Senate Report 110-215 - TERRORISM RISK INSURANCE PROGRAM REAUTHORIZATION ACT OF 2007

[Senate Report 110-215]
[From the U.S. Government Publishing Office]

Calendar No. 461
110th Congress Report
SENATE
1st Session 110-215

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TERRORISM RISK INSURANCE PROGRAM REAUTHORIZATION ACT OF 2007

_______

November 1, 2007.--Ordered to be printed

_______

Mr. Dodd, from the Committee on Banking, Housing and Urban Affairs,
submitted the following

R E P O R T

[To accompany S. 2285]

The Committee on Banking, Housing, and Urban Affairs, which
considered an original bill to reauthorize the Federal
terrorism risk insurance program, and for other purposes,
having considered the same, reports favorably thereon and
recommends that the bill do pass.

INTRODUCTION

On October 17, 2007, the Senate Committee on Banking,
Housing, and Urban Affairs considered the ``Terrorism Risk
Insurance Program Reauthorization Act of 2007,'' a bill to
reauthorize the Terrorism Risk Insurance Act through December
31, 2014 and to make various enhancements to the Terrorism Risk
Insurance Program. The Committee unanimously accepted a
managers' amendment offered by Chairman Dodd and Senator
Shelby. The Committee then voted 20-1 to report the bill to the
full Senate for consideration. Senators voting in favor of the
motion to report the bill were: Dodd, Johnson, Reed, Schumer,
Bayh, Carper, Menendez, Akaka, Brown, Casey, Tester, Shelby,
Bennett, Enzi, Hagel, Bunning, Crapo, Sununu, Dole, and
Martinez. Senator Allard voted against the motion.

PURPOSE OF THE LEGISLATION

The purpose of the ``Terrorism Risk Insurance Program
Reauthorization Act of 2007'' is to reauthorize the Terrorism
Risk Insurance Program.

HEARINGS

The Banking Committee has held a number of hearings on
terrorism insurance since the attacks of September 11, 2001.
110th Congress. The Banking Committee held a hearing
entitled ``Examining the Terrorism Risk Insurance Program'' on
February 28, 2007. The following witnesses testified: Mr.
Charles Clarke, Vice Chairman, The Travelers Companies, Inc.,
on behalf of the American Insurance Association; Mr. Thomas
Minkler, President, Clark-Mortenson Agency, Inc., on behalf of
the Independent Insurance Agents & Brokers of America; Mr. Mike
Peninger, President and CEO, Assurant Employee Benefits, Inc.,
on behalf of the American Council of Life Insurers; Mr. Jaime
Veghte, Chief Executive Officer, XL Reinsurance America, Inc.,
on behalf of the Reinsurance Association of America; Mr. Don
Bailey, Chief Executive Officer, Willis North America, Inc., on
behalf of the Council of Insurance Agents & Brokers; Mr.
Michael McRaith, Director, Illinois State Division of
Insurance, on behalf of the National Association of Insurance
Commissioners; Mr. Arthur Coppola, President and CEO, The
Macerich Company, on behalf of the Coalition to Insure Against
Terrorism; Mr. Travis Plunkett, Legislative Director, Consumer
Federation of America; and Mr. Janno Lieber, Senior Vice
President, World Trade Center Properties.
109th Congress. On April 14, 2005, the Banking Committee
held a hearing entitled ``Oversight of the Terrorism Risk
Insurance Program.'' The following witnesses testified: Dr.
Douglas Holtz-Eakin, Director, Congressional Budget Office;
Honorable Howard Mills, Superintendent, New York State
Department of Insurance; Mr. Ernst Csiszar, President and Chief
Executive Officer, Property Casualty Insurers Association of
America; Mr. J. Robert Hunter, Director of Insurance, Consumer
Federation of America; Mr. Brian Duperreault, Chairman, ACE
Limited; Mr. Franklin Nutter, President, Reinsurance
Association of America; and Mr. Robert J. Lowe, Chairman of the
Board and CEO, Lowe Enterprises. On July 14, 2005, the
Committee held a hearing entitled ``The Treasury Department's
Report to Congress Regarding the Terrorism Risk Insurance Act
of 2002'' at which the Honorable John W. Snow, Secretary,
United States Treasury Department and the Honorable Ben S.
Bernanke, Chairman, Council of Economic Advisers, testified.
108th Congress. On May 18, 2004, the Banking Committee held
a hearing on ``Oversight of the Terrorism Risk Insurance
Program.'' The Committee heard testimony from: The Honorable
Brian Roseboro, Under Secretary for Domestic Finance,
Department of the Treasury; Mr. Richard Hillman, Director of
Financial Markets and Community Investment, U.S. General
Accounting Office; Mr. John Degnan, Vice Chairman, The Chubb
Corporation; Mr. J. Robert Hunter, Director of Insurance,
Consumer Federation of America; Mr. Christopher Nassetta,
President and CEO, Host Marriott Corporation; Mr. Jacques E.
Dubois, Chairman and CEO, Swiss Re America Holding Corporation;
and Ms. Donna Lee Williams, Commissioner, Delaware Department
of Insurance.
107th Congress. On October 24 and 25, 2001, the Banking
Committee held two hearings on terrorism insurance. At the
first hearing, the Committee heard testimony from: the
Honorable Bill Nelson, United States Senator (D-FL); the
Honorable Paul O'Neill, Secretary, United States Treasury
Department; the Honorable R. Glenn Hubbard, Chairman, Council
of Economic Advisers; Ms. Kathleen Sebelius, President,
National Association of Insurance Commissioners; Mr. Thomas
McCool, U.S. General Accounting Office; Mr. J. Robert Hunter,
Director of Insurance, Consumer Federation of America; and
Professor Kenneth Froot, Harvard University School of Business.
At the second hearing, the Committee heard testimony from: Mr.
Robert E. Vagley, President, American Insurance Association;
Mr. Ron Ferguson, CEO, General Re Corporation, representing the
Reinsurance Association of America; Mr. John T. Sinnott, CEO,
Marsh, Inc., representing the Council of Insurance Agents and
Brokers; Mr. Thomas J. Donahue, President and CEO, U.S. Chamber
of Commerce; Mr. L. M. Baker, Chairman, Wachovia Corporation,
representing the Financial Services Roundtable; and Mr. Thomas
A. Carr, President and CEO, CarrAmerica Realty Corporation,
representing the National Association of Real Estate Investment
Trusts.

