[House Report 107-300]
[From the U.S. Government Publishing Office]
107th Congress Rept. 107-300
HOUSE OF REPRESENTATIVES
1st Session Part 1
======================================================================
TERRORISM RISK PROTECTION ACT
_______
November 19, 2001.--Ordered to be printed
_______
Mr. Oxley, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
ADDITIONAL AND DISSENTING VIEWS
[To accompany H.R. 3210]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred the
bill (H.R. 3210) to ensure the continued financial capacity of
insurers to provide coverage for risks from terrorism, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
Purpose and Summary.............................................. 12
Background and Need for Legislation.............................. 12
Hearings......................................................... 15
Committee Consideration.......................................... 16
Committee Votes.................................................. 16
Committee Oversight Findings..................................... 22
Performance Goals and Objectives................................. 22
New Budget Authority, Entitlement Authority, and Tax Expenditures 22
Committee Cost Estimate.......................................... 22
Congressional Budget Office Estimate............................. 22
Federal Mandates Statement....................................... 29
Advisory Committee Statement..................................... 29
Constitutional Authority Statement............................... 30
Applicability to Legislative Branch.............................. 30
Section-by-Section Analysis of the Legislation................... 30
Changes in Existing Law Made by the Bill, as Reported............ 36
Additional and Dissenting Views.................................. 40
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Terrorism Risk
Protection Act''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title and table of contents.
Sec. 2. Congressional findings.
Sec. 3. Authority of Secretary of the Treasury.
Sec. 4. Submission of premium information to Secretary.
Sec. 5. Triggering determination and covered period.
Sec. 6. Federal cost-sharing for commercial insurers.
Sec. 7. Assessments.
Sec. 8. Terrorism loss repayment surcharge.
Sec. 9. Administration of assessments and surcharges.
Sec. 10. Application to self-insurance arrangements and offshore
insurers and reinsurers.
Sec. 11. Reserve for terrorism coverage under commercial lines of
business.
Sec. 12. State preemption.
Sec. 13. Consistent State guidelines for coverage for acts of
terrorism.
Sec. 14. Consultation with State insurance regulators and NAIC.
Sec. 15. Sovereign immunity protections.
Sec. 16. Study of potential effects of terrorism on life insurance
industry.
Sec. 17. Railroad insurance study.
Sec. 18. Study of reinsurance pool system for future acts of terrorism.
Sec. 19. Definitions.
Sec. 20. Extension of program.
Sec. 21. Regulations.
SEC. 2. CONGRESSIONAL FINDINGS.
The Congress finds that--
(1) the terrorist attacks on the World Trade Center and the
Pentagon of September 11, 2001, resulted in a large number of
deaths and injuries, the destruction and damage to buildings,
and interruption of business operations;
(2) the attacks have inflicted possibly the largest losses
ever incurred by insurers and reinsurers in a single day;
(3) while the insurance and reinsurance industries have
committed to pay the losses arising from the September 11
attacks, the resulting disruption has created widespread market
uncertainties with regard to the risk of losses arising from
possible future terrorist attacks;
(4) such uncertainty threatens the continued availability of
United States commercial property and casualty insurance for
terrorism risk at meaningful coverage levels;
(5) the unavailability of affordable commercial property and
casualty insurance for terrorist acts threatens the growth and
stability of the United States economy, including impeding the
ability of financial services providers to finance commercial
property acquisitions and new construction;
(6) in the past, the private insurance markets have shown a
remarkable resiliency in adapting to changed circumstances;
(7) given time, the private markets will diversify and
develop risk spreading mechanisms to increase capacity and
guard against possible future losses incurred by terrorist
attacks;
(8) it is necessary to create a temporary industry risk
sharing program to ensure the continued availability of
commercial property and casualty insurance and reinsurance for
terrorism-related risks;
(9) such action is necessary to limit immediate market
disruptions, encourage economic stabilization, and facilitate a
transition to a viable market for private terrorism risk
insurance; and
(10) in addition, it is necessary to repeal portions of the
tax law which discourage the insurance market from developing
the necessary reserves to handle possible future losses due to
acts of terrorism.
SEC. 3. AUTHORITY OF SECRETARY OF THE TREASURY.
The Secretary of the Treasury shall be responsible for carrying out a
program for financial assistance for commercial property and casualty
insurers, as provided in this Act.
SEC. 4. SUBMISSION OF PREMIUM INFORMATION TO SECRETARY.
To the extent such information is not otherwise available to the
Secretary, the Secretary may require each insurer to submit, to the
Secretary or to the NAIC, a statement specifying the net premium amount
of coverage written by such insurer for properties and persons in the
United States under each line of commercial property and casualty
insurance sold by such insurer during such periods as the Secretary may
provide.
