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Wednesday, April 28, 2004
U.S. House of Representatives,
Subcommittees on Capital Markets, Insurance, and
Government, Sponsored Enterprises and
Subcommittee on Oversight and Investigations
Committee on Financial Services,
Washington, D.C.
    The subcommittees met, pursuant to call, at 10:02 a.m., in Room 2128, Rayburn House Office Building, Hon. Richard Baker and Hon. Sue Kelly [chairmen of the subcommittees] presiding.
    Present: Representatives Baker, Kelly, Royce, Gillmor, Ose, Shays, Hensarling, Garrett, Brown-Waite, Barrett, Kanjorski, Maloney, Gutierrez, Velazquez, Sherman, Moore, Capuano, Lucas, Crowley, Clay, Israel, Matheson, Miller, Emanuel, Scott and Bell.
    Chairman BAKER. [Presiding.] I would like to call our subcommittees's meeting to order this morning. This morning, we have a joint meeting of the Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee, together with the Oversight and Investigations Subcommittee chaired by Ms. Kelly, for the purpose of receiving comment on the advisability of an extension of and the effectiveness of the current Terrorism Risk Insurance Act adopted by the Congress in 2002.
    As all of us are painfully aware, the events of September 11 brought about the necessity for change in many aspects of American life. One area not given a great deal of attention, but extremely important for the functioning of our commercial enterprises is that of our insurance network necessary to enable the production, distribution and sale of almost every commodity and many activities in daily life.
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    Because of the enormous exposures created by the concentration of loss in this terrible event, it was necessary for the Congress to act to provide a backstop to the private marketplace to enable appropriate adjustments to be made in the free market system to prepare for what we hope will never happen again. As we approach the expiration mandated by the legislation of this network, it is now appropriate and advisable for the committee to hear comment as to whether the market is sufficiently prepared for a transition to a free market remedy, or whether it is appropriate for some extension of the current guarantees to be considered by the Congress in light of the difficulty of assessing the current risks.
    It is also appropriate to note that the legislation did require the Treasury Department to prepare an analytical study and assessment of the adequacy of the system and to make such report to the Congress by June 30 of the following year. It has been my observation that perhaps it would be advisable in light of that professional analysis to wait on the conclusion of that report and study before the Congress makes final determinations. The report requirements go to the very issues of whether extensions are warranted or not, and I believe would be greatly influential in the Congress's final determinations as to whether the market structures are adequate to face the long-term needs of insurance coverage.
    I am pleased this morning to have the witnesses before us who can give us informed insight on these matters and I look forward to their testimony.
    Mr. Kanjorski?
    Mr. KANJORSKI. Mr. Chairman, we meet today for the first time in the 108th Congress to examine the effectiveness of the Terrorism Risk Insurance Act. As you know, I worked closely with you during the 107th Congress to enact this important economic stabilization law.
    Prior to the terrorist attacks on the World Trade Center and the Pentagon, most Americans took their security for granted. These attacks, however, altered how we each assess risk. This adjustment was especially apparent in the insurance industry.
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    Prior to 2001, many insurers could not price for terrorism risk and offered it for free. Ultimately, the industry sustained approximately $40 billion in losses on September 11 as a result of its poor economic judgment. Subsequently, it turned to the Congress to seek assistance in protecting the American public against future terrorism attacks, particularly in the short term.
    Terrorism insurance is critical to protecting jobs and promoting America's economic security. Unfortunately, reinsurers curtailed the supply of terrorism reinsurance and insurers began to exclude terrorism coverage from customers's policies in the wake of the 2001 terrorist attacks. Eventually, we belatedly approved the Terrorism Risk Insurance Act to address these pressing problems.
    Seventeen months have now passed since the Terrorism Risk Insurance Act became law. It is therefore an appropriate time for us to begin to examine the effectiveness of this statute. Because we crafted the law to last just 37 months, it is also an appropriate time for us to begin deliberations over the program's future.
    Today, Mr. Chairman, we will hear from several insurance experts on these important matters. I am especially pleased that our witnesses will report that the Terrorism Risk Insurance Act has worked to increase the availability of Terrorism Risk Insurance. As I understand, it has also lowered the cost of such insurance, contributed significantly to stabilizing the overall insurance marketplace, and advanced delayed economic development projects.
    We wisely designed the Terrorism Risk Insurance Act as a temporary backstop to get our nation through a period of economic uncertainty until the private sector could develop the models to price for terrorism reinsurance. I agreed with this decision. The reinsurance industry is dynamic and we should not disrupt the development of new products.
    Nevertheless, I now believe that we might have decided to sunset this program too soon. In designing the law, we sought to give insurers a transitional period. The General Accounting Office, however, has recently determined that the industry has made little progress to date in providing terrorism insurance without government involvement. This finding causes me significant concern.
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    Although the law will expire at the end of 2005, many industry participants have also already called upon the Congress to act expeditiously in 2004 to extend the life of the Terrorism Risk Insurance Program in order to prevent short-term market disruptions. I agree.
    As I have previously noted, terrorism insurance plays an important role in the efficient functioning of our economy. We should therefore pursue appropriate action before the end of the 108th Congress to provide greater stability to our capital markets in the short term, while they work to develop private sector solutions to these problems for the long term. It is also my expectation that the Treasury Department will decide as soon as possible to extend the ''make available'' provisions of the law that require companies to offer terrorism insurance on the same terms and conditions as other property-and-casualty products.
    In debating any plan to extend the Terrorism Risk Insurance Act, we additionally ought to work to incorporate group life insurance into the federal backstop program. Group life products have characteristics similar to commercial property-and-casualty insurance in that there is often an excessive concentration of risk within a small geographic area. Despite a lack of terrorism reinsurance, group life insurers have remained in the marketplace, fully exposed to future terrorism events. This reality has created significant anxiety in the life insurance industry and uncertainty for individuals who obtain life insurance through their employers.
    In closing, Mr. Chairman, time is of the essence. I stand ready to work with you and all other interested parties on these matters in the upcoming months. I am also looking forward to hearing from each of our witnesses to learn of their insights on these matters.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Paul E. Kanjorski can be found on page 46 in the appendix.]
    Chairman BAKER. I thank the gentleman.
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    The Chair of the Subcommittee on Oversight, Ms. Kelly?
    Chairwoman KELLY. Thank you. I want to thank you, my colleague, Mr. Baker, for being willing to hold this hearing. This is a very important issue for the people of America. I thank Mr. Kanjorski and Mr. Gutierrez for also their cooperation in holding this hearing.
    In the last 2 1/2 years, our country has been engaged in a war against terror that has permeated virtually every aspect of American life. Congress and the Administration have responded to our new realities with comprehensive reforms that seek to eradicate the threat posed by fanatical terror networks to our citizens, our economy and our way of life.
    Today's hearing highlights a law that has made a significant contribution to this effort. The Terrorism Risk Insurance Act ensures the availability of terrorism insurance that is crucial to our economic security. After 9-11, the marketplace for terrorism insurance vanished. With losses from the terrorist attacks exceeding $40 billion and uncertainty in the marketplace, insurers and reinsurers began to exclude terrorism coverage from commercial policies. Hospitals, office buildings, malls, stadiums, museums, and even small businesses located near these large facilities had difficulty finding terrorism insurance coverage. Without this insurance, commercial development stalled and workers missed out on jobs.
    As the availability of coverage continued to disappear and threaten our economic security, it was clear that the market for terrorism insurance would not return on its own. Something needed to be done to provide stability and avoid market disruptions. Congress, with strong support from the Administration, passed legislation to address the uncertainty in the market, protect American jobs, and strengthen the resiliency of our economy.
    TRIA established a 3-year program to pay the federal share of compensation for insured losses resulting from foreign acts of terrorism. In TRIA, our goals were clear: make terrorism insurance affordable and available to policyholders in the short term, while also giving the market time to develop resources and mechanisms to ensure viability beyond the expiration of the Act.
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    Today, the committee will examine the effectiveness of TRIA and its impact on the economy. Thus far, the results of TRIA have been very positive. Terrorism insurance is widely available and a growing number of businesses are accessing this coverage. By enabling commercial policyholders to obtain terrorism insurance, TRIA has provided a boost to construction and job creation, strengthened economic growth and security, and reduced the impact of any future terrorist attack. Overall, TRIA has been an important stabilizing factor in the market, as we will hear from the General Accounting Office today.
    But as the program moves closer to expiration in 2005, we must examine the future of terrorism insurance and whether the private market will be able to make coverage available without a federal backstop. While there is no doubt that our country is better prepared today than it was prior to 9-11, we remain on heightened alert and still face the threat of terrorist activity. This uncertainty makes it difficult to determine methods to price coverage and to ensure a viable marketplace without a federal backstop. As a result, it remains unclear whether there will be a sustainable marketplace after TRIA expires.
    Given the state of the insurance marketplace and the continued war against terror, there is compelling reason to continue the federal backstop for terrorism insurance until we can ensure a viable marketplace that enables businesses to receive coverage. To begin with, it is crucial that the Treasury Department extend the requirement that private insurers continue to ''make available'' terrorism reinsurance.
    This provision, which sunsets at the end of 2004, guarantees that commercial policyholders have access to terrorism coverage. A wide range of businesses and organizations, from the transportation, energy and real estate industries to manufacturing, construction, entertainment and retail sectors, are rightfully concerned that the failure to extend the ''make available'' provision will ultimately impact their operations, business development and ability to create jobs. This clearly threatens both our economic growth and our security.
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    When it comes to the security of our country and our economy, we must take every necessary precaution to defend the American people. The Administration is doing everything possible to strengthen our security, from efforts to secure our nation's borders, ports and major transportation systems to additional resources to dry up terrorist financing.
    The TRIA program is essential to the economic security of the American people. I want to thank Chairman Oxley and Subcommittee Chairman Baker for their cooperation in holding this important and timely hearing on terrorism insurance. Their leadership and perseverance, along with that of the President, is the reason that Congress was initially able to pass this monumental legislation, despite significant obstacles.
    I also want to commend the Treasury Department and the National Association of Insurance Commissioners for their collaborative work on these important issues under extraordinary circumstances. The Treasury Department and state insurance commissioners have been faced with an extremely difficult task of developing a reinsurance market through an unprecedented program. As we speak, businesses and insurers are beginning to make decisions that impact operations beyond the potential sunset of the ''make available'' language. As a result of these operational realities, I urge the Treasury Department to provide Congress with information on the future of TRIA in a timely manner in order to help the businesses make informed decisions about the future.
    We need to make informed decisions about the future of this program. I look forward to continuing to work with the public and private sectors to protect and preserve the economic security of the American people.
    Thank you for letting me speak.
    Chairman BAKER. Thank you for your statement, Ms. Kelly, and your interest in this subject.
    [The prepared statement of Hon. Sue W. Kelly can be found on page 40 in the appendix.]
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    Mr. Gutierrez?
    Mr. GUTIERREZ. After listening carefully to the preceding opening statements, I find that my opening statement should be submitted for the record in its entirety, if it is okay with everybody on the committee.
    Chairman BAKER. I do not think anybody is going to object.