BACKGROUND AND NEED FOR LEGISLATION

The ``Terrorism Risk Insurance Program Reauthorization Act
of 2007'' reauthorizes the Terrorism Risk Insurance Act (TRIA)
through December 31, 2014. TRIA was enacted in 2002 to respond
to the dislocation in the terrorism insurance market caused by
the attacks of September 11, 2001. Prior to the attacks,
terrorism insurance had been widely available and affordable,
as terrorism was perceived as a minimal risk. After the
attacks, as the insurance industry re-evaluated the risk
presented by terrorism, reinsurance for that risk virtually
disappeared, and as a result primary writers began to exclude
terrorism coverage from commercial property and casualty
policies. Since lenders and investors typically require
properties to have adequate insurance coverage, the inability
to acquire terrorism insurance threatened to disrupt many
commercial transactions, putting jobs at risk and potentially
adversely affecting the national economy. Less than six months
after the 9/11 attacks, the U.S. Government Accountability
Office found examples of ``large projects canceling or
experiencing delays * * * with a lack of terrorism coverage
being cited as a principal contributing factor.'' See
``Terrorism Insurance: Rising Uninsured Exposure to Attacks
Heightens Potential Economic Vulnerabilities'', GAO-02-472T,
February 27, 2002. The GAO concluded that if terrorism
insurance were not available, ``another terrorist attack
similar to that experienced on September 11th could have
significant economic effects on the marketplace and the public
at large.''
To address these adverse economic effects, TRIA (P.L. 107-
297) was enacted on November 26, 2002. The purpose of TRIA was
to establish a temporary Federal program to protect consumers
by addressing market disruptions, to ensure the continued
availability and affordability of terrorism insurance, and to
allow for a transitional period for the private markets to
stabilize, resume pricing of such insurance, and build capacity
to absorb any future losses. TRIA established a program within
the Department of the Treasury under which the Federal
government shares the risk of loss from future terrorist
attacks with the insurance industry. Insurers, through
individual company deductibles and co-pays along with an
industry-wide retention, would bear the initial cost of any
attack, with Federal assistance becoming available for the most
catastrophic losses. TRIA was originally set to expire on
December 31, 2005. The Terrorism Risk Insurance Extension Act
of 2005 (P.L. 109-144) extended TRIA, with some changes, for
two years. TRIA now expires on December 31, 2007.
The evidence demonstrates that TRIA has worked to stabilize
the terrorism insurance marketplace and to make such insurance
available and affordable once again. The President's Working
Group on Financial Markets (PWG) was directed in the TRIA
extension legislation to analyze the availability and
affordability of insurance for terrorism risk. In that study,
the PWG concluded that ``[t]he availability and affordability
of terrorism risk insurance has improved since the terrorist
attacks of September 11, 2001.'' Specifically, the PWG found
that ``[t]he take-up rate--or the percentage of companies
buying terrorism coverage--has reportedly increased from 27
percent in 2003 to 58 percent in 2005, while the cost of
coverage has generally fallen to roughly 3 to 5 percent of
total property insurance costs.'' Rising take-up rates and
falling prices prove that terrorism insurance has become more
widely available and more affordable since TRIA was enacted in
2002.
Presented with this evidence, the Committee believes that
another extension of TRIA is appropriate. While terrorism
insurance is generally available and affordable in the private
market today, the Committee heard testimony that the
elimination of TRIA at this time could result in a significant
retraction in the supply of terrorism insurance that could
possibly disrupt commercial activity and have an adverse impact
on American jobs and businesses. Witnesses at the Committee's
hearing on February 28, 2007 testified that the private
insurance industry alone cannot presently handle terrorism
risk, and that terrorism insurance would disappear or be
significantly diminished if TRIA were to expire. For example,
Thomas Minkler testified on behalf of the Independent Insurance
Agents and Brokers of America that ``the terrorism risk
insurance coverage currently available to the policyholders * *
* would not exist without TRIA * * * Federal legislation is
necessary to ensure that policyholders continue to have access
to such coverage.''
According to Charles Clarke, testifying for the American
Insurance Association, the current demand for private
reinsurance ``far outstrips'' supply. This assessment was
supported by Mr. Jaime Veghte, who testified on behalf of the
Reinsurance Association of America (RAA) that ``[r]einsurers
have been willing to put only limited capital at risk to manage
terror-related losses.'' The RAA estimates that only $6-$8
billion of reinsurance capacity is available in the United
States for terrorism risk. It is the Committee's hope that a
seven-year extension of TRIA will allow additional capacity to
develop in the private market to cover terrorism risk. A seven-
year extension will also provide more certainty to businesses,
lenders, and investors about the continued availability of
terrorism insurance when they seek to develop long-term plans.
In addition, the bill provides greater clarity regarding
TRIA's $100 billion annual cap and deletes TRIA's requirement
that the terrorist act triggering the TRIA program be committed
``on behalf of any foreign person or foreign interest,''
thereby bringing domestic terrorism within the scope of the
program. Charles Clarke, testifying on behalf of the American
Insurance Association at the February 28th hearing, told the
Committee that ``[e]xperience has shown that the distinction
between foreign and domestic terrorism is artificial,
impractical, and meaningless from an economic perspective.''
The Committee expects that the Treasury Department, in
consultation with the National Association of Insurance
Commissioners and other relevant parties, will ensure that
prompt guidance is available to all stakeholders to facilitate
an orderly incorporation of domestic acts of terrorism into
rating plans, premiums, and insurance contracts.
The bill requires on-going reporting by the President's
Working Group on Financial Markets, and mandates two studies by
the U.S. Government Accountability Office. One study will focus
on nuclear, biological, chemical, and radiological (NBCR)
terrorist events. Two recent studies, one by the GAO and one by
the President's Working Group on Financial Markets, found that
there is currently very little insurance available to cover the
risk of a NBCR attack, and virtually no likelihood that a
private market in this area will emerge in the near future.
This issue is of particular concern to state workers
compensation funds, which cannot exclude this coverage by law
and are by their nature geographically concentrated. While many
of the witnesses at the Committee's February 28th hearing
expressed concern about the lack of NBCR terrorism insurance,
serious questions remain about how best to address this issue.
The bill requires the GAO to examine the NBCR issue and to make
recommendations to Congress within one year of enactment on
ways to expand insurance availability in this area.
The other study responds to a concern expressed at the
Committee's February 28th hearing that there are specific high-
risk areas of the United States in which insurers' capacity to
write terrorism coverage is significantly limited. The bill
instructs the GAO to identify any specific markets which are
experiencing unique capacity constraints and to report back to
the Congress within 180 days of enactment with recommendations
on how to address those capacity constraints.
While the Committee believes that the TRIA program is
working well overall, the Committee believes that the Treasury
Department should respond expeditiously to requests for
determination of controlling influence under 31 CFR 50.8, as it
is essential for all insurers participating in the program to
have certainty about their obligations.

