FROM THE OFFICE OF PUBLIC AFFAIRS

Las Vegas, Nevada

Thank you for inviting me to speak with you today regarding the Terrorism Risk Insurance Program.  It is a great pleasure to be able to come to Las Vegas and discuss this important program with some of America’s leaders in the tourism and travel industry.

Those in the gaming industry are familiar with the principles of calculating odds, taking risks, and hedging against those risks.  I doubt there would still be a casino open in this town if it wasn’t possible to estimate, with an acceptable degree of proximate certainty, what the given losses and gains of the casino would be for any given time period.  But for the insurance industry, September 11th was akin to having every slot machine in the casino come up triple lemons.

As we know, the cowardly attacks by the terrorists on September 11th were a despicable act of murder unprecedented in their cruelty and scope.  As well as the loss of the lives of scores of heroic firefighters, police, and people who had simply gone to work expecting to put in another day at the office, 9-11 wreaked havoc on our economy and financial markets.  For the insurance industry, it was the day that separate catastrophic insurable events occurred almost simultaneously: four large passenger planes, both World Trade Center buildings and most of the surrounding real estate was destroyed.  Clearly this was a loss on a scale that was not anticipated, or even thinkable.

After 9-11 it was clear that insureds faced a new type of risk:  the potential for loss due to massive catastrophic terror.  The difficulty this presented was that, as a first of its kind risk, it was difficult to immediately quantify.  And being unable to quantify it, no insurance company could reasonably insure against it without obtaining reinsurance.  And reinsurers made it clear that if they were to provide terror coverage at all, it would be prohibitively expensive.

President Bush immediately recognized the chilling effect this placed on our economy.  Most of commercial America would be unable to find insurance against this new and profound threat.  Without insurance, American companies faced serious financing difficulties.  The cost of this lack of insurance had the potential to put a massive brake on the engine of the economy which was already sputtering because of the attacks.

The President and the Congress began to work on creating a Federal program to provide a backstop for terrorism risk insurance.  On November 26, 2002 President Bush signed into law the Terrorism Risk Insurance Act of 2002.  This act, known as TRIA, provides a temporary program of shared Federal and private coverage for commercial property and casualty losses resulting from acts of terror.  TRIA became effective immediately, and it pre-empted all existing policies and exclusions while mandating that policy holders be given access to terrorism risk coverage.

The first thing to remember about TRIA is that it is a temporary program.  It sunsets, or ceases to be law, on December 31, 2005.  Until that date, the program provides a government backstop for terrorism reinsurance. 

It is important that policyholders understand that the government’s backstop for terrorism reinsurance is not on a policy-by-policy basis, but rather it operates  through a private insurance company  deductible, with excess losses being shared with the Federal government.  If an insurance company suffers a loss resulting from an act of terrorism equal to its deductible, the Treasury will cover 90% of the losses beyond that threshold.  This is an important feature of the program, for it requires that an insurance company retain a portion of terror risk and thus ensures that such companies will exercise normal due diligence in their underwriting and risk allocation.  Additionally, throughout the life of the program an insurance company’s deductible increases so that the potential share of losses paid by the taxpayers decreases proportionally.  By increasing the amount of the deductible every year, the Federal government phases itself out of the reinsurance business while private companies develop their own market means of calculating and insuring against terror risk.  From the first year of the program, which is this year, the insurance company deductible increases from 7% of premiums, to 10%, and finally 15% in the program’s final year.

To further protect the taxpayers, the Program provides the Treasury with the authority to recoup Federal payments from policyholder payments paid to the insurers.  Finally, the government’s total liability under the program is limited to $100 billion.

As I stated a few moments ago, TRIA mandates that all insurers offer terror insurance as part of their property and casualty policies.  This coverage must be made available on terms and conditions that do not materially differ from the terms and conditions generally applicable to other types of insured losses.  This does not mean that the price of terror policies must be the same as for other types of property and casualty insurance, but rather that the type and amount of coverage cannot be significantly different.

Under TRIA, an act of terrorism is defined as an act committed on behalf of a foreign power which is violent or dangerous to life, property or infrastructure.  This means that the law does not apply to domestic terrorism, or to acts committed in the course of a war that has been declared by Congress.  Nor does it apply to acts of terrorism where the aggregate losses from the attack are less than $5 million.