    Mr. GUTIERREZ. Thank you, Mr. Chairman.
    Chairman BAKER. Reluctantly so made part of the official record.
    Are there members with further statements? Mr. Israel? And then I will come to you, Mr. Scott.
    Mr. Israel?
    Mr. ISRAEL. Thank you, Mr. Chairman. Let me thank you and Chairman Kelly and Ranking Members Kanjorski and Gutierrez for this hearing.
    I also want to take this opportunity to welcome Mr. Serio, the Superintendent of the New York State Insurance Department. Mr. Serio knows that my congressional district is less than 50 miles from ground zero. In the aftermath of 9-11, one of the leading concerns for businesses in New York City and near New York City was the need to get back up on our feet and rebuild as quickly as possible. One of the major obstacles to doing that was in fact the apparent inability of the insurance industry to assess and absorb the risk of another large-scale terrorist threat.
    I was very proud to be a part of this committee when we acted quickly to create a federal government backstop for terrorism insurance in the event of another catastrophic occurrence. It is a profound example of what this committee can do when members from both sides of the aisle work together with each other and with industry to a common goal and a common sense goal.
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    Mr. Chairman, I believe that TRIA has worked fairly well. It has in fact allowed businesses in my district and businesses in New York City, where many of my constituents work, to continue uninterrupted. However, as we have heard, we are now faced with the possibility of a sunset and we cannot allow this to happen. I was very proud to sign a letter written by Ranking Member Frank encouraging the Secretary of the Treasury to exercise his ability to extend the ''make available'' provisions of TRIA and I think that this is an important and necessary first step.
    But I do not believe it goes far enough. TRIA needs to be reauthorized. During the original consideration of this legislation, there was a great deal of debate regarding how long the authorization should last. The final product settled on three years, with the Department of the Treasury being required to issue a report in 6 months before the program expires, detailing any problems with the program.
    I fear that we may have painted ourselves into a bind with this language and on this timetable. By the time the report is submitted to Congress, I believe it is going to be too late for Congress to fully get and act upon the concerns that that report may raise. Indeed, I strongly believe that TRIA must be reauthorized before June of next year to allow industry adequate time to ensure the continuation of current policies.
    So in order to give us adequate time to consider this and any other concerns that may come to light in the Treasury report without disrupting the market, I am very proud to be working with Mr. Capuano on crafting a clean, quick, short-term extension of TRIA until December of 2006. I believe that by acting on such a measure, we will fulfill our responsibility to ensure the orderly continuation of the insurance market in high-risk areas, and at the same time allow ourselves sufficient time to conduct a full and necessary review of this new and important program.
    I look forward to working with Mr. Capuano and all members of this committee to ensure the continuity of our markets and the continuity of capital.
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    I thank the Chairman and yield back the balance of my time.
    Chairman BAKER. I thank the gentleman.
    Mr. Scott?
    Mr. SCOTT. Thank you very much, Mr. Chairman. I certainly look forward to the testimony of this very distinguished panel.
    I want to thank the Chairman and Ranking Member of both the Capital Markets and Oversight Subcommittees, Mr. Kanjorski, Mr. Gutierrez, as well, for holding this hearing today on the Terrorism Risk Insurance Act. I also look forward to some very good information to be exchanged and questions asked in today's testimony.
    Access to terrorism insurance is very essential to business confidence and continued economic growth. From the written testimony, I understand that TRIA has been successful in providing an insurance backstop for consumers, thus enabling millions of dollars in business transactions to proceed. However, this law is only a temporary backstop for property and casualty insurance risk. According to the Bush Administration, the United States remains at a high state of alert and could be the target of terrorist actions this year, and especially because this being a very critical important election year.
    In my area of metropolitan Atlanta, we have the world's busiest airport located in my district. In addition to that, we have Fort McPherson that handles ForceCom, controls all the logistics and command for the forces in Iraq and in Afghanistan; also Fort Gillem, which handles all of the call-up and processing for our Reservists and National Guard in the eastern half of the United States east of the Mississippi, which is approximately 65 percent of those call-ups, all processed in my district.
    We also have the Centers for Disease Control located in my district. The World Congress Center, trade and convention facilities, and two of the highest recognized brand names in the world in Coca-Cola and CNN. And very, very important and critical financial service institutions and sensitive sites that are at risk, making Atlanta potentially high target and as a matter of fact has been on several lists of terrorist targets for terrorist attacks.
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    So quite naturally, I am very concerned that businesses and my constituents in my district will come to expect a permanent terrorism insurance backstop, regardless if they use it now to make sure future business decisions. As we move forward in today's hearings, we should ask that if the law expires, how that will affect private markets.
    Thank you again, Mr. Chairman, and I await the statements from our panel.
    Chairman BAKER. I thank the gentleman.
    Are there any other members? The gentleman is recognized.
    Mr. GARRETT. I thank the chairman for holding this hearing today. As was previously indicated, obviously the visual effects of 9-11 are burned in our minds. The economic effects and the dollar and cents ones are sometimes a little bit harder for us to comprehend.
    Overall, though, of course all the numbers in the last few weeks and months are showing that the economy is turning around and things are picking up and we are on to a robust economic recovery. But the net effect of 9-11 was over $50 billion has been paid out in insurance claims due to that attack, the largest manmade insurance disaster in history. The effect of that was that many reinsurers were simply unable to price for future such risk due to the unique nature of those attacks. When an insurer is unable to price for a risk, well then they simply stop offering the insurance coverage. That was the impact of that attack.
    Now, when we recognize these possible negative impacts on the insurance market and therefore the economy, I have to commend the members of this committee here before me who acted quickly and responsibly to come up with a solution to it. This measure was necessary to simply stabilize the terrorism market in the United States.
    I join my colleagues on the other side of the aisle who have already pointed out that TRIA has been successful in accomplishing the goals that were laid out by Congress. It has provided a program that shares the commercial property and casualty losses between the federal government and the private insurance market in a way that obviously has worked and benefited this economy. For that reason, I share their concerns also and share their feelings that we should make available provisions and TRIA should be extended prior to the September 1 deadline.
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    One member has indicated already the issue of timing. My experience, having been in the industry, is that timing is a significant aspect for carriers because it is not an industry that can simply snap into a response on the spur of the moment; that notices will be going out not literally as we speak, but shortly as we speak, because of the nature of the business and the nature of renewals. So that is something that we all have to be mindful of, of how the industry actually respond to and how their paperwork actually flows with regard to any insurance product and market.
    Finally, I would just say this. Where I come from, I am from the State of New Jersey. I live in the metropolitan area. As I say, we still have the visual impact of 9-11 there, but also from an economic point of view many businesses are still recovering from that attack to this day. The importance therefore, of the reinstitution of TRIA is even more heavily important for my district as well.
    I thank you again, Mr. Chairman, for holding these hearings today.
    Chairman BAKER. I thank the gentleman for his statement.
    Does any other member desire to make an opening statement? If not, this is a joint hearing with Ms. Kelly's subcommittee and Ms. Kelly is going to take the chair for our panel of witnesses.
    Chairwoman KELLY. [Presiding.] I am going to take the chair from here.
    Before we move to our panel, I would like to enter into the record several documents that include a letter that 18 Republicans sent to Secretary Snow in support of extending the ''make available'' provision; another letter on ''make available'' from the Real Estate Roundtable; a support letter requesting the extension of TRIA from the American Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents and Brokers, the Property-Casualty Insurers Association of America, the Reinsurance Association of America, and the UWC, Strategic Services on Unemployment and Workers Compensation.
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    Another TRIA support letter from Group Life Coalition, the ACLI, and the Financial Services Roundtable; and a support letter from the Coalition to Insure Against Terrorism, which is a broad coalition of businesses and organizations from the transportation, energy and real estate industries, to manufacturing, construction, entertainment and retail sectors.
    With unanimous consent, I am entering these into the record. So moved.
    [The following information can be found on pages 139, 107, 136 and 115 in the appendix.]
    We now turn to our panel. Our first witnesses representing the Department of Treasury, is Mr. Wayne Abernathy. Mr. Abernathy is the Assistant Secretary of Treasury for Financial Institutions, where he oversees Treasury's Terrorism Risk Insurance Program. I commend you, sir, for your work on such a difficult task and I look forward to your testimony.
    It is also a great pleasure to have the opportunity to welcome back to the committee again Mr. Greg Serio, Superintendent of Insurance back from the great State of New York. New York knows first-hand the threat and devastation of terrorism. In the aftermath of 9-11, many individuals responded in a way that represents the best of America's spirit. I believe that Superintendent Serio is one of those individuals. In addition to his work on terrorism insurance issues, Mr. Serio serves in the leadership of NAIC, and has been an active participant in the insurance roadmap the committee is exploring. We thank you very much for your valuable service and your testimony here today. It is a pleasure to see you.
    Our third witness is Richard J. Hillman, Director of Financial Markets and Community Investment at the General Accounting Office. I thank you, Mr. Hillman, for being here, and the GAO for their comprehensive report on the state of terrorism insurance.
    Without objection, your written statements will be made a part of the record. You will all be recognized for a 5-minute summary of your testimony. I just want to remind you that the lights in the boxes at the end of the table, the green light indicates that you have 5 minutes for your testimony; the yellow light means you have 1 minute remaining; and of course the red light means stop.
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    With that, we will proceed with you, Mr. Abernathy, and thank you for being here.
    Mr. ABERNATHY. Thank you, Chairwoman Kelly, Chairman Baker, Ranking Member Kanjorski, Ranking Member Gutierrez, members of the two subcommittees. It is a pleasure to be here today to report on the Terrorism Risk Insurance Program as we approach the mid-stream of that program as established by Congress.
    TRIA establishes a temporary federal program of insured commercial property and casualty terrorism losses. TRIA, in effect, places the federal government in the reinsurance business through December 31, 2005. TRIA has been successful in achieving the fundamental goals of enhancing the availability and affordability of commercial property and casualty Terrorism Risk Insurance. No longer are heard the concerns from real estate developers that new project financing has been frozen.
    Preliminary accounts indicate that premiums have decreased significantly throughout the early stages of TRIA and continue to do so. Reports are that the demand for this coverage is low, but coverage is available and those that desire coverage have been able to obtain it. Whether the low take-up rate reflects a lack of interest in terrorism coverage even with the federal backstop; a lack of awareness of the availability of coverage; an assessment by business of low terrorism loss risk, or some combination, will require careful study and analysis.
    Treasury has five main administrative goals: first, to ensure that the program was ready for use from the day it was signed into law; second, to implement TRIA in a transparent manner that is fair and easily understood; third, to rely as much as possible on the state insurance regulatory structure; fourth, to allow participation in a manner consistent with the normal course of business; and fifth, to ensure that benefits can be provided in the most expedited manner.
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    As I have often reflected, implementing TRIA has been like building a house by starting with the roof. The coverage came first. TRIA's first action was to issue a series of interim guidance notices beginning on December 3, 2002, about 1 week after TRIA was signed into law. This allowed us to respond quickly to implementation issues and to prevent confusion prior to the issuance of formal regulations. Even while the interim guidance process went forward, we began formal rulemakings.