SECTION-BY-SECTION ANALYSIS

Section 1. Short title; table of contents

This section provides a short title and table of contents.

Section 2. Definition of act of terrorism

This section adds domestic terrorism (i.e. terrorism which
is not committed on behalf of a foreign person or a foreign
interest) to the Terrorism Risk Insurance Program.

Section 3. Reauthorization of the program

This section extends the Terrorism Risk Insurance Program
for seven years, through December 31, 2014.

Section 4. Annual liability cap

This section provides greater clarity regarding the $100
billion Program cap.
Section 4(a) clarifies the limits of insurer responsibility
under the Program and strikes a reference to future acts of
Congress.
Section 4(b) requires Treasury to notify Congress within 15
days of an act of terrorism if insured losses are expected to
exceed $100 billion and strikes a reference to future acts of
Congress.
Section 4(c) requires Treasury to submit a report and issue
regulations regarding the allocation of pro rata payments for
insured losses should such losses exceed $100 billion.
Section 4(d) requires insurers to disclose the existence of
the $100 billion cap to policyholders.

Section 5. Enhanced reports to Congress

Section 5(a) requires the GAO to study availability and
affordability of insurance for nuclear, biological, chemical,
and radiological terrorist events and report to Congress within
1 year with recommendations for expanding the availability and
affordability of such insurance.
Section 5(b) requires the GAO to determine whether there
are specific markets in the United States that are experiencing
unique capacity constraints on the amount of available
terrorism insurance and to report to Congress within 180 days
with recommendations for addressing any such constraints.
Section 5(c) continues the requirement for the President's
Working Group on Financial Markets to study the long-term
availability and affordability of terrorism insurance, with
reports required in 2010 and 2013.