SEC. 5. TRIGGERING DETERMINATION AND COVERED PERIOD.
(a) In General.--For purposes of this Act, a ``triggering
determination'' is a determination by the Secretary that the insured
losses resulting from the occurrence of an act of terrorism during the
covered period (as such term is defined in subsection (b)), or the
aggregate insured losses resulting from multiple occurrences of acts of
terrorism all occurring during the covered period, meet the
requirements under either of the following paragraphs:
(1) Industry-wide trigger.--Such industry-wide losses exceed
$1,000,000,000.
(2) Individual insurer trigger.--Such industry-wide losses
exceed $100,000,000 and some portion of such losses for any
single commercial insurer exceed--
(A) 10 percent of the capital surplus of such
commercial insurer (as such term is defined by the
Secretary); and
(B) 10 percent of the net commercial property and
casualty premiums written by such commercial insurer;
except that this paragraph shall not apply to any commercial
insurer that was not providing commercial property and casualty
insurance coverage prior to September 11, 2001.
(b) Covered Period.--For purposes of this Act, the ``covered period''
is the period beginning on the date of the enactment of this Act and
ending on January 1, 2003.
(c) Determinations Regarding Occurrences.--For purposes of subsection
(a), the Secretary shall have the sole authority, which may not be
delegated or designated to any other officer, employee, or position,
for determining whether--
(1) an occurrence was caused by an act of terrorism;
(2) insured losses from acts of terrorism were caused by one
or multiple occurrences; and
(3) an act of terrorism occurred during the covered period.
SEC. 6. FEDERAL COST-SHARING FOR COMMERCIAL INSURERS.
(a) In General.--Pursuant to a triggering determination, the
Secretary shall provide financial assistance to commercial insurers in
accordance with this section to cover insured losses resulting from
acts of terrorism, which shall be repaid in accordance with subsection
(e).
(b) Amount.--
(1) Industry-wide trigger.--Subject to subsection (c), with
respect to a triggering determination under section 5(a)(1),
financial assistance shall be made available under this section
to each commercial insurer in an amount equal to 90 percent of
the amount of the insured losses of the insurer as a result of
the triggering event involved.
(2) Individual insurer trigger.--Subject to subsection (c),
with respect to a triggering determination under section
5(a)(2), financial assistance shall be made available under
this section, to each commercial insurer incurring insured
losses as a result of the triggering event involved that exceed
the amounts under subparagraphs (A) and (B) of such section, in
an amount equal to the difference between--
(A) 90 percent of the amount of the insured losses of
the insurer as a result of such triggering event; and
(B) the amount under subparagraph (B) of section
5(a)(2).
(c) Aggregate Limitation.--The aggregate amount of financial
assistance provided pursuant to this section may not exceed
$100,000,000,000.
(d) Limitations.--The Secretary may establish such limitations as may
be necessary to ensure that payments under this section in connection
with a triggering determination are made only to commercial insurers
that are not in default of any obligation under section 7 to pay
assessments or under section 8 to collect surcharges.
(e) Repayment.--Financial assistance made available under this
section shall be repaid through assessments under section 7 collected
by the Secretary and surcharges remitted to the Secretary under section
8. Any such amounts collected or remitted shall be deposited into the
general fund of the Treasury.
(f) Emergency Designation.--Congress designates the amount of new
budget authority and outlays in all fiscal years resulting from this
section as an emergency requirement pursuant to section 252(e) of the
Balanced Budget and Emergency Deficit Control Act of 1985 (2 U.S.C.
901(e)). Such amount shall be available only to the extent that a
request, that includes designation of such amount as an emergency
requirement as defined in such Act, is transmitted by the President to
Congress.
SEC. 7. ASSESSMENTS.
(a) In General.--In the case of a triggering determination, each
commercial insurer shall be subject to assessments under this section
for the purpose of repaying financial assistance made available under
section 6 in connection with such determination.
(b) Aggregate Assessment.--Pursuant to a triggering determination,
the Secretary shall determine the aggregate amount to be assessed among
all commercial insurers, which shall be equal to the lesser of--
(1) $20,000,000,000; and
(2) the amount of financial assistance paid under section 6
in connection with the triggering determination.
(c) Allocation of Assessment.--
(1) In general.--The Secretary shall allocate the aggregate
assessment amount determined under subsection (b) among all
commercial insurers. The portion of the aggregate assessment
amount that is allocated as an assessment on each commercial
insurer shall be based on the percentage, written by that
insurer, of the aggregate written premium for all commercial
insurers, for the calendar year preceding the assessment.
(2) Payment requirement.--Upon notification by the Secretary
of an assessment under this section, each commercial insurer
shall be required to pay to the Secretary, in the manner
provided under section 9 by the Secretary, the amount equal to
the assessment on such commercial insurer (subject to the
limitation under paragraph (3)).