    It is important to stress that while we have been moving progressively through the rulemaking process, the program from the beginning has been and continues to be fully operational. These rules have been refinements and improvements on practices and operations, but from the earliest days we have had procedures and resources ''at the ready'' to respond to any covered insurable event that might arise.
    Treasury also created and staffed a Terrorism Risk Insurance Program office to administer the Act. TRIP office director Jeffrey Bragg brings deep experience from the property and casualty insurance market, as well as experience as a former administrator of the federal flood, riot and crime insurance programs. In almost no time, he has assembled an outstanding team of insurance professionals who have been willing at some sacrifice to interrupt successful private careers to help administer this important program.
    TRIA is an interesting hybrid. It provides a federal reinsurance backstop to insurance programs that are regulated almost exclusively at the state level. This would be unmanageable without the cooperation of the state insurance regulators. Throughout the implementation process, Treasury has consulted and worked closely with the NAIC and the NAIC's assistance has been invaluable.
    An important requirement of TRIA is to keep a careful eye on market conditions and report to Congress by June 30, 2005. Specifically, Treasury is required by the statute to assess the effectiveness of the program, the likely capacity of the industry after termination of the program, and the availability and affordability of such insurance for various policyholders.
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    Together with this analysis, Treasury is also required to compile information on premium rates. To ensure that we do this with a comprehensive view, Treasury has contracted with an outside research firm to conduct a nationally representative survey. Companies chosen for the survey will be contacted several times to capture effects of changes in TRIA's insurer deductibles in successive program years. The first survey wave was mailed to over 30,000 policyholders and almost 500 insurers. A second wave to collect 2004 data is planned for early this fall. The last survey wave is planned for January and February of 2005.
    This phased structure will allow us to move beyond snapshots and anecdotal evidence to a broader and more dynamic view of the conditions in the marketplace. Anything less would not provide the full and reliable information, the kind of basis that is needed to make a careful, trustworthy and responsible evaluation that is called for by Congress in the statute.
    The Secretary of the Treasury is required to determine by September 1, 2004 whether to extend TRIA's ''make available'' provisions into the third year of the program, that is, through December 31, 2005. Treasury is now developing a base of information from which to make this determination. We encourage any who have views on this question to share those views with Treasury with as much detail as they can provide.
    We must all remember that the basic goal of TRIA as called for by President Bush was to develop a temporary backstop for property and casualty commercial insurance against terrorism risk so that private markets would have a chance to adjust. We would encourage interested parties to think creatively and to consider methods to allow for broader private sector involvement in the market for managing property and casualty terrorism risk.
    Treasury looks forward to completing our review and considering the many complicated issues presented to us in a thorough manner, with the best information that can be obtained. Our obligations to the taxpayers and the need for the long-term health and vitality of our financial services markets require nothing less.
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    While we hope that we will never be called upon to trigger the coverage under TRIA, the program stands ready today as it has from its earliest days to meet its responsibilities.
    Thank you.
    [The prepared statement of Hon. Wayne A. Abernathy can be found on page 49 in the appendix.]
    Chairwoman KELLY. Thank you very much, Mr. Abernathy.
    Mr. Serio?
    Mr. SERIO. Good morning, Madam Chair, Mr. Chairman, and members of the subcommittee. Thank you for the opportunity to come before you today to relate New York's experiences with the Terrorism Risk Insurance Risk. It is greatly appreciated.
    Let me get right to the point. TRIA is a success by any measure and has been very effective in stabilizing a tumultuous insurance marketplace in the aftermath of September 11 and it has been a key factor in stabilizing and reenergizing New York's economy. As we have opined several times over the past 2 years, sometimes before these subcommittees, TRIA was and is an insurance buyers law, allowing the continuation of critical insurance coverages for those who needed to or wanted to maintain the level of coverage routinely available prior to September 11.
    The success of this initiative cannot and should not be measured simply by the number of businesses who have availed themselves of terrorism risk protections through TRIA. Some businesses chose to go without coverage for terrorism risk. That is their decision. Others chose to rely upon the already meaningful protections offered by the standard fire insurance policy widely available in the United States prior to September 11, 2001, and still in place in New York and other states to this day.
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    For those businesses that wanted or needed terrorism insurance protection, though, TRIA became their safety net. Coverages were required to be made available at the same limits and terms as the other property-casualty coverages, thus assuring all risk protection for those who needed it for lending agreements, contractual obligations, or frankly their own peace of mind.
    The businesses of New York who availed themselves of the opportunity to establish captive insurance companies, to better manage and frankly afford the terrorism risk coverage through the benefits of TRIA should also be counted among those who consider TRIA a success. Yet those who did the responsible thing by establishing self-insurance mechanisms to manage terrorism risk do not get included among those who opted to take up TRIA-provided terrorism coverage, even though the covering of risk placed through captives is one of the strongest provisions of the TRIA law and of the decisions made by the Treasury Department.
    President Bush, the Congress, especially the leadership shown by the House Financial Services Committee and these subcommittees before whom we appear today, together with the Treasury Department and the manner with which they have managed the TRIA program, are all owed a debt of gratitude in moving with singularity of purpose to help protect New York's businesses and those of the country.
    As the National Association of Insurance Commissioners indicated in a letter to Secretary Snow, and I believe you have a copy of it and I would appreciate it if that would be made a part of the record as well, we think the continuation of the ''make available'' provision of TRIA beyond September 1 is crucial. Maintaining a steady flow of insurance to the business community will keep business and the economy moving without fear of or actual disruption caused by the lack of availability of all-risk insurance coverage.
    TRIA has been one of the main ingredients in the recovery and renewal of lower Manhattan and the New York economy and it should continue to provide that positive stabilizing element as we continue to strengthen. The restoration of the national economy and the economies of all major cities that depend upon insurance as a key component are also benefit from a decision to maintain the ''make available'' provision in TRIA.
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    There is already much discussion taking place on the larger issue of the continuation of TRIA. As with the ''make available'' issue, early consideration and deliberation on the reauthorization of TRIA is also in everyone's collective best interest. Even as Treasury performs its due diligence on the law's effectiveness, there can and should be discussions on steps to be taken to ensure the continuity of coverage that is TRIA's hallmark along with the business cycle of insurance. Again, the mere potential for disruption should be avoided.
    Already there is a school of thought and a growing body of evidence that TRIA should be continued and improved. Straight reauthorization of the Act without deliberation on improving private participation in terrorism risk coverage, the availability of state-based options, better managing the still-unaddressed concentration of risk issue, and other considerations would not be advisable.
    Rather, reconsideration of the group life insurance participation in TRIA, an issue on which we respectfully disagree with Treasury's final determination to leave group life out of the TRIA program, maintaining and expanding TRIA's protections for captive and other self-insurance mechanisms, and addressing straight-on the complexities of workers compensation issues in the terrorism risk context, that being heavy concentration risk with long-term liabilities making it particularly challenging, could all improve the TRIA Act.
    Knowing of and appreciating the federal government's concern over permanentizing TRIA, something we do not advocate at this point, is important to this discussion, but a public-private partnership with meaningful federal government participation is critical to the continued stabilization of the commercial insurance marketplace, at least in the near term. That participation in fact should well be calibrated to the viability of long-term solutions to the terrorism and catastrophe risk and insurance challenges before us now.
    Short-term continuity of coverage through TRIA, together with productive discussions on long-term remedies, I believe is in everyone's best interest. To that end, New York, taken with the commissioners of the District of Columbia and the other states most affected by terrorism risk, have been meeting with congressional and Treasury staff, insurance brokers, carriers, and most importantly our respective business communities, to spearhead the discussion on appropriate changes and improvements at TRIA, greater private sector participation in the Terrorism Risk Insurance market and state options for improving these markets.
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    Governor Pataki from New York, in a workers compensation reform bill that he submitted to the legislature just 2 weeks ago, provides one such option by calling for a change in the way workers compensation insurance is written in New York. By diffusing the concentration of risk, by allowing multiple insurers on a single workers compensation risk. Changing the statutory requirement on the risk coverage to allow a syndication of workers compensation risk may just be one way for us to effectively manage this issue, and one way that can serve as a catalyst for additional discussions along these lines.
    Thank you for allowing me to present these views this morning. I look forward to answering your questions.
    [The prepared statement of Hon. Gregory V. Serio can be found on page 80 in the appendix.]
    Chairwoman KELLY. Thank you very much, Mr. Serio.
    Mr. Hillman?
    Mr. HILLMAN. I am pleased to be here today to discuss our report on the implementation of the Terrorism Risk Insurance Act of 2002 or TRIA and the Act's impact on the insurance market. Our report being released today on the implementation of TRIA has two objectives. First, we describe the progress made by Treasury and insurance industry participants in implementing TRIA. We found that Treasury has made significant progress in implementing the provisions of TRIA, but has important work to complete in order to comply with all of its responsibilities under the Act.
    Second, we discuss the changes in the market for terrorism insurance under TRIA. As requested, my testimony today focuses on the second of these two objectives, that is, how TRIA has affected the market for terrorism insurance, and more generally the economy.
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    Additionally, I have included appendices to this statement that provide background information on TRIA and describe completed and ongoing engagements that GAO has under way for this committee that relates to increasing the insurance industry's capacity to provide insurance for terrorism and national catastrophe risks.
    In summary, it appears that Congress's first objective in creating TRIA, to ensure that business activity did not materially suffer from a lack of available terrorism insurance, largely has been achieved. Since TRIA was enacted in November 2002, terrorism insurance generally has been available to businesses. In particular, TRIA has benefited commercial policyholders in major metropolitan areas perceived to be at the greatest risk to a terrorist attack.
    Prior to TRIA, we reported concerns that some development projects had already been delayed or canceled because of the unavailability of insurance and continued fears that other projects would also be adversely affected. We also conveyed widespread concern that general economic growth and development could be slowed by lack of available terrorism insurance. Since TRIA's enactment, terrorism insurance has generally been widely available even for development projects in perceived high-risk areas, largely because of the requirement in TRIA that insurers make available coverage for terrorism on terms not differing materially from other coverage.
    However, despite increased availability of coverage, limited industry data suggests that only 10 to 30 percent of the commercial policyholders are purchasing terrorism insurance. According to industry experts, purchases have been higher in areas considered to be high-risk of another terrorist attack. However, many policyholders with businesses or properties not located in perceived high-risk locations are not buying coverage, perhaps because they view any price for terrorism insurance as high relative to their perceived risk exposure.
    Some industry experts are concerned that those most at risk from terrorism are generally ones buying terrorism insurance. In combination with low purchase rates, should a terrorist event occur, these conditions could impede business recovery efforts for those businesses without terrorism coverage or cause financial problems for insurers.
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    Moreover, we found that even policyholders who have purchased terrorism insurance remain exposed to significant risks arising from certified events, including losses from nuclear, biological or chemical agents or radioactive contamination. Since September 11, 2001, the insurance industry has moved to tighten longstanding exclusions from coverage for losses from such events. As a result, these exclusions and these policyholders who choose to buy terrorism insurance may be exposed to potentially significant losses.