CHANGES IN EXISTING LAW (CORDON RULE)

On October 17, 2007, the Committee unanimously approved a
motion by Chairman Dodd to waive the Cordon Rule. Thus, in the
opinion of the Committee, it is necessary to dispense with the
requirements of section 12 of Rule XXVI of the Standing Rules
of the Senate in order to expedite the business of the Senate.

REGULATORY IMPACT STATEMENT

In accordance with section 11(b) of rule XXVI of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill. The
bill requires insurers participating in the Terrorism Risk
Insurance Program to make coverage for domestic terrorism
available and to disclose the existence of the $100 billion
annual cap to their policyholders. According to industry
estimates, there are approximately 2051 insurers participating
in the Program. The inclusion of domestic terrorism and the
disclosure of the cap should have little immediate economic
impact on participating insurers, which will be able to collect
premiums for any additional risk they are assuming. The bill
should have little additional impact upon the privacy of
particular individuals.
The bill also requires the Treasury Department to issue a
rule regarding the allocation of payments for insured losses
when aggregate insured losses exceed the $100 billion annual
cap. The regulation issued by Treasury will contain its own
regulatory and paperwork estimate, as required by applicable
law. Because TRIA already requires Treasury to determine the
pro rata share of payments to be made by insurers in such
cases, the provision of this bill requiring Treasury to issue a
regulation on that topic is not a substantive change and does
not affect TRIA's impact on participating insurers.

COST OF LEGISLATION

Section 11(b) of rule XXVI of the Standing Rules of the
Senate, and Section 402 of the Congressional Budget Act of
1974, require that each Committee Report on a bill contain a
statement estimating the cost of the proposed legislation. The
Congressional Budget Office has provided the following cost
estimate and estimate of costs of private-sector mandates.
October 29, 2007.
Hon. Christopher J. Dodd,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Terrorism Risk
Insurance Revision and Extension Act of 2007.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Peter R. Orszag.
Enclosure.

S. 2285--Terrorism Risk Insurance Program Reauthorization Act of 2007

Summary: This legislation would extend the Terrorism Risk
Insurance Act (TRIA) for seven years--through calendar year
2014. The bill also would require insurers to make coverage
available to property and casualty policyholders for losses
resulting from domestic terrorism.
Enacted in 2002, TRIA requires insurance firms that sell
commercial property and casualty insurance to offer clients
insurance coverage for damages caused by foreign terrorist
attacks. Under TRIA, the federal government would help insurers
cover losses in the event of a terrorist attack under certain
conditions and would also impose assessments on the insurance
industry to recover all or a portion of the federal payments.
The program is set to expire at the end of calendar year 2007.
There is no reliable way to predict precisely how much
insured damage terrorists might cause, if any, in any specific
year. Rather, CBO's estimate of the cost of financial
assistance provided under the bill represents an expected value
of payments from the program--a weighted average that reflects
industry experts' opinions of various outcomes ranging from
zero damages up to very large damages resulting from possible
future terrorist attacks. The expected value can be thought of
as the amount of an insurance premium that would be necessary
to just offset the government's losses from providing this
insurance, although firms do not pay any premium for the
federal assistance offered by TRIA.
On this basis, CBO estimates that enacting the bill would
increase direct spending by $3.1 billion over the 2008-2012
period and by $6.6 billion over the 2008-2017 period. An
additional $1.1 billion would be spent after 2017.
Under the legislation, the Department of the Treasury would
be directed to recoup some or all of the costs of providing
financial assistance through taxes imposed on insurance firms
(surcharges). Over many years, CBO expects that an increase in
spending for financial assistance would be largely offset (on a
cash basis) by a corresponding increase in governmental
receipts (i.e., revenues) depending on the amount of insured
losses. We assume, however, that the Secretary of the Treasury
would not impose any surcharges until two years after federal
assistance is provided and that those amounts would be
collected over many years. Thus, CBO estimates that enacting
the recoupment provision in the bill would increase
governmental receipts by about $100 million over the 2008-2012
period and by $1.5 billion over the 2008-2017 period, net of
income and payroll tax offsets.
Considering both the direct spending and revenue impacts of
the bill, CBO estimates that enacting the bill would increase
budget deficits or decrease surpluses by $200 million in 2008,
$3.0 billion over the 2008-2012 period, and $5.1 billion over
the 2008-2017 period. Pursuant to section 203 of S. Con. Res.
21, the Concurrent Resolution on the Budget for fiscal year
2008, CBO estimates that enacting the bill would not result in
a deficit increase of more than $5 billion in any of the four
10-year periods following 2017.
Enacting the bill could affect potential future spending
for disaster relief, which is subject to appropriation, or
potential future changes in revenues resulting from tax
legislation that might be enacted in the aftermath of an
attack. Any potential savings from this effect would depend on
future discretionary spending decisions or future tax
legislation, and thus would not be available--for scorekeeping
purposes--to offset the estimated direct spending cost of
extending TRIA in this legislation.
The bill would extend and impose intergovernmental and
private-sector mandates as defined in the Unfunded Mandates
Reform Act (UMRA). CBO estimates that the aggregate costs of
complying with those mandates would not exceed the annual
thresholds established by UMRA ($66 million for
intergovernmental mandates and $131 million for private-sector
mandates in 2007, adjusted annually for inflation).
Estimated Cost to the Federal Government: The estimated
budgetary impact of the Terrorism Risk Insurance Program
Reauthorization Act of 2007 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credits).