The provision that requires that losses total $5 million before an event can be certified as an act of terrorism has caused some confusion among policyholders.  We have heard that some policyholders have looked at this provision and concluded that because they do not have $5 million in exposure they have little need for the coverage offered under TRIA.  In this regard I think that it is important that policyholders understand that the $5 million threshold is not on a policy-by-policy basis, but rather the threshold is related to aggregate property and casualty insurance losses associated with a particular act of terrorism.  For example, if $7 million in aggregate property and casualty insurance losses from a certified act of terrorism were distributed among 10 policyholders, those losses could contribute to an insurance companies ability to access the TRIA backstop, and in turn policyholders should derive some benefit from the TRIA backstop.

TRIA mandates that insurers clearly and conspicuously disclose the premium which they are charging for terror coverage, and the Federal share of losses under the program.  The program is limited to commercial property and casualty losses, and it provides specific procedures for processing claims in order to manage any potential litigation which might follow an act of terrorism.  The program requires the Treasury Department to conduct a study to determine whether the coverage should be applied to group life insurance policies as well as property and casualty policies.  The Secretary continues to review the comments we have received on this issue, and the Treasury is continuing its work on that study.

As with any new law, implementing TRIA requires a great deal of regulatory work.  Already the Treasury has issued interim guidance and regulations regarding various aspects of the proposal.  The regulations issued by Treasury are subject to the  normal notice and comment procedures, and the whole series interim guidance notices and regulations can be found on Treasury’s website - www.treasury.gov/trip.  In addition, we will shortly be completing certain aspects of the rulemaking process, such as issuing a final rule on the definitions and other requirements in the statute.  The infrastructure for processing claims under the program has also been created as a separate office within the Treasury, and that office continues to solidify the administrative application of the program.

The Treasury Department continues to monitor the effectiveness of the Terrorism Risk Insurance Program.  The key goal of the law is to make sure not only that terrorism insurance is available, but also to improve insurance companies’ ability to price such coverage, and in turn improve the affordability of such coverage for commercial entities.    This is ultimately the idea behind the Act.  By creating a Federal role in being the insurer of last resort for terror risk, TRIA aims to improve the availability of  terror coverage while the private marketplace can assess risk and create pricing models that reasonably accommodate their own risks.

And that is why TRIA is temporary.  The Federal government cannot and should not be in the business of attempting to do what market forces can do better.  Ultimately the insurance industry should have the opportunity to  provide terror coverage to all of its policyholders on the terms and conditions that the market and events require.  We will ultimately realize the success of this law when, on January 1, 2006, it no longer exists.

Having covered the basics of TRIA, I will now turn to a question I am often asked:  does my business need to purchase  terror insurance?  It is a question I cannot answer.  Each commercial entity must evaluate its own operations and sense of risk to determine whether terror insurance is right for that enterprise.

But the great success of TRIA is that, if the business determines it should purchase terror insurance, businesses will have the opportunity to purchase such coverage.

In some places there still exists some uncertainty about how TRIA works, but this is to be expected with any program of its kind.  Although it is still early in the implementation of the law, we have received initial data indicating that pricing is stabilizing in the terror insurance market.  The insurance industry, policyholders and the National Association of Insurance Commissioners have all played a crucial role in helping Treasury make TRIA work.  We are grateful for the support and input they have given, and we look forward to continuing to work with them throughout the duration of the program.  Likewise, leaders in Congress not only helped create the law, but continue to provide invaluable guidance and suggestions.  All of this support is certainly helpful in ensuring the program responds to the needs and desires of those who seek terror coverage.

Let me conclude on this note.  September 11th was a dark day for America.  But it was a turning point not only in that it awoke us to the new realization that there are many in the world who hate us and despise our way of life.  It was a turning point in that it inspired us to hold dear those ideals which are most a part of our country and our character:  freedom and the rule of law, the rights to speak and worship as we see fit.  It was these values which were attacked, and these values which we defend.

As President Bush has said, September 11 was not the beginning of a war against our ideals; it was the beginning of the end for those who oppose them.  Already the nations of Afghanistan and Iraq have been freed; those who sought our downfall found in the terrorists’ cowardly deeds their own downfall instead.

The War on Terror, the creation of the Homeland Security Agency, the Terrorism Risk Insurance Act and a host of other actions since 9-11 are only a part of America’s response to the terrible events of that day.  Like all of you, I look forward to the day when the thought of the need for terror insurance seems absurd. 

Thank you very much for inviting me to speak with you today, and I will be around after the program if I can answer any questions.