    Nearly 1 1/2 years after TRIA's enactment, we found that there has been little progress towards Congress's second objective, to give private industry a transitional period during which it could begin pricing terrorism insurance and develop ways to cover losses after TRIA expires. Industry sources indicate that under TRIA insurance market participants have made no progress to date toward the development of reliable methods for pricing terrorism risks and little movement toward any mechanism that would enable insurers to provide terrorism insurance to businesses without government involvement.
    According to industry sources, TRIA's ceiling on the potential losses has enabled reinsurers to return cautiously to the market. That is, some reinsurers are offering coverage for terrorism risks within the limits of the insurer deductibles and the 10 percent share that the insurers would pay under TRIA. However, insurance experts said that without TRIA caps on the potential losses, both insurers and reinsurers likely still would be unwilling to sell terrorism insurance coverage because they have not found a reliable way to price their exposure to terrorist losses. Without being able to set appropriate prices, such losses could lead to their insolvency.
    Not only have no private sector mechanism emerged for supplying terrorism insurance after TRIA expires, but to date there also has been little discussion of possible alternatives for ensuring the availability and affordability of terrorism coverage after TRIA expires. Congress may benefit from informed assessment of possible alternatives, including both wholly private alternatives and alternatives that could involve some government participation or action. Such an assessment could be part of Treasury's TRIA-mandated study to assess the likely capacity of the property and casualty insurance industry to offer insurance for terrorism risks after termination of the program.
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    As a result, as part of the response to the TRIA-mandated study, our report being released today recommends that the Secretary of the Treasury consult with the insurance industry and other interested parties and identify for Congress an array of alternatives that may exist for exploring the availability and affordability of terrorism insurance after TRIA expires. These alternatives could assist Congress during its deliberations on how best to insure the availability and affordability of terrorism insurance after December 2005.
    Madam Chair, Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions.
    [The prepared statement of Richard J. Hillman can be found on page 57 in the appendix.]
    Chairwoman KELLY. Thank you very much.
    Just to keep you all amused in the audience, I am going to pass the gavel back to my colleague, Mr. Baker.
    Chairman BAKER. [Presiding.] I thank the gentlelady for her distinguished leadership of the committee. You have set a high standard for me to emulate, so I will do my best.
    Ms. Kelly does have obligations on the floor and I am going to yield my time for her to be recognized to go first to questions. Ms. Kelly?
    Chairwoman KELLY. Thank you very much.
    One of the problems that we know that the market is experiencing, Mr. Abernathy, is the fact that policyholders are having to make decisions about their policies this year, rather than next year for next year. I am concerned that this creates an uncertainty for many people. That uncertainty needs to be addressed.
    The ''make available'' provision is crucial, I believe, to our economic security. We need this decision as soon as possible to create a certainty in the market that people can deal with. How quickly will Treasury move on this issue?
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    Mr. ABERNATHY. Chairwoman Kelly, we concur with that entirely, your sentiment on that. The decision needs to be made as soon as we possibly can. We want to make sure that the decision is made, however, based not upon anecdotal information, which is all that we have up to this point, and rather unspecific information. We have received so far a wide array of very unspecific inputs with regard to that issue that expresses sentiment, and that is important. But what we would like to have is greater detail in the information that is being provided and to make sure that it is of a more comprehensive nature. We think that can be done fairly quickly.
    Chairwoman KELLY. How quickly?
    Mr. ABERNATHY. What we are planning to do as far as gathering what we would feel is a comprehensive set of information that would allow us to make a good decision as quickly as possible is put out in the Federal Register a request for information from everybody. We figure we can get that request out most widely through the Federal Register and we plan to publish that tomorrow.
    Chairwoman KELLY. You are going to publish the request for comments tomorrow in the Federal Register. Is that what I understood you to say?
    Mr. ABERNATHY. That is right. It is very specific, saying, please give us information in these following areas that allows us to make that decision. We are having a fairly contracted comment period of just 30 days.
    Chairwoman KELLY. Since the Treasury has to complete this study, and you are going to get these comments, at the very least wouldn't it be prudent for Congress to think about extending, at least officially consider, extending TRIA for any policy that is written prior to 2005?
    Mr. ABERNATHY. That is a separate issue from the ''make available'' issue.
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    Chairwoman KELLY. Right.
    Mr. ABERNATHY. I do not know that we have any particular comment to make with regard to what happens after 2005, because in that particular case we have even less information on which to make any kind of determination. We are engaged already, as I outlined in my testimony, in a fairly elaborate information-gathering process that is designed to examine TRIA as the evolving statute that Congress intended.
    I think a fair way of looking at TRIA is that it is actually three programs. It changes every year. In the first year, you had one particular program with certain parameters, which have changed this year, and which are scheduled to change next year. For that reason, we believe that in order to get the kind of information you need to make recommendations with regard to what happens after 2005, you have to gather information on each of those periods.
    Chairwoman KELLY. I have a very short period of time left, but I would really like to hear very quickly from Mr. Serio and Mr. Hillman on those questions.
    Mr. SERIO. On the ''make available,'' we think that it needs to be decided sooner than later. I think waiting until September 1 probably does not serve anybody's interest here. I know that Treasury is doing what they can to find out firm information. I think, though, that just by seeing the nature of the businesses that have taken the offer to buy terrorism insurance under TRIA shows that there has been a demonstrable interest in the coverage. I think if you focus it on, like the Coalition for Insurance Against Terrorism, there is a wide range of industries that have taken this up either through direct coverages or through captives, showing that there has been a significant, but targeted, use of TRIA.
    I think those same industries could well see the same need for that in a renewal period after September 1, and to that extent alone keeping it out there for them to buy we think is a worthwhile policy goal.
    But there is a merging of the issue of ''make available'' and the continuation of TRIA in some form. Even the ''make available,'' and if a decision was made by Treasury to move ahead with the ''make available,'' because of the business cycle, you are already into the question about the continuation of the program itself. So there really would be a very small window with respect to the effectiveness of a decision to continue to ''make available,'' which would then raise the question, particularly if you are in a 45-or 60-or 90-day renewal cycle, what will this get me in terms of terrorism protection for the year period of my policy that I am about to renew?
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    I am assuming that ''make available'' is still there between September and December of 2004. That raises the question that when the policy does come up for renewal and you have that rollover into 2006, a question that I know both the GAO and us and all of you have been looking at is this question of whether that coverage stops dead on December 31, 2005. Our opinion is that it does without further amplification or clarification of that issue. That is what raises so much of this question and this uncertainty in the economy.
    If a business person is using their portion of business decision properly, they cannot simply take it as an article of faith that there may be a continuation into a 2006 policy year when they are in fact renewing that coverage. That will stop a business decision at the beginning of the process, not when the program expires.
    Chairwoman KELLY. Thank you.
    Mr. Hillman, did you want to add to that? My time is up, so if you could say something very quickly, I would appreciate it, if you would like to.
    Mr. HILLMAN. Yes, the ''make available'' decision is a very important issue, particularly for insurers. Timing is a significant aspect. There are paperwork flows, there are rate and form reviews that need to take place. The sooner that Treasury acts, the better.
    Chairwoman KELLY. Thank you.
    Mr. Chairman, I thank you for allowing me to do this. I have floor obligations and I will be back, but thank you.
    Chairman BAKER. I thank the gentlelady.
    Mr. Kanjorski?
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    Mr. Abernathy, I am going to take 30 seconds to review the history of terrorism reinsurance and to compliment the former member of the President's cabinet, Secretary O'Neill. I had the occasion within the first months of 9-11 to work with Mr. O'Neill in putting this package together with Mr. Baker and the Chairman. I think that he is an unsung hero, if you will; that he was here; he understood the problems of the industry, of the communities, of the economic development field. I think we moved expeditiously in the Congress within 3 months to structure a reinsurance bill, and then ran into some problems. Those problems I anticipate could occur again. I am leery of what may happen.
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    If you will recall, although the Congress was prepared with a piece of legislation within 3 months, we had the piece of legislation go over to the White House for review and of course Treasury and the White House saw the piece of legislation as an engine to carry tort reform. As a result thereof, we had a delay of almost a year before we had the enactment of this statute, which I think I have seen estimates that in the State of New York something like $20 billion of commercial development was held up and discouraged from occurring because of the lack of insurance coverage.
    In anticipation that politics have not changed in this city and are not likely to change in the next several years, it seems to me that it is absolutely essential that the Congress and the Administration sends a message now to the insurance industry that we are going to take another 2-year extension or one-year extension of the Act as it exists, or even with some corrections, and one correction I think would be group insurance.
    But to not do that and to wait until the report is finally filed 6 months before the expiration of the Act would only create another engine. I do not see that that would be in anyone's interest, either from the industry standpoint, the economic standpoint of the country, and even from a political standpoint. This is something that we had some great bipartisan effort on. I can speak for my side of the aisle that we did not expect or appreciate the attempt to use this as a vehicle to carry an entirely different issue to get enacted into law when we had something that was very vital.
    Can you give us some assurances that you are going to be able to look at this in terms of whether or not we can get an extension of a year or 2 years and do it very quickly? I have discussed with the Chairman that I think we have a bipartisan agreement on this committee right now to enact an extension of at least 1 year, and possibly 2 years of the conditions that exist in the statute today. My own preference would be to see if we can perfect it and cover group insurance, but even if we cannot, we should act for two purposes, one to stabilize the market, as the New York Commissioner has indicated; and two, not to skew your eventual study, because at this point, with the shortness of the existence of this policy, things are going to change and the industry is going to change in anticipation of the end of the government program supporting reinsurance.
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    So I guess I am putting you on the spot, but purposely. Are we going to go through this song and dance again of using this as an engine at the end of the period of time, to carry some other unrelated piece of legislation or issue? Or are we going to direct ourselves to doing what is proper for American industry and the insurance industry and the American population in terms of getting good effective legislation into the field as soon as possible to make sure there is no hiatus that could occur or the fear thereof?
    Mr. ABERNATHY. Thank you, Congressman. In a sense, you are putting me on the spot, but that is why I am here. I am here frankly to continue what I think has been a very successful cooperation between the executive branch and the Congress on the whole issue of Terrorism Risk Insurance.
    Frankly, it was the hard work of President Bush to convince a lot of members of Congress about the importance of Terrorism Risk Insurance, and I think in the end——
    Mr. KANJORSKI. I am going to interrupt you, Mr. Abernathy. I sat in the White House and on those conference committees. That was not the intent. It was the full intent of this Administration to pass tort reform and it held up this legislation for almost a year. To make some argument that the President was instrumental, I was there when Mr. Lindsey was there and other aides of the President, and they were putting the brakes on this unless they could get tort reform. It was only with embarrassment at the end that the American industry and the insurance industry came in and said we absolutely need this and we are losing all this construction that it ever occurred.
    So it was not some magnificent leadership by the Administration, the President or anyone else. It was hardcore politics. I sat in the conference room for hours when it was debated, so do not give me the argument that it was the great leadership of the President putting this together and getting this done. It was almost in spite of the Administration's objectives and the use of this legislation for political purposes that held it up.