ESTIMATED BUDGETARY IMPACT OF THE TERRORISM RISK INSURANCE PROGRAM REAUTHORIZATION ACT OF 2007
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By fiscal year, in billions of dollars--
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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008-2012 2008-2017
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CHANGES IN DIRECT SPENDING

Estimated Budget Authority.................................. 0.2 0.5 0.7 0.8 0.9 1.0 1.0 0.8 0.5 0.2 3.1 6.6
Estimated Outlays........................................... 0.2 0.5 0.7 0.8 0.9 1.0 1.0 0.8 0.5 0.2 3.1 6.6

CHANGES IN REVENUES

Estimated Revenues.......................................... 0 0 * * 0.1 0.1 0.2 0.3 0.4 0.4 0.1 1.5

NET IMPACT

Estimated Change in the Deficit or Surplus a................ -0.2 -0.5 -0.7 -0.8 -0.8 -0.9 -0.8 -0.5 -0.1 0.2 -3.0 -5.1
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aNegative numbers indicate an increase in the deficit or a decrease in the surplus.

Note: * = less than $50 million.

Basis of estimate: For this estimate, CBO assumes that the
legislation will be enacted before the end of calendar year
2007. We estimate that enacting the bill would increase direct
spending by $6.6 billion and would increase governmental
revenues by $1.5 billion over the 2008-2017 period. While this
estimate reflects CBO's best judgment on the basis of available
information, the cost of this federal program is a function of
inherently unpredictable future terrorist attacks. As such,
actual costs are likely to vary significantly from the
estimated amounts. Such costs could be either higher or lower
than the expected value estimates provided for each year.

Terrorism Risk Insurance Act under current law

Enacted in 2002 and reauthorized in 2005, the Terrorism
Risk Insurance Act provides financial assistance to commercial
property and casualty insurers for losses above certain
thresholds caused by terrorist attacks by individuals acting on
behalf of foreign interests. For such assistance to be
provided, the Secretary of the Treasury must certify that a
terrorist attack has occurred in the United States or other
specified locations. TRIA is currently set to expire on
December 31, 2007.
TRIA does not require commercial property and casualty
insurance policies to cover losses from terrorist attacks
committed by a domestic interest or those involving nuclear,
biological, chemical, or radioactive materials. If an insurer
and a policyholder choose to include losses from terrorist
attacks involving nuclear, biological, chemical, or
radiological (NBCR) materials in a policy, TRIA would cover a
portion of the losses resulting from those risks.
For the Secretary of the Treasury to certify a terrorist
attack, insured damages resulting from the attack must exceed
$5 million. Financial assistance becomes available to insurers
suffering losses from a certified attack once the industry's
aggregate insured losses from that attack exceed $100 million
(in 2007). Once that $100 million threshold is exceeded,
participating insurance companies that suffer losses are
responsible for paying claims up to a deductible amount based
on the premiums they collected for covered lines in the
calendar year preceding a certified attack. In 2007, the
deductible is 20 percent of such premiums.
After meeting their individual deductibles for damage
claims, insurers and the federal government would each pay a
portion of the loss above the deductible (the federal
government would pay 85 percent of insured losses in 2007;
individual insurers, 15 percent) up to total losses of $100
billion. The law does not address how losses above the $100
billion cap would be handled.
The Secretary of the Treasury is authorized to recover
payments made by the federal government through taxes in the
form of surcharges paid by the insurance industry and
purchasers of commercial property and casualty insurance. The
Secretary is required to recoup federal payments to the extent
that the total amount paid by the insurance industry, including
the deductible, is less than the industry ``retention amount''
specified in law, which represents the total liability of the
property and casualty insurance industry in the event of a
certified attack. In 2007, that amount is $27.5 billion.

Modifications to TRIA under the bill

The legislation would extend TRIA for seven years, through
December 31, 2014. The bill also would eliminate the
distinction between foreign and domestic terrorist attacks.
TRIA would now cover attacks by either foreign or domestic
interests.
As under current law, an insurer suffering losses as a
result of an attack would pay claims up to a specified
deductible. The bill would maintain the same deductible limits
as in current law, 20 percent of the premiums collected by each
property and casualty insurer in the calendar year preceding an
attack.
Likewise, the bill would continue the payment-sharing
process that exists under current law. Insurers and the federal
government would each pay a portion of the loss over the
deductible. The federal government's portion would remain 85
percent of insured losses up to the $100 billion limit for each
year of the seven-year extension of the program.

