FROM THE OFFICE OF PUBLIC AFFAIRS

March 3, 2005
JS-2292

Remarks of
Acting Assistant Secretary for Financial Institutions Greg Zerzan
before the Networks Financial Institute’s Regulatory
Reform Summit
Washington, D.C.

Thank you for inviting me to participate in the Networks Financial Institute's (NFI's) Second Annual Regulatory Reform Summit. The NFI Summit is an important forum for dialogue about the many issues facing the financial services industry in the 21st century.

Today, I would like to focus my remarks on the Terrorism Risk Insurance Act, also known as "TRIA." The Act plays a role in a key priority for the Administration -- winning the war on terror. This war is being waged on many fronts and in many ways. The attacks of September 11 were designed to strike at America's core strengths, one of which is our economy. And while our intelligence, military, homeland security, and local communities deal with offensive and defensive strategies, we must continue to strengthen our systems in order to withstand and minimize any disruptions to our businesses, markets, and economy, should another attack occur.

In the aftermath of September 11, the important role that insurance plays in our economy became very clear.

Before September 11, 2001, losses from terrorism were generally covered in commercial property and casualty insurance policies. A general exception to this was coverage for losses resulting from nuclear, biological, and chemical (commonly referred to as "NBC") reaction, release, and/or contamination, however caused. Most policies were written so as to cover all risks of loss unless specifically excluded from the policy. Generally, underwriters did not perceive terrorism – foreign or domestic – as a significant risk despite the occurrences of the 1993 attack on the World Trade Center and the 1995 bombing of the federal building in Oklahoma City, nor did they perceive the extent of losses that could occur from a single event. Accordingly, terrorism was not separately priced. Like so many others, the insurance industry simply had not anticipated a catastrophic terrorist attack in the United States.

After September 11, the market significantly changed. As a result of the losses stemming from the attacks, reinsurers by and large stopped offering reinsurance coverage for property/casualty terrorism risks, or offered it at costs that were generally considered prohibitive. Not being able to reinsure the terrorism risks covered in their direct policies to consumers, property and casualty insurers responded by writing specific terrorism exclusions in their policies where allowed by state regulators, thereby leaving many U.S. businesses exposed and uninsured. The insurers withdrawal led to a slow down in construction projects, increased business costs for the insurance that was available, and generally impeded businesses' ability to finance new job-creating economic activity in the midst of the economic downturn caused in part by the September 11 attacks.

In addition, because the laws in some states required insurers to cover terrorism losses, those insurers who had not collected premiums for the risk or could not obtain reinsurance suddenly faced the possibility of insolvency in the event of another large terrorism-related loss.

The market also faced the consequences that usually result anytime a catastrophe occurs, be it terrorism, hurricanes, or otherwise -- the suspension of renewals until risks and underwriting practices can be reassessed; and increasing premiums for all property and casualty coverage as insurers try to replenish their diminished surpluses.

It was against this backdrop that Congress and President Bush acted by passing the Terrorism Risk Insurance Act.

To address market disruptions and ensure the continued widespread availability and affordability of commercial property and casualty terrorism coverage, TRIA nullified the existing terrorism exclusions being used by insurers. In return, TRIA established a temporary federal program of shared public and private compensation for insured commercial property and casualty losses resulting from acts of terrorism.

TRIA in effect placed the federal government in the commercial property and casualty terrorism risk reinsurance business for three years (through December 31, 2005). TRIA provides a federal "back stop" for terrorism reinsurance at no up-front cost, covering up to an annual aggregate limit of $100 billion, subject to individual insurer and industry-wide retentions. It also requires direct insurers to offer (or "make available") terrorism coverage to policyholders on the same terms and conditions (but not price) applicable to the other insured losses covered by the policy. Thus, if a policy covered nuclear, biological or chemical losses due to non-terrorism causes, it would also have to cover such losses if caused by terrorism. TRIA does not require insurance companies to pay premiums but provides authority for Treasury to recoup its federal payments via surcharges on policyholders. Certain recoupment is mandatory, based on insurance marketplace aggregate annual retention amounts specified in the law. In other circumstances, TRIA authorizes discretionary recoupment, ensuring that in the event the program is utilized, there is a mechanism to allow for the potential recovery of the taxpayers' contributions.

It is also worth noting that TRIA preserved state insurance regulation and consumer protections.

TRIA also contains important provisions relating to the management of litigation arising from a certified act of terrorism. The law creates an exclusive federal cause of action for property damage, personal injury, or death caused by an attack. This sole and exclusive federal cause of action, pre-empts all other actions under state law. This little-talked about part of TRIA is actually one of its most significant aspects; by turning all potential claims into a single federal cause of action, as well as consolidating cases in the federal courts, the Act creates a model for judicial economy and the principle of putting victims' well being ahead of administrative or legal costs, such as unreasonable attorneys' fees. Additionally, under TRIA's litigation management provisions, punitive damages will not be shared by the federal government. These provisions offer a guide on how potential claims in a wide variety of different contexts can be resolved in a just and economical manner.

Promptly after TRIA was signed into law, Treasury issued a number of interim guidance notices to assist the insurance industry in complying with the immediately-effective requirements of the Act. The interim guidance notices were directly followed by the issuance of formal regulations to implement TRIA. Treasury also created and staffed a separate Terrorism Risk Insurance Program office. Treasury has since:

• finalized all of the regulations necessary for the submission and payment of potential claims under TRIA;
• contracted a claims management contractor and an auditor to assist with the processing and verification of potential claims; and
• established a Web-based claims facility for the submission and payment of claims.

By most indications TRIA has been successful in achieving the fundamental goal of enhancing the availability and affordability of commercial property and casualty terrorism risk insurance, particularly for economic development purposes.

Now that we are entering the final months of the program created under TRIA, it is logical to ask what happens next. The law directs that Treasury conduct a study assessing the effectiveness of the program and the likely capacity of the industry to offer insurance for terrorism risk after the program ends, as well as the availability and affordability of such insurance for various policyholders.

Treasury has sent out surveys to help us obtain the information needed to complete our study. The last survey wave was sent out just recently. Under the law, Treasury is required to report our results to Congress by June 30. Our goal is to have the study ready at the earliest date practicable, while ensuring that we have given the necessary rigor and scrutiny that this important matter deserves.

There is no question that very serious policy questions are raised by TRIA's expiration. As a general matter, there is widespread consensus across the federal government favoring the efficiency of markets. At the same time, it should be acknowledged that insurance markets are not entirely free -- a host of state regulations, varying from one jurisdiction to the next, place a variety of controls and responsibilities on insurers. In the terror context, the variety of state regulation must be contrasted with the potentially nationwide distribution of risk, the exact concentrations of which are difficult to fully determine.

No matter how these questions are ultimately answered, there should be no doubt that TRIA has played a useful role in stabilizing markets and providing for the management of the threat of terrorism related loss. Because of the importance of this element of the war on terror, insurers and insureds alike should know that this Administration is fully considering all of the possible options in order to make sure that this front is properly covered.

It has been a pleasure speaking with you today, and I thank you for allowing me to touch upon this important topic.