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    Mr. ABERNATHY. I respectfully disagree with that, Congressman. I was involved with that exercise. I was a witness to putting together the legislation. Frankly, I think with regard to the tort issues, the only question on the part of the Administration was to make sure that this effort to provide Terrorism Risk Insurance did not open up an avenue for abusive lawsuits to have a free rein and access to the Treasury and the taxpayer's pocket. The legislation as it was finally enacted, we believe, closed that opportunity, to make sure that the backstop is available only for providing compensation for real victims of terrorism, and not creating opportunities for abusive lawsuits.
    I believe that it was only because President Bush pushed very hard against a number of people who were very skeptical about opening up a brand new federal program that in the end this program was able to be enacted. We look forward to continuing that cooperation with you throughout the life of this program and with a very careful and proper evaluation of what should take place after 2005 when the scheduled deadline of the Act is here.
    Mr. KANJORSKI. If I may press you on that, what are we going to do? Is the Administration not going to take a position now in the next several months and are you going to leave it up to the Congress just to pass a reauthorization bill, or are you going to be supportive of a reauthorization bill for a limited period of time so that we can take this out of the political realm and get some certainty in the marketplace?
    Mr. ABERNATHY. We certainly concur with your desire to keep this out of the political realm. In our view, there is no left or right, Republican or Democrat view with regard to terrorism and fighting terrorism and its consequences, and taking away from the terrorists the potential fruits of what they seek, which is a disruption of our economy. But at that same time, we think that whatever decision is made ought to be made upon the best information that can be gained and is available. There is a process that the Act laid out for us to follow, and we are following that and intend in that process to continue close consultations with the Congress.
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    Mr. KANJORSKI. That seems to me to say that you have no intention of taking a position until you complete the study, which is 6 months before the expiration of the Act. Let me ask you this simple question, if the Congress of the United States enacts reauthorization within the next several months, is the President prepared to sign it, do you believe? Or would there be a recommendation from the Secretary that the Act be signed into law?
    Mr. ABERNATHY. Certainly, I am not in any position to make any statement with regard to that. Frankly, if Congress comes forward with proposals that Members seek the Administration's views on, we will be happy to enter into that discussion.
    Mr. KANJORSKI. Thank you, Mr. Chairman.
    Chairman BAKER. I thank the gentleman.
    Mr. Abernathy, let me take a slightly different track, but with an eye toward a similar end goal as that of Mr. Kanjorski. In reviewing your written statement, you go, and this is really for the members's benefit so that they understand the scope of what is to be contemplated, the report to be issued by or before June 30, 2005 is assigned to assess the effectiveness of the program, likely capacity of the insurance industry, availability and affordability.
    To seek out those general goals, Treasury has already contracted with an outside research firm. The first survey for data went out in the fall of 2002 and 2003. A second wave is planned for 2004, later this year. A last wave is for early 2005. The view is that in order to make the trustworthy and responsible evaluation called for, this process is necessary. You continue in this effort to consult with NAIC, a broad range of experts and on and on.
    The Secretary has been insistent we draw upon as many sources as is possible. The completed results, based on the surveys and these consultations, will conclude with the effectiveness of TRIA in a proper professional assessment. In coordination with that, you have the authority and responsibility to make available the determination this year, but the study that you are engaging in really will go to the validity of extension of ''make available'' as well as the possible extension of TRIA, and will only be arrived at subject to that lengthy public vetting process which you have described in your testimony.
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    My point in coming to some conclusion on this matter is that the one thing the insurance industry has an abhorrence of is uncertainty and surprise. There is no apparent downside, in my view, to some extension, and we can talk about the time period later, because that only gives certainty that the current structure, which has received very positive comments from all participants. I have not heard criticism of the current methodology. So that it would seem to me that providing market assurance that current structures will continue until such time as the report is concluded, the Congress has the ability to understand and pass the statutory reforms, or to simply let TRIA dissipate, whatever the report may indicate.
    If we were to take that view and then look at the calendar, we have an August recess and normally a November adjournment date. That really leaves Congress a 90-day effective legislative period to respond to whatever those recommendations may conclude. It would seem highly advisable to me in light of that, and uncertainties associated with that calendar, that for the sake of market function we should at least go out a year and maybe two, because there is no disadvantage to having a longer period of certainty, as long as we make it clear in this regard. There will be one and only one extension. The study will be determinative. We are not going to come back and make this an annual extension program. The Congress wants to do this appropriately after the professional study by folks who understand it, in consultation with all stakeholders. We are going to come to a conclusion and that, dear industry, is going to be it.
    So we do not do it with the presumption that the Congress is in the business of insuring this risk in perpetuity, but that when we make the transition it shall be based on the most formal and comprehensive study possible.
    Is there a counter-view to that that you would like to give to the committee today? Or do you think those presumptions are based in relatively sound facts?
    Mr. ABERNATHY. I think those are concerns that we have heard from a number of sources. There are various different proposals that we have heard as to what should happen after 2005, whether there should be some kind of temporary extension. One of the proposals that Mr. Serio made today that requires some very careful looking at is if you continue with the same structure of the program, the deadlines that are built in there, maybe you should allow in the third year that any insurance policy that is written during the third year would still be able to extend with the particular backstop coverage beyond that third year. That is something that is worthwhile looking at.
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    Chairman BAKER. But that would mean any new start would then be prejudiced in the third year. If you were going to start a new project, you would not have the availability of the program and that would create a market disruption between somebody who met the deadline and a new start. I cannot see that being helpful for economic growth.
    Mr. ABERNATHY. I think the suggestion is that that coverage would continue even beyond the third year if the insurance coverage were written during the third year. So that you would be starting the third year; your coverage would continue beyond there. I think that is something worthwhile looking at.
    Frankly, the problem that we have is, we do not have enough of a factual basis to be able to say which of these ideas really carry the most merit.
    Chairman BAKER. That makes my point exactly. We have dealt the card to the Administration's efforts to do the thoughtful analysis, to come back to us with a report. What I am suggesting to you is that a 90-day legislative clock, subject to such a comprehensive study, is really not a clock that makes legislative sense. We need to remove the volatility and uncertainty from the markets. There is no apparent downside to at least a 1 year, and maybe longer extension, to make sure we have the legislative time to respond.
    I am to this extent agreeing with Mr. Kanjorski that there is no downside to making this determination in this Congress to provide that 1-year extension solely for the purpose of receiving your work, and that the downside of not doing that is to throw markets in some degree of uncertainty either in the near term or certainly by the end of 2005.
    I have used my time, so I will come back to you if circumstances permit us.
    Mr. Scott, you would be next.
    Mr. SCOTT. Thank you very much, Mr. Chairman.
    Let me ask this question first. The Consumer Federation of America believes that there are only nine major cities that will not be covered by the private insurance market after the 2005 expiration of TRIA. Is there a need to curtail and limit future extension of TRIA to just nine cities? And could you tell us who those nine cities are?
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    Mr. ABERNATHY. Are you asking me, Mr. Scott?
    Mr. SCOTT. Yes, I am sorry.
    Mr. ABERNATHY. That is one of the suggestions that has been made. The CFA has made it. Others have made it. One of the questions of the program is, is Terrorism Risk Insurance availability really just an issue for certain parts of the country and not other parts of the country? That is one of the questions that is begged by the fact that the take-up rates, the participation rates in the program are so relatively low.
    Some questions are even asked as to whether it is an issue for entire cities? I think Mr. Serio could point out there are people in Manhattan that are not buying insurance. They just do not feel that there is a need. They might be right, they may be wrong. Who knows? There are some who say, well, we ought to make it mandatory for everybody and then have people whether they feel they are at risk or not participate in the pool because the bigger the pool, the more we are able to spread the risk.
    There are some who would say, well, why should I have to participate in somebody else's risk? These are all the kinds of questions that we need to address. Unfortunately, we have right now more questions than we have information to answer those questions.
    Mr. SCOTT. Could you share with us for the record what those nine cities are? Would you have that information?
    Mr. ABERNATHY. We do not have any list of any particular nine cities. I do not recall whether the CFA mentions the nine cities or not, that they recommend.
    Mr. SCOTT. Okay. The other part of my question is, if the Treasury has until September 1, 2004 to determine if it will extend the ''make available'' provision, how will that affect an insurer's ability to offer products for future terms?
    Mr. ABERNATHY. Thank you for asking that, because there has been a fair amount of confusion as to how the ''make available'' requirement will operate with regard to time frame. The law requires that any insurance policy offered during the whole year, through the end of the calendar year 2004, must make Terrorism Risk Insurance available regardless of what the decision is on September 1. So if on September 1 the decision is not to extend, people still under the statute are required throughout this calendar year to make their product available for their policies that extend beyond that.
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    That is without prejudice to what that decision might be. If the decision on September 1 is, or before September 1, whenever we make that decision, and again I want to emphasize we are committed to making it as soon as we can gather enough information to do that, to make an informed decision. Should the decision be yea, extend it into the third year, that would then begin with January 1 and that requirement would continue throughout the remainder of the program.
    Mr. SCOTT. And one more, if I may, Mr. Chairman. Should the Treasury Department reconsider its decision to include group life insurance in TRIA, given that it is a basic benefit for venerable, highly concentrated workers?
    Mr. ABERNATHY. That was one of the early mandated questions that was put to Treasury. That was one where our hands were fairly tied. The Act did not say whether we thought it was advisable or not to extend coverage to group life. The Act said investigate whether or not two specific things are happening: Is insurance available for group life, initially primary insurance?; and is insurance group life reinsurance available? Our study verified that group life reinsurance coverage had by and large receded. There was little if any reinsurance being made available for group life.
    On the other hand, primary group life insurance has shown no significant receding from the markets. That still seems to be as available to day, with little change, as it was on September 10. Because of that, the test under the statute was not made, so we could not include it in the program.
    Mr. SCOTT. A question on the timing of the Treasury survey wave. If the last Treasury survey wave is sent to stakeholders in February 2005, in your opinion does that provide enough information for analysis to be made to make a recommendation regarding the expiration of TRIA later that same year?
    Mr. ABERNATHY. That is a very good question. We hope so. We felt because of the structure of TRIA, it is really three separate programs. We are right now in program two of TRIA that operates under different numbers than last year. Next year, it will be operating under yet a different set of numbers. The purpose for that is to try to increase the space within which the private markets operate.
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    So in order to be able to evaluate, as the law says, what is going on on the ground, we need to test in each of those years. We are hoping that we will get enough of a test in January and February that we will be able to make some determination as to how the program is operating in its third year and whether the take-up rates, the market participation rates are changing at all. That is early in the year, but I think that is the best we can do, given the time frames provided for under the Act.
    Mr. SCOTT. Thank you very much, Mr. Chairman.
    Chairman BAKER. Thank you, Mr. Scott.
    Mr. Hensarling?
    Mr. HENSARLING. Thank you, Mr. Chairman.
    As I often do, I find myself concurring with Chairman Baker with respect to the need for certainty. No editorial comment from my colleague there.
    Chairman BAKER. I did not want to interrupt.
    Mr. HENSARLING. The need to bring certainty into this facet of the insurance market, the need for quick action, and also the need to ensure that Congress is not faced with a series of renewals or extensions is important because I have a concern about the federal government becoming a permanent fixture in the property and casualty reinsurance business, and giving the taxpayer this type of exposure.