Direct spending

By extending financial assistance to certain commercial
insurers for future acts of terrorism against insured private
property, enacting the bill would expose the federal government
to potentially large liabilities for seven more years (2008
through 2014). For any particular year, the amount of insured
damage caused by terrorists could range from zero to many
billions of dollars. CBO's estimate of the cost of this program
reflects how much, on average, the government could be expected
to pay to insurers and recover from the industry over the 2008-
2017 period.
The following sections describe our method for estimating
the expected value of financial assistance under the bill and
explain how we convert that cost to annual estimates of
spending.
Estimating the Expected Cost of Federal Assistance. For
this estimate, CBO discussed the concepts involved in
estimating insured losses with industry actuaries and reviewed
models used by firms to set premiums for the terrorism
component of property and casualty insurance and group life
insurance that they offer. State insurance regulators generally
require such premiums to be grounded in a widely accepted model
of expected losses from covered events. After the terrorist
attacks on September 11, 2001, the insurance industry began
efforts to set premiums for insurance coverage for terrorist
events using such models.
Although estimating losses associated with terrorist events
is difficult because of the lack of meaningful historical data,
the insurance industry has experience setting premiums for
catastrophic events--namely, natural disasters. Setting
premiums for hurricanes and earthquakes, for example, involves
determining areas that could sustain damage, the value of the
losses that could result from various types of events with
different levels of severity, and the frequency of such events.
Similarly, estimating premiums for losses resulting from
terrorist attacks involves judgments regarding potential
targets and the frequency of such attacks. Because there is a
very limited history of terrorist attacks in the United States,
many of the parameters needed by the insurance industry to set
premiums are based on expert opinion regarding terrorist
activities and capabilities rather than on historical data.
Estimating potential insured losses. Based on discussions
with insurers and information provided by the insurance
industry, CBO estimates that the expected or average annual
loss subject to TRIA coverage under the bill would be about
$2.3 billion (in 2007 dollars). This estimate incorporates
industry expectations of the probabilities of terrorist
attacks, encompassing the possibility of attacks that result in
enormous loss of life and property damage, as well as a
significant likelihood that no such attacks would occur in any
given year. This estimate also reflects our expectation that
some portion of losses from terrorism would not be covered by
TRIA because some policyholders would choose not to purchase
insurance coverage for terrorism risks.
Our estimate of expected annual losses covered by TRIA
under the bill includes around $150 million for the inclusion
of coverage for domestic terrorism.
The estimate includes about $800 million in expected annual
losses resulting from terrorist attacks involving NBCR
materials. Under current law, insurers are not required to
offer this coverage, although if an insurer and a policyholder
voluntarily agree to include this coverage in a policy, TRIA
would cover some of those losses. While the bill would not
require insurance policies to include coverage for losses
resulting from attacks using NBCR materials, information
provided by the industry indicates that a small amount of
coverage is currently in place for such losses. Thus, under the
bill, the government's exposure to losses resulting from
terrorist attacks involving NBCR materials would likewise be
small as compared with losses resulting from attacks using
conventional materials, except in the workers' compensation
insurance line, where no exclusions are allowed.
CBO's estimate assumes that, in most years, losses from
terrorist attacks covered by TRIA would cost significantly less
than $2.3 billion. We expect that there is a significant chance
that no terrorist attacks that would be covered by TRIA would
occur in a given year. Since enactment of TRIA, no covered
events have occurred; it is unclear whether no such attacks
were planned or attempted, or whether some were prevented by
law enforcement and other security measures. Although the risk
of a terrorist attack with many lives lost and substantial
property damage still remains, based on industry models, CBO
assumes for this estimate that attacks causing losses similar
in scale to those sustained on September 11, 2001, in New York
City are likely to occur very rarely.\1\
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\1\Industry losses on September 11, 2001, are estimated to be about
$36 billion (in 2006 dollars), including about $30 billion in losses in
New York City that would have qualified for coverage under TRIA had the
law been in effect on that date.
---------------------------------------------------------------------------
Determining the federal share of insured losses. Federal
payments under TRIA would be lower than expected losses from
terrorist attacks because TRIA places limits on eligibility for
federal assistance and requires that insurers pay a share of
covered losses. CBO took account of those requirements to
calculate federal spending for any given amount of insured
losses from future terrorist attacks.
First, because federal payments under TRIA would be capped
at $100 billion per event, we excluded costs for potential
losses above that level. The bill would maintain the minimum
losses set under current law that would trigger federal
payments under TRIA at $100 million.
Second, we accounted for the share of losses that would be
paid by affected insurers in the event of a covered attack.
Before the federal government would make any payments under
TRIA, an insurer incurring losses would first pay claims up to
a deductible amount. The bill would maintain the current-law
deductible of 20 percent of certain premiums collected by
property and casualty insurers in the calendar year preceding
an attack.
The total amount of claims paid by insurers below the
deductible amount could range from a few million dollars to
several billion dollars, depending on how many insurers provide
coverage for losses resulting from a particular terrorist
attack. In addition, the value of each individual insurer's
deductibles would vary greatly across the industry. For this
estimate, CBO considered a range of possibilities regarding the
share of federal assistance, based on industry data regarding
estimated insurers' deductibles under the bill. The range
encompasses the possibility that an attack would affect only a
few insurers with relatively small deductibles or several
insurers with relatively large deductibles. CBO expects that
insured losses below a few hundred million dollars would most
likely be covered by insurers' deductibles, and therefore,
would not result in a significant increase in federal spending.
Finally, once affected insurers have paid claims up to
their deductibles, the federal government would share a portion
of the losses above the deductible with each insurer.
Under this legislation, the federal government's share of
claims above the deductible would be 85 percent of total losses
up to the $100 billion limit covered by the program.
After taking into account maximum limits, deductibles, and
the insurers' share of payments above the deductible, CBO
estimates that enacting the bill would increase direct spending
by about $7.7 billion over the full life of the program before
taking into account any revenues from surcharges on
policyholders. Actual spending would be spread out over many
years, and most such costs would eventually be recovered
through surcharges imposed on policyholders.
Taken another way, if the Secretary of the Treasury were
authorized to collect premiums for the program, CBO estimates
that the Secretary would need to charge, on average, about $1.1
billion per year to fully compensate the government for the
projected average annual losses due to terrorist attacks that
would be covered under the bill. The bill, however, would not
authorize any charges prior to a certified attack. Similarly,
the bill does not contain an explicit requirement for the
Secretary to recoup interest that would accrue on amounts
outstanding.
Timing of Federal Spending. To estimate federal spending
for this program on a cash basis, CBO used information from
insurance experts on historical rates of payment for property
and casualty claims following catastrophic events. Based on
such information, CBO estimates that outlays under the bill
would total about $3.1 billion over the 2008-2012 period, an
additional $3.5 billion over the 2013-2017 period, and about
$1.1 billion after 2017. In general, following a catastrophic
loss, it takes many years to complete insurance payments
because of disputes over the value of covered losses by
property and business owners. For this estimate, we assumed
that financial assistance to insurers would be paid over
several years, with most of the spending occurring within the
first five years following an insurable event.

