage this risk. 

Unlike natural catastrophe models, which take both frequency 

and severity into account, current terrorism models in use are deterministic, not probabilistic—i.e., they quantify the impact of representative terrorist attack scenarios but do not assess the likelihood of an attack. However, both the frequency and severity of attacks are important considerations with respect to the underwriting and pricing of terrorism coverage. As long as the frequency 

of such events remains unpredictable, the models will be of limited 

assistance to insurers as they grapple with the dimensions of terrorism risk. 

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Q.3. According to the President’s Working Group study, about forty 

percent of all policyholders do not purchase terrorism insurance. A 

contributing factor to this may be the belief by some that the federal government will step in if another attack occurs. Do you think 

government subsidies to the insurance industry contribute to this 

perception? 

A.3. TRIA does not provide a subsidy to the insurance industry. It 

is a federal program intended to stabilize terrorism risk insurance 

markets, that provides a benefit to policyholders and enables the 

U.S. economy to operate and grow in the face of potential terrorist 

attacks in this country. Pursuant to the National Association of Insurance Commissioners Model Disclosure form (which has been accepted by the U.S. Treasury), insurers are required to warrant that 

the premiums paid by policyholders do not include any charges for 

the portion of losses covered by the TRIA backstop. 

According to research by the Center for Terrorism Risk Management Policy at RAND, the structure of the current program helps 

to keep premiums more affordable for policyholders and therefore 

encourages a higher take-up rate. Moreover, RAND believes that, 

‘‘if TRIA is allowed to sunset, given the likely increase in prices 

[paid by policyholders], and assuming no change in the perception 

of risk by those who are insured, it is likely that take-up rates will 

fall.’’ Thus, rather than depressing take-up rates, we believe that 

the federal backstop in TRIA helps to keep rates affordable and encourages the purchase of insurance. 

Prior to Hurricane Katrina, most post-disaster response and recovery grants provided by the federal government went to pay for 

products and services that traditionally are not covered by private 

insurance, such as government infrastructure repairs and small 

business loan programs. Hurricane Katrina changed that equation 

by expanding the categories of federal assistance to some areas 

that traditionally have been covered exclusively by insurance. 

Changing expectations about the role of post-event government assistance, rather than TRIA’s support for the insurance marketplace, may change the willingness of policyholders to purchase insurance in the future. To understand this better, we encourage a 

thorough analysis of how federal aid following a natural or manmade catastrophe should be distributed in the future, particularly 

as it relates to losses that typically are covered by private insurance. 

Q.3.a. Would increased purchases of terrorism insurance increase 

availability of policies in the marketplace? 

A.3.a. TRIA requires that insurers make terrorism insurance available for all TRIA-covered lines, on the same terms and conditions 

that they make non-terrorism insurance available. Thus, to increase property insurance take-up rates, it is not a matter of more 

insurers making the coverage available, but of more policyholders 

choosing to purchase it. For workers’ compensation, state laws in 

every jurisdiction not only require insurers to make insurance 

available, but also mandate its purchase as part of comprehensive 

workers’ compensation policies that cover all workplace accidents 

and injuries. As a result, for workers’ compensation, the take-up 

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rate is effectively 100%, so there is no need to increase take-up 

rates. 

As I noted previously, the percentage of companies buying terrorism insurance covering property risks has increased consistently 

since TRIA was enacted, suggesting both increased demand and 

more acceptable pricing. The 60 percent take-up rate actually compares favorably to other voluntary purchases of catastrophic risk 

insurance, particularly flood insurance and earthquake insurance. 

Looking ahead, supply is dependent on underwriters’ perception 

of risk and it will remain very limited for certain target exposures 

and concentrations of risk. Increased ability of insurers to provide 

coverage beneath the TRIA retentions will only occur with the improvement in terms and conditions of reinsurance available to the 

industry. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM CHARLES CLARKE 

Q.1. Has industry proposed a long-term private sector solution or 

is the federal program the only long-term solution? If the federal 

backstop is the long-term solution, then what modifications does industry propose? 

A.1. TRIA is a public/private partnership which requires insurers 

to retain significant losses before the federal backstop is triggered. 