    Can anybody give me at this point, any of you gentlemen, some sliver of hope that, particularly with respect to the latter concern of the federal government being a permanent fixture in this market, any sliver of hope that this will not be the case? Starting with you, Mr. Abernathy?
    Mr. ABERNATHY. That was the design of the statute. When the statute was enacted, there was the concern that we might be creating a permanent federal program. For that reason, it is structured so that each year the coverage provided by the federal government declines. The space that is not insured by the federal government increases, with the hope that that would be a glide-path to get the federal government out of the program, particularly in the third year.
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    In fact, the design of the third year is to have as little effective federal involvement in the marketplace as possible. I have met with some insurance people who already say they think under the second year, there really is not any federal program. Some of the major insurers, they say, act as if there is no TRIA now because of the various deductibles that would pretty much cover anything they are doing anyway and they are carrying significant risk on their own.
    Mr. HENSARLING. Any comment, Mr. Serio?
    Mr. SERIO. I do not know that anybody has an interest in having the federal government as a permanent fixture in this business either. But I think, as Mr. Abernathy said, it is that glide-path that we are working on. When you get back into the insurance economics of this, there has to be enough capacity that has been built up in this marketplace not just to pay for an event, they handled 9-11 very well, the problem was having enough capacity to cover a future risk that they have to be responsible for up front because the financial regulator requires that.
    So depending up what other things we can put in place working with private industry in terms of giving them the opportunity to build that kind of capital base, that they are not currently allowed to build, will go a long way towards allowing the federal government to glide out of and to get out of this reinsurance program.
    Mr. HENSARLING. On a slight refinement on the question, if I understood your testimony correctly, I think you stated that there was really not much progress in establishing a viable terrorism reinsurance market and that so far there has not been a reliable way in which to assess the risk. We have obviously had some passage of time since 9-11, so my question is what has to happen to be able for the participants to be able to assess this risk and when might this happen?
    Mr. HILLMAN. Based upon the results of our work, what we have generally come to the conclusion is that the problem that insurers and reinsurers are having right after the terrorist attacks on September 11 are the same problems that they are having today. They simply have an inability to determine the frequency or severity of another terrorist attack. Understanding the enormity of possible losses associated with such an event, they are pulling themselves away from the market and will be unable to do so until such time that there would be reliable information for them to be able to make some of those assessments. Hopefully, that information will never come to bear.
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    Mr. HENSARLING. I think all you gentleman have given evidence about the low take-up rates. Obviously, there are primarily a couple of reasons why somebody does not purchase a service or a product. I do not care what a set of golf clubs costs because I am not a golfer, so I am not going to buy a set of golf clubs. Which I guess begs the question why Chairman Oxley allowed me on this committee, but I do not have time to pursue that.
    Another reason I might not buy something is because I do not like the price. As much as I may want a new pickup truck, they just might have priced me out of the market. I think several of you gentlemen gave evidence that supposedly now with TRIA in place that relative to the risk, this insurance is affordable. So why aren't people taking it up? Obviously right after 9-11, a number of real estate developments and projects and construction were held up, but is that true today and why do we see such a low participation rate?
    Mr. ABERNATHY. We do not have any evidence that has been brought to our attention that development projects are now being put on ice because of lack of Terrorism Risk Insurance. So far as we can tell, that phenomenon has now disappeared with the current availability of the insurance coverage. With regard to why the take-up rates are so low, that is a very interesting issue. I think we can only speculate. We have a number of anecdotal pieces of evidence as to why people are not picking up the coverage, but we want to get a more comprehensive view and that is why we are engaging in our various surveys.
    Mr. SERIO. Again, maybe it is a mistake to call it a low take-up rate. I think the take-up rate has been appropriate to those who either feel they need it or want it. Some have been very comfortable with the protections that are afforded in the standard fire policy that has been on the market for years. That does provide some terrorism coverage. But for those who have a contractual obligation to have this all-risk coverage need access to a terrorism risk coverage. That is what TRIA has provided.
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    Going back to Mr. Scott's question, it is not just a question of geography of those who may need it. It is not just businesses in New York City, but there are some businesses in New York who do not have it. But depending upon the nature of the business they are in, if they were neighbors to that Army base in greater Atlanta, they may well need access to coverage because they do not have other market alternatives. It goes both to the location of the risk, as well as to the nature of the risk and where they are relative to other trophy or sensitive locations, as they call them, that you want to make sure they have equal access to insurance coverage as somebody who is not in that type of sensitive location.
    Mr. HILLMAN. I think that is important to not understate the importance of TRIA being able to provide for terrorism coverage for high-risk target properties. That is exactly what the Act has done and it has been extremely successful from that standpoint. Why other commercial policyholders are not accepting terrorism insurance could be for a variety of reasons. As the Assistant Secretary from Treasury said, we have anecdotal information ourselves which suggests that they may just perceive their overall risk exposure to be such that any amount that they might pay might be too high.
    Mr. HENSARLING. My time is up. Thank you, Mr. Chairman.
    Chairman BAKER. I thank the gentleman.
    Mr. Capuano?
    Mr. CAPUANO. Thank you, Mr. Chairman.
    Gentlemen, I am not going to repeat a lot of things that have been said. We have had a lot of good questions and a lot of good answers already. But Mr. Abernathy, I would like to make sure that I understand what the law was when we passed it. There is nothing in the law that I remember that says you cannot make interim reports or other reports prior to the June 2005 deadline. Is that correct?
    Mr. ABERNATHY. That is correct, sir.
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    Mr. CAPUANO. So there is nothing here that I am aware of that would prohibit you or your agency from making recommendations or taking actions today.
    Mr. ABERNATHY. Nothing whatsoever.
    Mr. CAPUANO. Okay. If that is the case, I feel the same way, we all agree, I think, that business decisions will have to be made before we have the answers to all of the questions that have been asked today that no one can be expected to have the answers to. Do we agree on that?
    Mr. ABERNATHY. I think those types of business decisions are made all the time. There is always an element of uncertainty that you have to cope with.
    Mr. CAPUANO. I agree with you. But with all the questions that you are looking for answers for, which I do not disagree with you, I think your approach to it on some levels is 100 percent correct. We would like to get as many answers as we can before we make decisions. I totally agree. But there is no hope of that before certain decisions relative to terrorism insurance have to be made by the end of this year. Is that a wrong assumption?
    Mr. ABERNATHY. We are going to do our best to have a good body of evidence that is focused on the specific ''make available'' issue as soon as we possibly can. Fortunately, that is a very narrow question and we are confident that we can get enough information to make a reasonably sound decision well in advance.
    Mr. CAPUANO. Would you also be able to make available information that is also tied directly to the existence or extension of TRIA? Or do you think that they are two completely separate issues?
    Mr. ABERNATHY. They are not completely separate, because as we make that decision with regard to ''make available,'' the Act says we are to look at the same factors that we are supposed to evaluate in connection with the June 2005 report.
    Mr. CAPUANO. Okay. So there is a fair amount of overlap both in your provisions and into the business decisions that have to be made by insurers and people who are looking to buy insurance.
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    Mr. ABERNATHY. There is some overlap, but again the ''make available'' decision is a very narrow decision, and whatever that decision is I do not think should be seen as in any way suggesting what recommendations we might make next year.
    Mr. CAPUANO. Okay, fair enough. I think we just disagree, because I would argue that there is a lot more overlap relative to business decisions that have to be made than you seem to agree. But that is fair enough. At least there is some, we agree with that.
    All that being said, I have been actually happily surprised at the general consensus that I have heard today by the members of the committee that we are all in agreement that we have to head towards extending this provision. I would have to agree with some of the concerns that were made that I am not sure that I want this permanent. I am not so sure that I like all the provisions. I am sure I do not like all the provisions that are there. But I also am not sure that it is time to tinker with it because we have so many questions that are left unanswered. If we tinker with it, you skew the answers and maybe changing something that you do not want to change, et cetera, et cetera.
    So I would urge you in your agency to look at this a little bit more quickly and to take back what you have heard here today that we went ahead on a general consensus, again not by a vote, but a general consensus is I think it is fair to say that we want to head towards extending TRIA for at least a year, maybe longer, not because we love every aspect of it. We still have questions and concerns, and I think we will have some serious disagreement when the time comes because we do not have the answers to those questions.
    I would particularly urge you, though I know that your agency would never be influenced by politics, it is an election year, and not that those things would ever have an influence on a decision such as this, but in an election year when you have a bipartisan consensus, take advantage of it. All the things can be lining up to get this thing done reasonably smoothly so that we can get to the arguments.
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    I do think that there will be a time for us to have these discussions and arguments and I hope it will be next year, if you want the truth, but I think it is important that we get beyond all the internal problems we have, allow people to make business decisions so it will give people like you and us the time to make thoughtful reads of the information we get, maybe a lot of the information, as you know, will lead to more questions that we will have to search out.
    I look at a consensus here. I look at the fact that the Sox just beat the Yankees six out of seven, and I have to tell you——
    UNKNOWN. Mr. Chairman, Mr. Chairman. Could we get back to the subject at hand, Mr. Chairman?
    Mr. CAPUANO. It just tells me that everything is lined up right.
    And if everything is lined up right, we should take advantage of it.
    UNKNOWN. I object, Mr. Chairman.
    Mr. CAPUANO. Thank you, Mr. Chairman. I yield back.
    Chairman BAKER. Mr. Capuano, that is y'all's problem.
    Mr. Royce?
    Mr. CAPUANO. Mr. Chairman, could I get a translation of that ''y'all'' thing?
    Chairman BAKER. It would take longer than you have for me to explain.
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    Mr. Royce?
    Mr. ROYCE. Thank you, Chairman Baker.
    Unfortunately, I believe that we are in the beginning stages of a very long and protracted war against radical terrorists of the Wahabi sect, of the most extreme branch of a sect that are very nihilistic in terms of how they are going to conduct a war that they have declared, basically. I think it is critical that we think about how our economy and about how our financial system deals and prepares for such a reality over the long term.
    The marketplace should and can be one of the greatest tools in mitigating our country's vulnerability to damaging terrorist attacks. By and large, I think the behavior in the market is rational. As a result, participants will make financial decisions based upon their expectations of a risk-weighted return. If the marketplace truly believes it would bear the brunt of losses due to terrorism, would it take some necessary precautions to limit downside risks over the long haul? In other words, maybe firms would strategically locate offices in various locations, instead of in one high-risk location.
    Terrorism is a terrible problem we face, but we should not ignore its effects. I think the value of some assets change as a result of the threat of terrorism. Less attractive assets such as high-profile assets probably are going to have less value. Many I think out in the market probably see more value in technology firms producing homeland security products and services. So the marketplace can force society to better prepare and defend against terrorism if we are looking at this over the long haul.
    If Congress were to reauthorize TRIA, would it be signaling to the market that business could continue as usual? Is this an acceptable outcome? Congress would be inviting moral hazard through adverse selection. Behavior would change as a result of the taxpayer backstopping losses that this legislation, if it is permanent, would constitute.