Revenues

Enacting this legislation would affect federal receipts by
authorizing the Secretary of the Treasury to impose taxes in
the form of surcharges on policyholders to recover the amount
of federal payments made under the program, with certain
limitations. CBO estimates that this provision would increase
revenues by about $100 million over the 2008-2012 period and
$1.5 billion over the 2008-2017 period. Surcharges could
continue for many years beyond 2017.
Surcharges. If a terrorist attack were to require the
government to provide financial assistance, the bill would
require the Secretary of the Treasury to recoup some or all of
that cost through taxes paid by the insurance industry and
purchasers of commercial property and casualty and group life
insurance. The Secretary would be required to recover the
difference between the total amount paid by the insurance
industry for deductibles and the industry's share of payments
over the deductible and the industry retention amount (the
maximum aggregate loss to be paid by the insurance industry),
which would be set at $27.5 billion annually over the seven-
year term of TRIA coverage under the bill.
The Secretary would have discretion in determining whether
to recover the full amount of financial assistance provided
under the program. Should the Secretary determine that amounts
above the industry retention amount cannot be recovered, the
Congress would be notified of that determination and provided
with an analysis of the effect on taxpayers, the economy, and
the burdens on small- and medium-sized businesses. For this
estimate, CBO assumes that the Secretary would not seek to
recover financial assistance provided above the industry
retention amount and would not collect interest on outstanding
amounts.
Under TRIA, the recoupment of financial assistance would be
accomplished by assessing each insurer based on its portion of
aggregate property and casualty premiums. Surcharges would
apply to insurance sold following a terrorist attack that
necessitated federal assistance; each property and casualty
insurance company's surcharge would be limited to 3 percent of
its aggregate premiums. The bill would direct the Secretary to
impose surcharges for as long as necessary to recover the
financial assistance provided by the federal government (at
least up to the industry retention amount). Thus, the
government could collect surcharges for many years, depending
on the amount of financial assistance. CBO estimates that
surcharges resulting from a seven-year extension of TRIA would
total $6.6 billion--but that recovery would extend well past
2017.
Timing and Tax Offset. The bill would allow the Secretary
to reduce annual charges after considering the effect on
taxpayers, the economy, or burdens on small- and medium-sized
businesses. Therefore, if annual losses were very high, we
expect that the Secretary would limit annual collections by
spreading them over many years. CBO assumes that the Secretary
would not impose surcharges until two years after federal
assistance is provided and that it would take more than 10
years to recover the costs of any financial assistance provided
under the program. Thus, we estimate that surcharges would
total $2.0 billion over the next 10 years and that an
additional $4.6 billion would be collected after 2017.
Those gross collections would be partially offset by a loss
of receipts from income and payroll taxes. Consistent with
standard procedures for estimating the revenue impact of
indirect business taxes, CBO reduced the gross revenue impact
of the insurance surcharges by 25 percent to reflect offsetting
effects on income and payroll tax receipts. On balance, CBO
estimates that enacting the bill would increase revenues by a
total of $1.5 billion over the next 10 years and that an
additional $3.5 billion will be collected after 2017, net of
income and payroll tax offsets.