(3) Annual limitation on amount allocated to each commercial
insurer.--
(A) In general.--Of any assessments under this
section on a commercial insurer, the portion required
to be paid by any commercial insurer during a calendar
year shall not exceed the amount that is equal to 3
percent of the net written premium for such insurer for
the preceding calendar year.
(B) Multiple payments.--If any amounts required to be
repaid under this section for a calendar year are
limited by operation of subparagraph (A), the Secretary
shall provide that all such remaining amounts shall be
reallocated among all commercial insurers (in the
manner provided in paragraph (1)) over such immediately
succeeding calendar years, and repaid over such years,
as may be necessary to provide for full payment of such
remaining amounts, except that the limitation under
subparagraph (A) shall apply to the amounts paid in any
such successive calendar years.
(4) Administrative flexibility.--
(A) Timing of assessments.--Assessments under this
section in connection with a triggering determination
shall be made, to the extent that the Secretary
considers practicable and appropriate, at the beginning
of the calendar year immediately following the
triggering determination.
(B) Estimates and corrections.--If the Secretary
makes an assessment at a time other than provided under
subparagraph (A), the Secretary may--
(i) require commercial insurers to estimate
their net premium written for the year in which
the assessment is made; and
(ii) make a subsequent refund or require
additional payments to correct such estimation
at the end of the calendar year.
(5) Deferral of contributions.--The Secretary may defer the
payment of part or all of the assessment required under
paragraph (2) to be paid by a commercial insurer, but only to
the extent that the Secretary determines that such deferral is
necessary to avoid the likely insolvency of the commercial
insurer.
SEC. 8. TERRORISM LOSS REPAYMENT SURCHARGE.
(a) Determination of Imposition and Collection.--
(1) In general.--If, pursuant to a triggering determination,
the Secretary determines that the aggregate amount of financial
assistance provided pursuant to section 6 exceeds
$20,000,000,000, the Secretary shall consider and weigh the
factors under paragraph (2) to determine the extent to which a
surcharge under this section should be established.
(2) Factors.--The factors under this paragraph are--
(A) the ultimate costs to taxpayers if a surcharge
under this section is not established;
(B) the economic conditions in the commercial
marketplace;
(C) the affordability of commercial insurance for
small- and medium-sized business; and
(D) such other factors as the Secretary considers
appropriate.
(3) Policyholder premium.--The amount established by the
Secretary as a surcharge under this section shall be
established and imposed as a policyholder premium surcharge on
commercial property and casualty insurance written after such
determination, for the purpose of repaying financial assistance
made available under section 6 in connection with such
triggering determination.
(4) Collection.--The Secretary shall provide for commercial
insurers to collect surcharge amounts established under this
section and remit such amounts collected to the Secretary.
(b) Amount and Duration.--Subject to subsection (c), the surcharge
under this section shall be established in such amount, and shall apply
to commercial property and casualty insurance written during such
period, as the Secretary determines is necessary to recover the
aggregate amount of financial assistance provided under section 6 to
cover insured losses resulting from the triggering event that exceed
$20,000,000,000.
(c) Percentage Limitation.--The surcharge under this section
applicable to commercial property and casualty insurance coverage may
not exceed, on an annual basis, the amount equal to 3 percent of the
premium charged for such coverage.
(d) Other Terms.--The surcharge under this section shall--
(1) be based on a percentage of the amount of commercial
property and casualty insurance coverage that a policy
provides; and
(2) be imposed with respect to all commercial property and
casualty insurance coverage written during the period referred
to in subsection (b).
(e) Exclusions.--For purposes of this section, commercial property
and casualty insurance does not include any reinsurance provided to
primary insurance companies.
SEC. 9. ADMINISTRATION OF ASSESSMENTS AND SURCHARGES.
(a) Manner and Method.--
(1) In general.--The Secretary shall provide for the manner
and method of carrying out assessments under section 7 and
surcharges under section 8, including the timing and procedures
of making assessments and surcharges, notifying commercial
insurers of assessments or surcharge requirements, collecting
payments from and surcharges through commercial insurers, and
refunding of any excess amounts paid or crediting such amounts
against future assessments.
(2) Effect of assessments and surcharges on urban commercial
centers.--In determining the method and manner of imposing
assessments under section 7 and surcharges under section 8,
including the amount of such assessments and surcharges, the
Secretary shall take into consideration the economic impact of
any such assessments and surcharges on commercial centers of
urban areas, including the effect on commercial rents and
commercial insurance premiums, particularly rents and premiums
charged to small businesses, and the availability of lease
space and commercial insurance within urban areas.