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    At the time of its creation, I believed that some form of a federally guaranteed insurance backstop for terrorism was an acceptable step. It was. Today, however, by extending this, would we signal permanence? In the long run, would this create serious distortions in the economy and would it basically, looking out over time, assuming the premise is right that this is a 20-year struggle, would it increase our vulnerability to terrorism? Could this harm our ability to absorb economic shocks over the next 20 years, resulting from an attack?
    I appreciate that this subject presents many, many problems. I know there are no easy answers to this. But Mr. Abernathy, those are just some of the thoughts that I have as I try to contemplate what is in store for us over the next generation. But getting back to a question to you, are you concerned that extending TRIA could create the perception of a permanent government backstop? And could that create distortions in the marketplace?
    Mr. ABERNATHY. I think all who stepped forward to create the very program that we have now carried with them the concern that by creating this federal program, are we creating some sort of moral hazard that will remove some of the motivation that people have to mitigate some of the risks that they have. We have certainly seen that with regard to the flood insurance program. We have gone through reform after reform to try to increase the incentive to mitigate the risk from flood insurance and there are continual concerns that people are still acting in ways that would be different if they did not have a federal flood insurance backstop program. That was the concern I think that everybody had when we were going forward with this Terrorism Risk Insurance. Are we taking away some of the incentive that people may have to mitigate their risks?
    We take comfort that the Act as written makes it very clear that this is a temporary program. It is structured as a temporary program. When people come and present their various ideas for extending this or that aspect of the program, one of the questions that needs to be asked is, does the extension contemplate continuing along that glide-path that removes the federal government out of that or do you level off that glide-path?
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    I do not know what the answer is to that, frankly, because the discussions are continuing. But usually when I put that question to people, they do not have an answer. The last time I put it to someone, they said, well frankly, we think that the federal reinsurance is too little at this point. We think year two is too stingy in terms of federal support. So I do not know what the answer is to that question other than it is a continual risk that we have to work against.
    Mr. ROYCE. Thank you, Mr. Abernathy.
    Thank you, Mr. Chairman.
    Chairman BAKER. I thank the gentleman.
    Mr. Miller?
    Mr. MILLER OF NORTH CAROLINA. I apologize for getting here late and I do not know what kind of questions you may have answered before I got here, but Mr. Abernathy you talked for a moment about the two statutory analyses required for the Department of Treasury to extend TRIA to group life insurance.
    Mr. ABERNATHY. Yes, sir.
    Mr. MILLER OF NORTH CAROLINA. You said that Treasury's analysis was that there was a ready supply still of primary group life coverage, although there was not an adequate and affordable catastrophic reinsurance.
    Mr. ABERNATHY. That is correct. That was our finding.
    Mr. MILLER OF NORTH CAROLINA. So there was one step satisfied, one of the criteria satisfied, and not the other, and the statute requires that both be satisfied.
    Mr. ABERNATHY. That is right.
    Mr. MILLER OF NORTH CAROLINA. I am curious as to the effect of the lack of availability of catastrophic reinsurance. Are insurance regulators who are charged with concerns for solvency looking at the possibility of catastrophic loss and the effect it might have on group life insurance?
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    Mr. ABERNATHY. I am not sure I understand the question, Congressman.
    Mr. MILLER OF NORTH CAROLINA. Solvency concerns are usually by the states.
    Mr. ABERNATHY. Yes, that is right.
    Mr. MILLER OF NORTH CAROLINA. Do you know if the regulators who are concerned with solvency are looking at the possibility now of catastrophic losses and effect they might have on the solvency of primary group life coverage?
    Mr. ABERNATHY. I do not have any primary evidence or information on that. I would defer to Mr. Serio about that and his colleagues.
    Mr. SERIO. Yes, we are in fact looking at that. That is what has given us so much concern about the decision. The group life industry's ability to continue to provide primary coverage was good. It shows you the internal strength of the life insurance industry, but it is putting that capital at risk for an extraordinary event like the terrorist event that has a large number of casualties.
    That would be putting a lot of that capital at risk, and that does concern the financial regulators, which is why we have been promoting the idea, along with many of you here today, of including group life in it simply because without the reinsurance they are essentially assuming that risk themselves. They are keeping that risk and retaining that themselves as opposed to being given an opportunity to spread that risk like most other lines of insurance do. That is why it is critical that that be a part of the TRIA program.
    Mr. MILLER OF NORTH CAROLINA. Okay. I am sorry. You are concerned about potential effect on solvency and also the ability to pay claims?
    Mr. SERIO. Sure. Given the fact that it is so hard to make estimates as to what a possible size of an event might be or an impact might be, the whole point of the TRIA Act was to provide that definitive backstop on property-casualty, to evaluate its impact and possible benefit to group life. We think it is a necessary and appropriate backstop so we do not get into that question, of where you do have an event that had a significant life loss.
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    Group life has the same concentration of risk character that worker compensation has. That is what has given us so much concern about this, that you will have thousands of lives in one location that this could be affected at once.
    Mr. MILLER OF NORTH CAROLINA. Okay. Is the concern that your Department has shared by the primary group life insurers themselves?
    Mr. SERIO. We have in fact been in significant discussion with them. The NAIC commissioners have been very concerned about it. We have discussed it with them and they are concerned. The industry is concerned about not having been included within the TRIA provisions.
    Mr. MILLER OF NORTH CAROLINA. Okay. Do you favor, then, changing the statutory criteria so it no longer requires that both criteria be met to include group life insurance in TRIA?
    Mr. SERIO. I think to clarify those provisions to get TRIA back to its original purpose of being that reinsurance backstop I think would be adequate for including group life in any clarification, and the statutory language would go a long way to that.
    Chairman BAKER. I thank the gentleman.
    Mr. Shays?
    Mr. SHAYS. Thank you all very much.
    I want to just say that I disagree with Mr. Kanjorski's interpretation of the Administration's participation in this effort. I obviously was very concerned about this issue, being from one of the financial capitals of the world, the Fairfield County, New York area, with lots of reinsurers and so on. I felt the Administration was paying a tremendous amount of attention to this issue.
    I also do not believe that trying to deal with tort reform has a political purpose. I think it is just essential that ultimately we deal with that issue, but I realize it related primarily to the issue of terrorism and tort reform, et cetera.
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    I want to be as clear as I can be, and I have a number of questions, but I believe Mr. Serio says we need to continue this, but we need to have the government and the insurance industry work this out. That is basically, I sense, the position of GAO.
    Mr. HILLMAN. Our view is that it is important to look at alternatives as soon as possible because we see no viable alternative coming forth from the industry itself.
    Mr. SHAYS. Right. And from New York we hear basically let's continue this, at least in the short run.
    Mr. SERIO. Right. That is correct.
    Mr. SHAYS. And from Treasury, I am getting an Alan Greenspan kind of answer. I am a little unclear. I get a sense you do not want it to be permanent, and you are kind of a little neutral here and we have to work it out.
    Mr. ABERNATHY. We are trying to operate within the parameters that the statute sets forward. The statute declares in a multitude of places that this is a temporary program with a glide-path——
    Mr. SHAYS. But you are not speaking definitively.
    Mr. ABERNATHY. No, we are.
    Mr. SHAYS. You are kind of still trying to sort this out yourselves.
    Mr. ABERNATHY. That is correct, because the statute also says we should consider what should take place after 2005.
    Mr. SHAYS. Right. I know what the statute says, but I also know the Administration has opinions——
    Mr. ABERNATHY. Yes.
    Mr. SHAYS.—and has never been electing to show them, as it should not.
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    Let me see, on GAO's statement basically it says, in summary it appears the Congress's first objective in creating TRIA was to ensure that business activity did not materially suffer from a lack of available terrorism insurance largely has been achieved. I agree with that. Then you say, while TRIA, on page three actually, has improved the availability of terrorism insurance particularly for high-risk properties in major metropolitan areas, most commercial policyholders are not buying the coverage. That interests me because I was told basically, and this speaks to why we need to continue to debate this issue, that the whole marketplace would literally fall apart; that new buildings would not be built; existing buildings would not get refinanced because there was no terrorism insurance available.
    So explain to me how we are able to see so many not have to buy the terrorism insurance and still get the financing they need.
    Mr. HILLMAN. That was an interesting outcome of our study as well, Congressman. It seems that perhaps most folks view their risk exposure to be so low that almost any price that they might have to pay for terrorism insurance would be too high.
    Mr. SHAYS. Right. But I thought that those financing buildings, the banking community, would have demanded it. What that implies is the banking community did not demand it. Maybe Mr. Abernathy would speak to this.
    Mr. ABERNATHY. I think the financing community, bankers or others who are providing funding for economic development projects are making those same sorts of assessments. In some cases where they believe there might be a significant terrorism risk because of the trophy nature of the project or where it may be located, they are looking to whether or not there is availability of insurance being applied. In other cases where they believe the risk is low or nonexistent, they are not demanding that there be that kind of coverage.
    Mr. SHAYS. Is that somewhat a surprise to you? It is logical in hindsight, but is it surprising?
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    Mr. ABERNATHY. It is a surprise in the sense that we did not predict that before we got into the program. I do not know that we knew what to expect would be the market reaction.
    Mr. SHAYS. Let me ask another question. I always had anticipated that this would not be permanent, but that we would basically allow a hand-off that there would be a building up of reserves by the insurance industry and therefore be able to deal with it through their own capabilities. But I am being told that they have not built up their reserves. I need that explained to me.
    Mr. SERIO. Yes, this really goes to what happened as we came out of 9-11. When you have $40 billion in losses mostly paid within an 18-month period, still some left outstanding, you had a serious drain on the reserves in the capital of the marketplace. There are a number of estimates as to how much of the total commercial property-casualty market was absorbed by 9-11.
    There are a couple of different ways to regain capital: investment income, the development of surpluses, a whole pulling back on writing new business, and rates. Frankly, they have had to go and replenish their rate structure or their reserves through rate alone, and that is why you have such pressure to raise rates.
    Mr. SHAYS. I realize my light is out, so rates went up for non-terrorist coverage?
    Mr. SERIO. Rates went up across the board. Absolutely.
    Mr. SHAYS. Unrelated to terrorism coverage.
    Mr. SERIO. That is correct, and related to terrorism because of the need to replenish that capacity. What we are suggesting is that if you give the industry an opportunity to create some ability to have catastrophe capacity in hand, you do not have that whipsaw effect on the market going forward after an event has occurred. Whether you are talking about a terrorism event or any other kind of catastrophic event, there is always a need to be able to replenish those reserves, unless you are allowed to maintain them on hand. What we are suggesting is that more should be allowed to be held on hand for those types of events.
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    Mr. SHAYS. Could I have a quick follow-up? It will be very short. I just need to be clear. Are we basically saying that companies that are not required, who are not buying terrorism insurance, then will not be covered for a terrorist act? That now there is written in the policy, you have no coverage for terrorism?
    Mr. SERIO. It depends on where you are. There are some policies in some states that have general terrorism exclusions, particularly on domestic terrorism which is not covered by TRIA. There are others. I mentioned earlier the standard fire policy provides coverage for terrorism if it results in a fire type of loss. That terrorism will in fact be covered, but there are policies that do exclude terrorism.
    Mr. SHAYS. Thank you, Mr. Chairman.
    Chairman BAKER. I thank the gentleman.
    Ms. Velazquez?
    Ms. VELAZQUEZ. Thank you, Mr. Chairman.
    Mr. Hillman, in the event of a terrorist attack by a non-foreign-based group, TRIA will not apply. Is there any evidence that the private market, and I know that Mr. Serio just touched on this, but I would like you to explain it more. Is there any evidence that the private market is offering coverage for acts of domestic terrorism?
    Mr. HILLMAN. To some extent in a limited degree insurance is being made available for those types of in-country events.
    Ms. VELAZQUEZ. Mr. Serio, would you like to comment on that?
    Mr. SERIO. We are seeing that it really depends upon the risk and the location of the risk, where there is some coverage being provided. That all-risk coverage has been provided. I think, in fact, TRIA probably has provided some relief by giving a backstop for international or foreign terrorism risks, and provided some capacity relief so that domestic coverage could be maintained.
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    Ms. VELAZQUEZ. Mr. Abernathy, I also understand that many insurers are excluding coverage for certain types of terrorist attacks. In the event of a nuclear, chemical or biological attack by a foreign interest, would losses generally be covered by TRIA?
    Mr. ABERNATHY. They would be covered by TRIA, but we have left it up to the various states to determine whether or not those particular events can be excluded. In the administration of the Act, we have relied as much as we possibly can upon the state regulators. Where states allow those exclusions, we do not supersede that local decision.
    Ms. VELAZQUEZ. Thank you.
    Mr. Serio, given the variety of means in which property damage could be inflicted during a terrorist attack, are you seeing insurers in New York State offering insurance products that will carve out certain types of terrorist attacks? If so, what types and why is this happening?
    Mr. SERIO. They have tried. I am not sure we have allowed it. We have allowed some exclusions in New York, but only so much that they are already being covered by TRIA. So yes, the carriers have come in. They have made application for exclusions on certain types of hazards, nuclear among others.
    Ms. VELAZQUEZ. And there is an intervention on your part, your office?
    Mr. SERIO. Thank you for your patience. If a policyholder wants coverage through TRIA, they have to be afforded that opportunity to have it. Okay? The exclusion is only essentially on a make available basis as well. They can essentially deny the coverage or a policyholder can pass on the coverage, if you will. So in that case, an exclusion will be allowed. But again, it is at the buyer's discretion, not at the company's discretion.
    Ms. VELAZQUEZ. Thank you.
    Mr. Hillman, I understand that the take-up rates of terrorism insurance have been low. Could you discuss whether the size of the business appears to be a determinant on whether it purchases terrorism insurance. For instance, are smaller businesses more or less likely to purchase this insurance than larger firms?
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    Mr. HILLMAN. We have limited information on why the take-up rate is as low as it is, but it does have an awful lot to do with the extent to which you see a tremendous risk from a geographical location standpoint, from a concentration standpoint, as to whether or not policyholders find themselves having to provide that coverage and, as we discussed, whether or not financiers are willing to provide funds for developments and the like.
    Ms. VELAZQUEZ. Okay. Thank you, Mr. Chairman.
    Chairman BAKER. I thank the gentlelady.
    Ms. Maloney?
    Mrs. MALONEY. Thank you so much, Mr. Chairman and Mr. Kanjorski for holding this hearing on truly one of the most important issues, I believe, before this body. I certainly join with all of my colleagues in representing from my home state, and applauding his testimony today, Superintendent of Insurance Greg Serio. He is a major leader in our own state, and actually has been a national leader by the amount of time that you have been willing to come to Congress and speak across the country on this. On behalf of my constituents, I thank you very, very much.
    I just want to say that after 9-11 I have never seen this Congress so bipartisan. We came together. We passed a whole series of legislation reacting to the disaster. All of the initiatives were tremendously important. But the bill that has the most significant long-term recovery, the biggest impact on New York City's economy, the site of the terrorist attack, was terrorism insurance. You can ask any professional, any business, any person. Most professionals, most people, most people working at ground zero, everyone believes that this legislation is truly the economic stimulus bill for the New York region.
    We could not move forward until we could get this insurance for our contractors, our legislators. I really compliment very much GAO, and I have in my testimony many of the examples that you had in that excellent report that you did, that showed the vital, vital need for this.
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    I am very proud to have been part of a letter that 30 Democratic members of this committee signed urging Treasury to extend the ''make available'' provisions of TRIA as soon as possible so that the insurers and consumers will know whether coverage will be available next year.
    This is very, very important. We need it now. We need a confirmation that this is going forward, and we need it as soon as possible so that we do not experience another period where the construction cranes are on mothballs and the workers are not called to be at the job sites. It is absolutely critical. I applaud every member of Congress that supported it in a bipartisan way, and the President. I urge him to show some leadership for the country and the city and other targeted areas that have suffered and those that are threatened by terrorist attack. We cannot wait for the study in six months. We really need it now. Maybe we need another GAO study right away.
    I just read one report that the original TRIA and the effort to extend it have been opposed by some consumer groups. I found this very, very unusual, because I have a great admiration for the Consumer Federation of America. My understanding is that this consumer group, a group that I regard very highly, has done an analysis where they use a model that quantifies possible future terrorist attacks, putting their likelihood at occurring every 6.9 years at a cost of $40 billion each. I just want to ask if anyone if familiar with this model, what do you think of this model that was done by the Consumer Federation. I would like to know, have private insurance companies been able to come up with models that can be used to underwrite future attacks?
    All I can tell you is the City of New York's economic development office, the Mayor's office, the individual insurers, businesses, everyone said they could not do anything until they got the reinsurance program passed. Building did not start because people could not get insurance. If you could get it, it jumped 20, 30, 40, 50 percent, which is terribly, terribly unfair.
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    I heard you testify earlier, Mr. Abernathy, that you are not going to complete this study particularly fast. I think we need it right away. I want to add that my district, I represent New York, I lost 500 constituents in 9-11, including the former Commissioner of, I cannot even talk about it, of Insurance for New York. But my home workers were very affected by group life insurance policies that also are part of this. And also in my home state, we have many insurance companies that hold these risks. I am interested in the issue, not only the group life insurance issue, from both the insurer and the insuree perspective.
    I was wondering also, Mr. Abernathy, if you could comment on the decision of Treasury not to include group life under TRIA last year, and your thoughts for this market going forward. So I would like those questions answered. Also, again, I cannot compliment enough your statements, and I quoted many of your statements in my opening statement which I would like to put in the record.
    Thank you.
    Mr. ABERNATHY. Yes, Congresswoman, I would be glad to comment. I believe there are two areas you want me to talk about, our group life decision and what our views are with regard to going forward with regard to the Act overall.
    With regard to group life, that was a decision that the statute gave us that was very narrowly defined. The question that the statute put before us is, Treasury should determine, based upon the evidence, whether or not group life insurance, primary insurance is available, and whether or not group life reinsurance was available. The statute says if both are not available, then we must include them under the program.
    We consulted with people in the industry, with supervisors around the nation, and the decision was pretty clear. There is very little evidence that there is much, or at least at the time of the decision, that there was much in the way of group life reinsurance available. At the same time, there was very little evidence that there had been any reduction in availability of primary group life insurance. So the test under the statute was not met, so we could not include them within the program.
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    With regard to going forward, our view is that the statute, while stating in many places that it is a temporary statute, also makes it clear that we should evaluate how it is doing. Not only how the Act is doing, but how is the marketplace faring, and that we should, based upon what is going on on the ground, make recommendations to the Congress no later than June of next year on the variety of issues that are involved. Frankly, the more we dig into this whole question, the more questions we find. We find more questions than answers, but we are going through a process that is trying to bring as much information together so we can start answering some of those questions.
    Mrs. MALONEY. GAO, you testified that the take-up rate is only 10 to 30 percent. What steps might we take as a Congress or as an insurance superintendent to increase this and thereby spread the risk? I am surprised at that, but on the other hand there are only a few areas that are the terrorist risk areas, Chicago, New York, Washington, Detroit. These are the areas. But if we do not have it in New York, I think Serio and others can testify, you are not going to be able to build or do anything. It will just kill our economy.
    We have been called to a vote and I would like, Mr. Serio, if you could answer the Consumer Federation question, and GAO, I may have to run out before you can even answer it, to vote.
    Chairman BAKER. The gentlelady's time has expired. Mr. Shays want to get something on the record as well.
    Mrs. MALONEY. Maybe he could answer in writing, if we do not have time, because I think these are important questions.
    Mr. SHAYS. Just a quick question. Thank you, Mr. Chairman.
    The 10 to 30 percent in the GAO study, I realize I did not ask a very needed question that was triggered by Ms. Maloney. Are we seeing insurance at 60 or 70 percent in the greater New York area and 5 percent elsewhere? How does it look geographically?
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    Mr. HILLMAN. The several studies that looked at this issue that we gathered information from did not provide specifics on this, but it is clear from the studies that we did see that there is a greater concentration of purchasing the insurance in the Northeast area than in other parts of the country.
    Mr. SHAYS. Could we ask GAO to tell us, to nail that down a little better? It is very important.
    Mrs. MALONEY. Will the gentleman yield for half a second?
    Mr. SHAYS. I yield.
    Mrs. MALONEY. What can we do to spread the risk?
    I yield back.
    Mr. SHAYS. That is another issue which I think you will need to answer in writing as well. But I just need to know, are we seeing a lot more terrorism insurance being written in the Northeast, and if so how much.
    Mr. HILLMAN. We can provide that information for the record.
    Mr. SHAYS. Thank you. I appreciate that.
    Thank you, Mr. Chairman.
    Chairman BAKER. For general membership purposes, I have been requested that we leave the hearing record open for at least 30 days for exactly these purposes, to have additional questions posed to our expert panel.
    One thing I would like to get on the record which was not discussed today, in response to concern about a permanent reinsurance program, is the Act also has, and I recognize it is conditioned, but there is a conditioned repayment obligation which is unique to this particular extension of credit. The view was that it was as a result of a catastrophic event, the capital on hand may be impaired and that it would be a cyclical problem that hopefully over time markets would rebuild and then be able to face future obligations with more resiliency.
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    So that in essence, it is a short-term cash problem, and that the United States government would step in to keep economic function performing without interruption and advance the capital necessary to get us by the window. But at such future as the Treasury would determine that the industry had recovered, and that there was an ability to repay the funds advanced, with certain limitations on the premium increases that could be assessed, taxpayer money could be regained at the end of the day because we would not want to write a $10 billion check from the United States Treasury and have the industry show a $10 billion net profit. My constituents would understand that pretty quickly.
    So it is unique in that regard, and were we to extend it, it would be my intent to make sure that that repayment provision is also revisited to ensure it has the necessary capabilities to be enforced in an appropriate window by Treasury determination. I think that was important to add to our consideration of this issue.
    Having said that, we do have a vote pending. If there are no further comments by our panelists, I want to thank you for your time and participation. Each of you has helped immeasurably in the committee's consideration of this difficult issue.
    Our meeting stands adjourned.
    [Whereupon, at 12:03 p.m., the subcommittees adjourned.]