Spending subject to appropriation

Enacting the bill could affect potential future spending
for disaster relief, which is subject to appropriation, or
potential future changes in revenues. Historically, the federal
government has provided assistance to disaster victims after
large-scale events, generally in supplemental or regular
appropriation acts (and occasionally through tax benefits). In
the past, such assistance has often been provided to local
governments, individuals, and businesses suffering losses.
By providing insurance coverage against damage due to
terrorist attacks, the terrorism insurance program could
diminish the need for federal disaster payments in future
appropriation acts (as well as possible tax relief). Any
potential savings from this effect, however, would depend on
future discretionary spending decisions or future tax
legislation, under both current law and under the bill, and
thus would not be available--for scorekeeping purposes--to
offset the estimated direct spending cost of extending TRIA in
this legislation.
Estimated long-term deficit impact: After 2017, the
legislation would decrease future deficits by about $2.4
billion as the government recovers the financial assistance
provided under TRIA through the recoupment process provided in
the bill. Pursuant to section 203 of S. Con. Res. 21, the
Concurrent Resolution on the Budget for Fiscal Year 2008, CBO
estimates that enacting the bill would not result in a deficit
increase of more than $5 billion in any of the four 10- year
periods following 2017.
Intergovernmental and private-sector impact: The bill would
extend and expand mandates contained in the Terrorism Risk
Insurance Act. Those mandates would:
Require that certain insurers offer
terrorism insurance, including insurance for acts of
domestic terrorism;
Require that certain insurers and their
policyholders repay the federal government for the cost
of assistance (in the form of assessments and
surcharges); and
Preempt state laws regulating insurance.
CBO estimates that the aggregate costs of complying with
those mandates would not exceed the annual thresholds
established by UMRA ($66 million for intergovernmental mandates
and $131 million for private-sector mandates in 2007, adjusted
annually for inflation).

Requirement to offer insurance

Current law requires that through calendar year 2007,
certain insurance companies offer terrorism insurance as part
of a property and casualty insurance policy. The bill would
extend that requirement to offer terrorism insurance through
calendar year 2014. The bill would require insurers to make
coverage available to property and casualty insurance
policyholders for losses resulting from domestic terrorism.
According to industry representatives, the direct cost for
insurance companies to continue making terrorism insurance
available under property and casualty insurance policies would
be minimal. The bill would require only that firms offer
terrorism insurance, including insurance for acts of domestic
terrorism; they would set their own premium rates and
policyholders could choose whether or not to purchase such
insurance. Insurers who offer such terrorism insurance would
receive federal payments that would help finance claims
payments in the event of a certified attack that met deductible
requirements.

Repayment of assistance

The bill would require the Secretary to recoup the costs of
financial assistance provided to certain insurers through
assessments paid by the insurance industry and surcharges paid
by purchasers of commercial property and casualty insurance.
This requirement to repay the federal government for financial
assistance received--an exercise of the federal government's
sovereign power--would be both an intergovernmental and a
private-sector mandate under UMRA because both state and local
governments and private entities are providers and purchasers
of insurance.
Specifically, the bill would require commercial property
and casualty insurers, as well as self-insured risk pools, to
pay back through assessments the financial assistance provided
by the federal government. Taken individually, some insurers
might benefit from the financial assistance, while others might
face only the cost of the assessment. CBO cannot predict how
these costs and benefits would be distributed among private and
public insurers. However, for that group as a whole, the cost
of the assessment would be no greater than the financial
assistance received, so the net cost of this mandate would be
zero.
In addition, the bill would require purchasers of
commercial property and casualty insurance to repay, in the
form of a surcharge, federal assistance provided to certain
insurers. CBO estimates that the expected value of the
surcharges on policyholders would total about $200 million over
the next five years. The surcharge would be a mandate on both
private-sector purchasers and state and local governments (in
their capacity as purchasers of insurance). Some purchasers
would receive a direct benefit under the bill, while other
purchasers would not.

Preemption of State law

The bill also would preempt some state laws that regulate
insurance. Based on information from state insurance
regulators, CBO estimates that the cost to states of extending
those preemptions would be minimal.
Previous CBO estimate: On September 6, 2007, CBO
transmitted an estimate for H.R. 2761, the Terrorism Risk
Insurance Reauthorization and Extension Act of 2007, as ordered
reported by the House Committee on Financial Services on August
1, 2007. H.R. 2761 would extend TRIA for 15 years, require
insurers to offer coverage for losses resulting from terrorist
attacks using NBCR materials, and include group life insurance
to the lines of insurance covered under the program. CBO
estimates that enacting H.R. 2761 would increase direct
spending by $3.7 billion over the 2008-2012 period and $10.4
billion over the 2008-2017 period. Further, CBO estimates that
enacting H.R. 2761 would increase federal revenues by $100
million over the 2008-2012 period and $2.0 billion over the
2008-2017 period, net of income and payroll tax offsets.
Estimate prepared by: Federal Costs: Susan Willie; Impact
on State, Local, and Tribal Governments: Elizabeth Cove; Impact
on the Private Sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Assistant Director
for Budget Analysis.