(b) Timing of Coverages and Assessments.--The Secretary may adjust
the timing of coverages and assessments provided under this Act to
provide for equivalent application of the provisions of this Act to
commercial insurers and policies that are not based on a calendar year.
(c) Adjustment.--The Secretary may adjust the assessments charged
under section 7 or the percentage imposed under the surcharge under
section 8 at any time, as the Secretary considers appropriate to
protect the national interest, which may include avoiding unreasonable
economic disruption or excessive market instability and avoiding undue
burdens on small businesses.
SEC. 10. APPLICATION TO SELF-INSURANCE ARRANGEMENTS AND OFFSHORE
INSURERS AND REINSURERS.
(a) Self-Insurance Arrangements.--The Secretary may, in consultation
with the NAIC, apply the provisions of this Act, as appropriate, to
self-insurance arrangements by municipalities and other entities, but
only if such application is determined before the occurrence of a
triggering event and all of the provisions of this Act are applied
uniformly to such entities.
(b) Offshore Insurers and Reinsurers.--The Secretary shall ensure
that the provisions of this Act are applied as appropriate to any
offshore or non-admitted entities that provide commercial property and
casualty insurance.
SEC. 11. RESERVE FOR TERRORISM COVERAGE UNDER COMMERCIAL LINES OF
BUSINESS.
(a) In General.--Section 832 of the Internal Revenue Code of 1986
(relating to insurance company taxable income) is amended by adding at
the end the following new subsection:
``(h) Terrorism Reserve for Commercial Lines of Business.--In the
case of an insurance company subject to tax under section 831(a)--
``(1) Inclusion for decreases, and deduction for increases,
in balance of reserve.--
``(A) Decrease treated as gross income.--If for any
taxable year--
``(i) the opening balance for the terrorism
commercial business reserve exceeds
``(ii) the closing balance for such reserve,
such excess shall be included in gross income under
subsection (b)(1)(F).
``(B) Increase treated as deduction.--If for any
taxable year--
``(i) the closing balance for the terrorism
commercial business reserve exceeds
``(ii) the opening balance for such reserve,
such excess shall be taken into account as a deduction
under subsection (c)(14).
``(2) Terrorism commercial business reserve.--For purposes of
this section, the term `terrorism commercial business reserve'
means amounts held in a segregated account (or other separately
identifiable arrangement or joint pooled account) which are set
aside exclusively--
``(A) to mature or liquidate, either by payment or
reinsurance, future unaccrued claims arising from
declared terrorism losses under commercial lines of
business, and
``(B) if so directed by the insurance commissioner of
any State, to pay other claims as part of a plan of the
company to avoid insolvency.
``(3) Limitation on amount of reserve.--
``(A) In general.--If the closing balance of any
terrorism commercial business reserve for any taxable
year exceeds such reserve's limit for such year--
``(i) such excess shall be included in gross
income under subsection (b)(1)(F) for the
following taxable year, and
``(ii) if such excess is distributed during
such following taxable year, the opening
balance of such reserve for such following
taxable year shall be determined without regard
to such excess.
``(B) Reserve limit.--
``(i) In general.--For purposes of
subparagraph (A), a reserve's limit for any
taxable year is such reserve's allocable share
of the national limit for the calendar year in
which such taxable year begins.
``(ii) National limit.--The national limit is
$40,000,000,000 ($13,340,000,000 for 2002).
``(iii) Allocation of limit.--
``(I) In general.--A reserve's
allocable share of the national limit
for any calendar year is the amount
which bears the same ratio to the
national limit for such year as the
company's net premium for insurance for
commercial lines of business which does
not exclude coverage for acts of
terrorism bears to the aggregate
written premium for insurance (without
regard to terrorism coverage) for all
companies for commercial lines of
business.
``(II) Determination of net written
premiums.--Except as otherwise provided
in this section, all determinations
under this subsection shall be made on
the basis of the amounts required to be
set forth on the annual statement
approved by the National Association of
Insurance Commissioners.
``(III) Aggregate written premiums
and net premiums.--For purposes of this
clause, the terms `aggregate written
premium' and `net premium' have the
meanings given such terms in section 19
of the Terrorism Risk Protection Act.
``(iv) Inflation adjustment of limit.--In the
case of any calendar year after 2002, the
$40,000,000,000 amount in clause (ii) shall be
increased by an amount equal to the product
of--
``(I) such dollar amount, and
``(II) the cost-of-living adjustment
determined under subsection (f)(3) for
such calendar year, determined by
substituting `calendar year 2001' for
`calendar year 1992' in subparagraph
(B) thereof.
If any amount after adjustment under the
preceding sentence is not a multiple of
$1,000,000, such amount shall be rounded to the
nearest multiple of $1,000,000.
``(4) