On February 28, 2007, the Senate's Banking, Housing and Urban Affairs Committee Chairman Christopher Dodd (D-CT), held a hearing entitled "Examining the Terrorism Risk Insurance Program" to address what steps should be taken with respect to the Terrorism Risk Insurance Act (TRIA) which is set to expire on December 31, 2007. While Dodd and ranking member, Richard Shelby (R-AL), agreed that a federal backstop should be extended beyond this year, they, like other committee members and many of those testifying, voiced differing views as to the nature and scope of such an extension.
To those following the ongoing TRIA debate, the list of topics covered by the committee was nothing new. Committee members and witnesses alike recognized that while TRIA was originally passed to address terrorism risk insurance shortfalls in the wake of 9/11, TRIA's eleventh-hour extension in 2005 has left uncertainty in the insurance market, which by its very nature depends upon certainty. Accordingly, the hearing focused on whether a TRIA extension should be temporary or permanent; whether the private market is better able to evaluate terrorism risks or whether it can survive without a federal backstop; how an extended TRIA should deal with nuclear, biological, chemical and radiological (NBCR) risks; and whether group life insurers should be included within TRIA.
In advocating for a long-term or permanent legislative solution, Chairman Dodd said "that doing nothing is simply not an option" because terrorism risks will not disappear in the short term and private insurance markets cannot absorb the level of risk associated with terrorism. Chairman Dodd indicated that he would urge the committee to act quickly.
Dodd's views were echoed by Robert F. Bennett (R-UT) and others, who expressed the belief that insurers are not willing to take certain risks, such as terrorism, if those risks prove too difficult to predict or too costly to cover. Mel Martinez (R-FL), a longtime supporter of a TRIA extension, also used the hearing as an opportunity to request that Chairman Dodd confirm that the committee will conduct a hearing to consider federal intervention for catastrophic risk insurance.
Despite Dodd's strong advocacy of quick action, one could see storm clouds on the horizon, with a number of Senators voicing skepticism on the bill. In this connection, Senator Shelby advocated a limited federal role in the terrorism risk insurance market and raised the possibility that the current TRIA program had created disincentives for the creation of private-market terrorism risk products. Senator Shelby's remarks were echoed by a number of other committee members, including Michael B. Enzi (R-WY) and Jim Bunning (R-KY), who stated their views that if forced to address terrorism coverage, the private market would be better able to handle the risk than any government program. Sherrod Brown (D-OH) also offered tepid support, at best, for extending TRIA, arguing that TRIA had been designed to fill a gap when the economy lost its footing after 9/11 and that the economy has since regained its footing.
Following the Members' opening remarks, the Committee heard testimony from insurance industry representatives representing insurers, reinsurers, brokers, and consumers, each of whom voiced their unanimous support for an extension of TRIA.1
Notably not at the witness table was any representative of the Bush Administration. While Treasury Secretary Paulson is thought to favor TRIA -- as he did when he was in the private sector -- the Administration has been cool to the idea of an extension, especially one that expands coverage beyond nuclear, biological and chemical risks. If the Administration decides to actively oppose a broad extension, it appears from the hearing that they will have a core group of Senators willing to carry their position. In a Senate that requires 60 votes to get anything passed, this could spell more trouble down stream than last week's placid hearing would lead one to believe. As we go to press, Allan Hubbard, Head of the Administration's National Economic Council is being quoted as saying that the Administration is willing to work with Congress on a TRIA extension with higher co-pays and deductibles, but that its goal is a phase out of the program.
The vast majority of witnesses also agreed that if extended, TRIA should provide greater coverage for NBCR risks and should further eliminate the distinction between coverage for domestic and foreign terrorist risks. In fact, only one witness, Mr. Travis Plunkett, testifying on behalf of the Consumer Federation of America, argued that TRIA should be "significantly scaled back and reconfigured" because "insurers no longer need TRIA subsidies to provide adequate terrorism capacity in most cases."
The Committee also heard testimony advocating the inclusion of group life insurance within an extended TRIA. Mr. Michael Peninger, testifying on behalf of the American Council of Life Insurers, and Mr. Michael McRaith, testifying on behalf of the National Association of Insurance Commissioners, both testified that any TRIA extension should include group life insurance because many insurers face potential insolvency in the event of a terrorist attack targeting an insured company's office or factory space. As a practical matter, group life is unlikely to be added to the law, as Congress has deliberately excluded it twice in the past and there does not seem to be any current congressional impulse to revisit that decision.
Some witnesses also expressed support for greater risk sharing that would reduce the burden of terrorism risk insurance upon so-called "high-risk" areas. Janno Lieber, speaking on behalf of Silverstein Properties, explained that there is a significant capacity shortfall for terrorism coverage in high-risk areas and for high-risk projects -- such as the World Trade Center site. Tom Minkler, speaking on behalf of the Independent Insurance Agents and Brokers of America, relied upon the prior testimony of Wiley Rein LLP partner Larry Mirel given in Mr. Mirel's former capacity as DC Insurance Commissioner. Mr. Minkler adopted Mr. Mirel's prior testimony, stating that "businesses in New York City, Washington, and other prominent 'target' areas pay very high premiums for terrorism coverage -- even with the existence of the federal program -- yet they are not the true targets of terrorists. Terrorists, as [Mr. Mirel] noted, want to attack America, and an attack on any particular town or city is actually an attack on our nation as a whole." Thus, as echoed by Mr. Minkler, "it is both appropriate and fair for policymakers to identify solutions that truly help protect America's national economy and identity through a wide spreading of this distinctive risk."
Finally, in addition to Mr. Plunkett, who advocated that insurers pay a premium for the federal backstop, some of the witnesses expressed support for some fee sharing or pooling scheme. Mr. McRaith advocated a modification of the tax code permitting "insurers to set aside catastrophic reserves on a tax-deferred basis" as one method of encouraging a private market solution. Mr. Coppola, speaking on behalf of the Coalition to Insure Against Terrorism, advocated the creation of "pre-event surcharges," on the order of 1% of premiums collected on TRIA-covered lines. This surcharge would be in addition to post-event recoupment provisions and would, according to Mr. Coppola, create a greater capacity to pay for and insure terrorist risks. As surcharges are taxes by another name, it would require a major philosophical shift by the Committee to adopt them. The current law provides for post event surcharges, but explicitly excludes any pre-event payments which opponents argue would just go to finance government debt.