Based on the current year’s retention levels (20 percent of premiums covered lines), it is likely that an event would have to exceed the magnitude of the September 11, 2001 attack on the World 

Trade Center—more than $30 billion—before the backstop comes 

into play. Additionally, there are mechanisms in TRIA which provide for a post-event policyholder surcharge through which Treasury can recoup federal dollars that are expended. Through the percompany retentions and policyholder surcharges, both insurers and 

insureds make a significant private sector commitment to managing terrorism risk. 

We continue to believe, however, that a federal backstop, particularly for CNBR risk, will remain necessary for the foreseeable future. As I outlined in my testimony, the characteristics that make 

terrorism an uninsurable risk remain as strong today as they were 

immediately following September 11, 2001. While TRIA and its extension do not change this basic dynamic, they put a box around 

the volatility associated with terrorism risk and, therefore, facilitate both coverage availability and affordability. 

For the past six and a half years, we have been working diligently with Congress, the Administration, capital markets experts, 

the policyholder community, and others to examine alternatives to 

TRIA. We continue to believe it is the most operationally effective 

and fiscally efficient structure for balancing market needs and solvency concerns. While well-intentioned, the ‘‘pool’’ proposals that 

we have analyzed could undermine sound underwriting and are unlikely to provide significant new capital for the spreading of this 

risk. 

We believe that the most important change that could be made 

to TRIA is to provide financial certainty for insurers and increased 

federal financial participation in the event of a CNBR attack. Our 

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greatest concern relates to the current $100 billion program cap, 

which would be wholly insufficient in the event of a nuclear strike 

on a U.S. city. We also support recalibrating insurer participation 

in a manner that is consistent with the potential financial and 

operational consequences of a CNBR attack. In my testimony, I 

outlined several other suggested program changes applicable to 

conventional terrorism risk, but we believe that appropriately addressing CNBR risk is the highest priority in terms of proposed 

modifications to the current program. 

Q.2. What effect would tax-deductible reserves for future terrorism 

losses have on an insurer’s balance sheet? What effect does it have 

on the ability to provide coverage? 

A.2. Under current federal tax laws, GAAP, and state insurance 

regulatory accounting standards (known as SAP), insurers are not 

permitted to establish reserves for events which have not yet occurred. This results in considerable volatility of losses and earnings, depending on catastrophe loss experience (natural catastrophes as well as terrorism) in a particular year. 

To address this issue fully (i.e., from both a tax and an accounting perspective), it would be necessary to amend the Internal Revenue Code, GAAP, and SAP. Insurers then could establish tax-deductible terrorism/catastrophe reserves, and reflect them on their 

accounting statements. 

These changes might reduce volatility initially as a reserve buildup would allow for payment of some or all claims with potentially 

little impact on an insurer’s capital; however, the reserve fund 

would have to be built up again over time and those costs would 

have to be factored into perspective costs and could create volatility 

post event. There are differences of opinion in the financial community as to whether this would put companies in better position to 

manage catastrophe risk. There are, for example, concerns that a 

catastrophe reserve would decrease insurers’ surplus (because the 

money is taken from surplus and put into a reserve), thus ‘‘trapping’’ capital that may be needed for other purposes, as well as potentially reducing the capital that would otherwise be used to underwrite risks. There is also a timing issue. Certainly, in the case 

of a CNBR terrorist attack, it would take many, many years for insurers to build reserves sufficient to pay losses that could total 

hundreds of billions of dollars. As this is occurring, money that otherwise would be paid in taxes is allocated to the tax-deductible reserve, leading to a federal revenue loss that might actually exceed 

the budgetary impacts of the TRIA program. 

Additionally, absent a federal backstop, tax-deductible pre-event 

reserves are not likely to aid availability in a material way because 

insurers must continue to manage their terrorism risk based on exposure models and overall exposure levels. They cannot take on 

more risk than is prudent in the short-term because of the possibility that a tax-deductible reserve will grow in the future. Moreover, rates are not likely to decline, and in fact could increase, because the money that is being set aside in the reserve to pay for 

future events is not available to pay non-terrorism losses in the 

current year, but both must be funded. 

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Q.3. If it does not become mandatory for insurers to offer CNBR 

coverage, how would insurers adjust or allocate a loss in the event 

of a terrorist attack involving both a conventional and unconventional weapon? In the case of, say, a dirty bomb it causes a large 

amount of physical damage to the building, but only a small 

amount of radioactive or chemical clean-up. Would insurers look to 

exclude the entire loss? 

A.3. Absent the specific facts as they apply to each policyholder, it 

is not possible to comment on how insurers would adjust or allocate 

a loss in the event of a terrorist attack involving both a conventional and unconventional weapon. However, your question underscores one of the problems that could arise from the current statutory framework, which recognizes that the current TRIA backstop 

is not robust enough to alleviate the solvency threat posed by unconventional weapons and therefore allows insurers to utilize 

CNBR exclusions to the extent permitted by state law. For workers’ 

compensation, there would be coverage for both conventional and 

CNBR terrorism losses, with no distinctions. 

Q.4. If industry could understand the long term probabilities of terrorism occurrences, how could the industry price the risk in a reasonable way that would spread the cost over time? In other words, 

if the private industry could learn to model and price the risk 

should insureds be able to expect little to no charge in advance of 

an event, and enormous charges after, dwindling over time? Is that 

desirable? 

A.4. As a general proposition, insurers use terrorism models to estimate the amount of insured loss from a static event so that they 

can manage their respective accumulations of risk; this is known 

as a deterministic model. This technique allows insurers to spread 

their allocations of capacity geographically so that the insurers’ responsibility to compensate for physical damage and human loss is 

expected to fall within its risk tolerance. It does not, however, 

allow them to factor in the likelihood of a future terrorist attack, 

which requires probabilistic modeling. Probabilistic modeling for 

terrorism is in its infancy, and it is likely to take years, if not decades, for it to advance to the point where insurers have any confidence in the predictions. 

Even if credible probabilistic models were available, one should 

not confuse the ability to quantify terrorism risk with the ability 

to insure it. Models do not provide insurers with any additional capacity to insure terrorism risk and in fact may result in reducing 

the amount of coverage provided by individual insurers in perceived high-risk or high-density locations. While developing this 

improved understanding of the terrorism loss potential is important to protect solvency, it does not further TRIA’s goals of improving availability and affordability of terrorism insurance. 

State rate regulatory requirements generally prohibit insurers 

from retrospectively recouping past losses in their rating base (i.e., 

rates are based on projected future costs, not recovery of past 

losses). Even if state regulations permitted such charges, they 

probably could not be sustained in the market, because new entrants who are not burdened by the losses in question could undercut insurers who need to recoup past losses. Thus, private insurers 

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do not have the legal or practical ability to charge ‘‘little or no’’ premium in advance of an event, and larger amounts after the fact, 

as suggested by your question. TRIA, however, provides such a 

framework for the federal government to recoup monies its pays for 

insured losses through a post-event policyholder surcharge (capped 

at 3% of premium annually). The federal backstop results in lower 

premiums in the absence of a terrorist attack and the policyholder 

surcharges result in higher post-event costs to allow for 

recoupment to the Treasury. 

Q.5. Granting that TRIA provides insurers some certainty about 

Federal support and their own retention of risk, whether we have 

TRIA in place or not, is it not true that a severe terrorist event will 

end up in the lap of the Federal Government to fund, after the fact, 

since insurers’ equity is insufficient? 

A.5. TRIA provides certainty not only to insurers but also to policyholders, the Treasury, and the economy at large. For insurers, the 

per-company retention has increased each year since TRIA was enacted (7% in 2003; 10% in 2004; 15% in 2005; 17.5% in 2006; 20% 

in 2007) and is unlikely to be breached in any but the most extreme terrorist attacks. Nonetheless, the backstop does provide stability to the marketplace and solvency protection in the event of a 

large scale terrorist attack. TRIA also provides policyholders who 

purchase terrorism coverage with the certainty of knowing that 

they have an economic safety net in place to cover workers’ compensation, property loss, and liability claims. 

The policyholder surcharge mechanism in TRIA provides fiscal 

certainty for taxpayers through recoupments to Treasury. The program imposes mandatory policyholder surcharges for aggregate loss 

levels to the extent those losses are paid by the federal government 

up to $27.5 billion, and allows policyholder surcharges at Treasury’s discretion above that level, up to the $100 billion annual program cap. 

Greater certainty in each of the aforementioned areas provides 

short- and long-term benefits to the economy. This certainty would 

be severely compromised in the absence of TRIA, however. Insurers 

would face the risk of ruin in the event of a catastrophic terrorist 

attack. As noted above, this could result in higher costs and reduced availability of terrorism insurance coverage, leading to more 

uninsured losses in the event of a large-scale attack and adversely 

affecting not only the policyholders who are the targets of the terrorists, but also the broader economy. The federal government may 

step in to pay these losses, but without TRIA’s policyholder surcharge mechanism, there is little likelihood that these federal expenditures will be recouped. 

Thus, while TRIA is perceived to be providing a federal benefit 

to the insurance system, it is altogether possible that federal payments would be higher if the program is allowed to expire than if 

a backstop remains in place. 

Q.6. Would it not be preferable for all parties to provide for some 

advance funding of this risk (possibly in combination with other 

risks to lower the burden of any one on the taxpayers and the society), so the cost could be spread over time, so the uncertainty conmstockstill on DSKH9S0YB1PROD with HEARING

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cerning the consequences be diminished and so that the government would receive some income for its inevitable support? 

A.6. As noted above, insurers do not charge any premium to policyholders for the protection provided by the federal backstop, with 

the understanding that policyholders will be assessed for postevent surcharges if a terrorist attack triggers federal payments 

under the program to the levels specified in the legislation. Should 

TRIA become ‘‘pre-funded’’ in some fashion, terrorism insurance 

rates are likely to increase to finance the layer of risk that currently is funded through the post-event policyholder surcharge, potentially resulting in a drop in take-up rates and less protection for 

the economy. We believe that an appropriate balance between the 

per-company retentions, which provide advance funding through 

the private insurance system, and policyholder surcharges, which 

provide after-the-fact recoupment to Treasury, provides greater 

overall economic efficiency than would a program that requires 

more advance funding of the loss layer that currently is post-event 

funded, and therefore higher insurance rates. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MICHAEL J. PENINGER 

Q.1.a. In your testimony, you state that if group life insurance is 

added as a covered line under TRIA, a separate recoupment mechanism should be created for group life insurers because they take on 

different types of risks than P&C insurers. Please explain why the 

risk covered by TRIA—the risk of loss from an act of terrorism— 

is not the same for both group life and P&C insurers? 

A.1.a. The business of group life insurance is very different than 

that of P&C insurance. P&C policies are generally priced to take 

into account the immediate and complete destruction of each property from various events, including fires, tornadoes, earthquakes 

and hurricanes. Terrorism risk simply adds to the probability of 

total loss (although at an indeterminable rate). Group life policies, 

on the other hand, are priced according to actuarially-sound mortality and morbidity tables that accurately estimate the independent death rates of individuals over various periods of time. 

These tables, and the resulting policy premiums, do not, and cannot, take into account unpredictable man-made terrorist attacks 

that can kill a significant number of insured individuals all at once. In this case, the probability of death is not just increased by the 

terrorism risk (once again, at an indeterminable rate), but magnified by the concentration risk prevalent by having groups of people all located in one place. 

In addition, unlike most P&C carriers, most (if not all) group life 

insurers do not exclude nuclear, biological, chemical and radiological terrorist events from coverage. As a result, life insurers are 

more susceptible to financial distress than P&C insurers if a major 

NBCR attack were to occur. 

Q.1.b. Please explain why the taxpayer should not have the right 

to recoup payouts under TRIA from all of the beneficiaries of the 

program? If an insurer receives the profits associated with writing 

a line of insurance covered by TRIA, why would they not also have 

to pay for the costs of the government backstop provided by TRIA? 

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If TRIA is an insurance program, should not beneficiaries have to 

pay for the cost of the insurance even if a beneficiary does not receive any payments under the program? 

A.1.b. We agree that the beneficiaries of the TRIA program should 

pay for the cost of the program. The proposal for separate 

recoupment provisions does nothing to prevent that from occurring. 

It simply allocates the recoupment in proportion to the benefits received from the program. Because group life and P&C insurance 

are very different from each other in terms of risks that are assumed, premiums that are charged and duration of coverage, we 

believe it would be inappropriate and inadvisable to commingle the 

recoupment of funds that were remitted for group life and/or P&C 

claims. Separate recoupment provisions should be included in any 

TRIA extension in order to properly and equitably match the repayment of taxpayer funds (via ‘‘terrorism loss risk-spreading premiums’’) with those major lines of insurance that triggered the disbursement of such funds. 

Group life insurers should not have to reimburse the Treasury 

for financial assistance that relates to P&C losses, and vice versa. 

Otherwise, in the event of a terrorist attack that causes mostly 

P&C losses in terms of dollars, life insurers would have to pay the 

Treasury billions of dollars for P&C losses that are completely unrelated to their line of business and for which they derived no benefit from. Group life insurers would not derive any benefit under 

TRIA (e.g., amount of deductibles, recoupment) by P&C insurance 

being covered in the program, just as P&C insurers would not derive any benefit by group life insurance being added to the program. 

Our recommended approach is similar to how our nation’s insurance guaranty association system works. All states but one (Wisconsin) have separate guaranty associations for P&C and the life/ 

health insurers. This system is designed so only life/health insurers 

are responsible for contributing toward the unpaid claims of another life or health insurer, while only P&C insurers are responsible for contributing toward the unpaid claims of another P&C insurer. The TRIA program should be designed similarly. 

Q.2.a. In your written testimony, you argue that group life insurance should be covered by TRIA because competitive pressures will 

force companies to write group life insurance. You state that ‘‘unless the entire industry took the same approach, any group life insurer that tried to prudently manage its risk exposure by excluding 

terrorism coverage would be placed at a severe competitive disadvantage in the marketplace.’’ As a general proposition, do you believe that life insurance companies have the discipline necessary to 

abide by their own underwriting standards and not to sell insurance that exposes them to risks they can not effectively manage? 

A.2.a. It is not a matter of discipline, but instead, a matter of economic necessity and good public policy that group insurers offer 

group life insurance to its policyholders at affordable rates. Since 

group life is generally offered to employers or associations as part 

of a package of other insurance benefits (e.g., medical, dental, disability, accidental death and dismemberment), an insurer would be 

significantly jeopardizing its ability to obtain any group insurance 

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business if it decided not to include group life in its benefits packages (since its competitors are including group life in their packages). 

While it is true that each and every insurer could decide not to 

offer group life (which would eliminate the competitive disadvantage of not offering it), group insurers believe that its policyholders 

and their employees and members (for whom group life is often 

their only form of life insurance) are better protected if group life 

is included in these benefit packages, despite the additional risk 

and potential financial loss if a major terrorist attack were to kill 

an extraordinary large number of certificate holders. 

Insurers attempt to minimize their own risks of loss by purchasing appropriate amounts of reinsurance. Immediately after 

September 11, 2001, group life insurers were generally unable to 

obtain catastrophic reinsurance, especially for terrorist events. 

While such reinsurance has generally become more available, it is 

often limited (e.g., it usually comes with higher premiums, 

deductibles, various exclusions and lower coverage limits). 

Q.2.b. If so, does not the fact that life insurers are presently offering group life at affordable rates, as the President’s Working Group 

on Financial Markets has reported, demonstrate that there is no 

need to include group life insurance as a line covered under TRIA? 

A.2.b. No. The fact that group life remains affordable is a function 

of competitive pressure as described above. To be able to sell employee or group benefit packages in today’s competitive market, insurers must not only offer group life insurance, but they must also 

price it low enough to remain competitive enough to obtain the underlying contracts. 

The life insurance industry is highly regulated in order to make 

sure that it has sufficient reserves and surpluses to withstand expected, as well as unexpected, death claims. Notwithstanding, a 

group insurer’s reserves and surplus accounts are not designed or 

expected to withstand a terrorist attack that kills a disproportionately large number of its insured. In addition, most carriers have 

limited amounts of catastrophic reinsurance that could be used to 

pay such claims. Furthermore, if a multi-line insurer’s reserves and 

surplus are completely depleted by group life claims, there would 

not be any other funds available to support other lines of insurance 

(e.g., health, disability). 

If one or several insurers are unable to meet some or most of its 

obligations after a small or medium-sized terrorist attack, state life 

and health guaranty associations are in place to assure that such 

obligations are indeed met (up to state-set limits). However, in the 

case of a major, cataclysmic terrorist attack (e.g., NBCR event), 

several (or many) insurers, including medium to large-size carriers, 

may become insolvent, and the guaranty association system may 

not have the capacity to fund unpaid claims. It is this potential system collapse that concerns the group life industry and is why it 

urges that group life be included in any TRIA extension. 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI 

FROM MICHAEL J. PENINGER 

Q.1. Studies have shown that terrorism risk insurance in group life 

policies remains available, and that prices have even declined, despite the fact that group life insurance is not part of the TRIA program. What is the rationale for including group life given these 

facts? 

A.1. As mentioned above, group life insurance remains available 

and affordable largely due to market competition, and will probably 

remain so regardless of whether group life is included in the TRIA 

program. What will change if group life is included in TRIA is the 

insurance industry’s increased ability to withstand a major terrorist event (since the reinsurance market for group life will be rejuvenated, just like it was for workers’ compensation when it was 

included in TRIA). TRIA would provide the necessary backstop for 

the group life industry, its policyholders and certificate holders— 

it would prevent many insurers from becoming insolvent after such 

an attack and provide the assurance that death claims will be paid. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI 

FROM JAMES H. VEGHTE 

Q.1. Accurate risk modeling is key to increasing the availability of 

insurance. Mr. Veghte discusses risk modeling in his testimony. 

Like other catastrophic events, terrorist attacks are unexpected, 

unpredictable, and carry a large potential for destruction. What 

makes terrorism risk impossible to model where other catastrophic 

events can be modeled with a certain degree of accuracy? 

A.1. In an attempt to better understand terrorism risk, reinsurance 

companies have created task forces, consulted military and intelligence experts, hired specialty risk modeling firms, invested in research and development, and developed new underwriting standards with the intention of trying to determine if a private market 

could develop to absorb this risk. Despite these efforts, a key struggle in the development of a private market is that terrorism is not 

conventional. It has characteristics, particularly with regard to frequency, severity, and correlation, unlike any other peril or risk. 

Terrorists act willfully and unpredictably to cause fear and inflict 

maximum harm and damages and confound those who study terrorism. They can learn from their prior attacks and attempt to defeat loss prevention and mitigation methods. In addition, the insurance industry does not have access to all potentially relevant information because the government keeps it confidential due to national security interests. 

The potential severity of terrorism losses, particularly nuclear, 

radiological, biological and chemical (NRBC), is enormous. The extreme loss scenarios would cause losses that far outstrip insurer financial resources and therefore are uninsurable. 

Unlike natural disaster risk, reinsurers achieve virtually no 

spread of risk or diversification with terrorism coverage. Natural 

disasters such as hurricanes in Japan and Florida and earthquakes 

in the far west are not correlated. This means that premiums can 

be collected from each risk knowing that one loss will not lead to 

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ing from multiple clients and multiple insurance products implicated in the same occurrence. Thus, terrorism risk in Europe and 

North America may lead to closely related loss events. Such high 

correlation thus minimizes any benefit of risk spreading geographically. 

At the same time, a terrorist attack can lead to major disruptions 

in the financial markets, where reinsurers may be liquidating assets to pay claims, while the asset values themselves may be under 

market pressure due to investors’ concerns over the terrorist risk. 

For these reasons, it has been impossible to effectively model terrorism. 

Q.2. The President’s Working Group study noted that TRIA appears to negatively affect the emergence of private reinsurance capacity. How do you respond to this? 

A.2. In fact, the opposite is true. By establishing definitive loss parameters, TRIA has provided a defined layer for reinsurers to participate in sharing the retained risk of loss that primary companies 

face under the federal terrorism program. The limited emergence 

of a private reinsurance market is explained by the factors in question 1. 

Q.3. You estimate that reinsurance capacity is currently between 

$6 billion and $8 billion. This is an increase from 2005, when the 

capacity was estimated by RAA to be between $4 billion and $6 billion, correct? 

A.3. This is correct. 

Q.3.a. This growth also corresponds with a significant scaling back 

of the TRIA program from the 2005 reauthorization. Do you project 

this growth to continue? 

A.3.a. Favorable loss experience and surplus growth may moderately increase the supply of private terrorism reinsurance but not 

to the extent that it would fill current capacity needs of the primary industry to meet its retentions under TRIEA. It would be difficult to expand participation in the current environment. First, 

there is only so much capital that companies are willing to dedicate 

to a TRIA-type program due to the nature of terrorism risk. Second, because of the 2005 hurricane season, rating agencies and catastrophe modelers began requiring companies to maintain more 

capital/surplus to write the same amount of business as before the 

2005 hurricanes. The private reinsurance market does not provide 

coverage in the layers retained by the government under the program. 

Q.3.b. Do you envision a marketplace without TRIA? 

A.3.b. Although progress has been made in modeling terrorism loss 

scenarios, forecasts of the frequency and the severity of terrorism 

losses are extremely problematic. Absent a lessening of the risk of 

terrorism, the RAA does not see a time in the foreseeable future 

when the frequency or severity of terrorism risk can be successfully 

modeled and underwritten such that reinsurers will be able to provide enough capacity to replace TRIEA coverage. Reinsurers can 

provide only limited capacity for terrorism because the magnitude 

of these potential losses would otherwise put these companies at 

risk of insolvency. Reinsurers’ capital is necessary to support many 

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other outstanding underwriting commitments made by reinsurers, 

including natural disasters, workers’ compensation, and other casualty coverages. 

The insurance industry’s retention under TRIEA is approxi- mately $36 billion now, but the reinsurance market is only $6 to 

$8 billion. Since this gap has not been closed even with TRIEA, it 

does not make sense to significantly alter TRIEA at this time. 

There is even less reinsurance appetite for NRBC risk, which is 

even more difficult to model and underwrite. 

Q.4. Mr. McRaith, you stated in your testimony that any successor 

program should be of, ‘‘sufficient time and means for the private 

sector to build the appropriate capacity.’’ Mr. Veghte, you noted 

that RAA does not see an industry without a TRIA program. Do 

you disagree here? 

A.4. We seem to agree that the industry currently is unable to provide enough capacity to replace TRIEA coverage and will not be 

able to do so for the foreseeable future. Mr. McGraith notes that 

TRIEA coverage must continue until the private sector can build 

the appropriate capacity, but does not address how the private sector could do that, how long it would take or if, in fact, it would necessarily occur. Thus, we do not appear to be in serious disagreement at this time. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM JAMES H. VEGHTE 

Q.1. Has industry proposed a long-term private sector solution or 

is the federal program the only long-term solution? If the federal 

backstop is the long-term solution, then what modifications does industry propose? 

A.1. Due to the nature of the terrorism peril, the RAA believes that 

private market mechanisms alone are insufficient at this time to 

spread the risk of catastrophic terrorism loss in a meaningful way. 

Instead, a continued public-private partnership is critical to address terrorism risk. Without some form of a federal role we would 

expect less coverage available at the policyholder level, rising 

prices for terrorism cover and even more limited private reinsurance capacity. 

With regard to modifications to TRIEA, because reinsurance is 

not covered under the program, we generally would defer to the 

primary industry as to modifications that would be necessary for 

a long-term program. 

Q.2.a. What effect would tax-deductible reserves for future terrorism losses have on an insurer’s balance sheet? What effect does 

it have on the ability to provide coverage? 

A.2.a. The effect on insurers and reinsurers would be different. For 

insurers, the ability to set aside terrorism reserves for events that 

have not yet occurred and the attendant investment securities and 

related investment income would increase the surplus of the insurance industry. This is because insurers could record a tax deductible reserve for losses that have not been incurred or paid, thus reducing current taxes that must be paid. These funds would be invested and would grow and earn investment income until a qualimstockstill on DSKH9S0YB1PROD with HEARING

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fying terrorism event occurred. The qualifying terrorism event (if 

and when it occurs) would cause these reserves to be released and 

the investments disposed to pay terrorism claims. 

Tax deductible reserves for terrorism would be used as an alternative to traditional reinsurance by insurers. Instead of transferring terrorism risk, tax deductible reserves would likely encourage 

insurers to retain it. That does not necessarily mean, however, that 

insurers’ appetite to assume that risk would increase. 

Q.2.b. What effect does it have on the ability to provide coverage? 

A.2.b. The effect on capacity may be different for insurers and reinsurers. In theory, if insurers have a larger pool of assets and surplus they would be able, all other things equal, to write more insurance business. There are several important caveats to this. First, 

the additional surplus and assets in the terrorism reserve are supposed to be earmarked to pay terrorism claims, so it is questionable 

whether this excess surplus would be allowed to be counted to support additional writings. The rating agencies, state insurance regulators or even the federal legislation may limit or prohibit this. Second, if insurers are allowed to use the additional surplus to support 

additional writings, there is no guarantee that the insurers will 

write additional terrorism insurance. The concentration of terrorism exposures may be too high or there may be alternative lines 

that are more profitable or prudent to write. Finally, whether or 

not the additional terrorism reserves are used to support other 

writings, other capital considerations would have to be considered 

such as when the price of coverage in the market is too low based 

on the insurer’s assessment of risk, etc. 

For reinsurers, the effect of tax deductible catastrophe reserves 

on capacity is clearer. A government tax incentive for insurers will 

discourage participation in the private reinsurance market. Risk 

transfer will suffer as insurers retain risk. 

Q.3. If it does not become mandatory for insurers to offer NRBC 

coverage, how would insurers adjust or allocate a loss in the event 

of a terrorist attack involving both a conventional and unconventional weapon? In the case of, say, a dirty bomb it causes a large 

amount of physical damage to the building, but only a small 

amount of radioactive or chemical clean-up. Would insurers look to 

exclude the entire loss? 

A.3. Each reinsurance company would makes its decisions based on 

the relevant law and contract language. 

Q.4. If industry could understand the long-term probabilities of terrorism occurrences, how could the industry price the risk in a reasonable way that would spread the cost over time? In other words, 

if the private industry could learn to model and price the risk 

should insureds be able to expect little to no charge in advance of 

an event, and enormous charges after, dwindling over time? Is that 

desirable? 

A.4. Insurers do not, and generally cannot by law, price coverage 

to recover past losses. Prices are based on estimates of future 

events. Improvements in modeling will obviously assist in pricing. 

Q.5. Granting that TRIA provides insurers some certainty about 

Federal support and their own retention of risk, whether we have 

TRIA in place or not, is it not true that a severe terrorist event will 

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end up in the lap of the Federal Government to fund, after the fact, 

since insurers’ equity is insufficient? 

A.5. It is true that without insurance, the Federal Government 

likely would decide to pay for the vast majority of recovery after 

a terrorist event. Through a public-private partnership developed 

in advance of such an event, the Government creates a viable market wherein the insurance industry can participate up to a certain 

cap, which allows insurers to maintain solvency in the event of an 

attack. This ultimately reduces the cost to the Federal Government 

in the event of an attack because the insurance industry is sharing 

in the costs. 

Q.6. Would it not be preferable for all parties to provide for some 

advance funding of this risk (possibly in combination with other 

risks to lower the burden of any one on the taxpayers and the society), so the cost could be spread over time, so the uncertainty concerning the consequences be diminished and so that the government would receive some income for its inevitable support? 

A.6. Current insurance coverage is pre-funded to the extent insureds buy policies covering acts of terrorism. TRIEA provides for 

post-event funding for any government contribution by requiring 

insurance companies to pay back the federal government for the reinsurance through post-event assessments on insurance companies. 

The RAA supports this provision. 

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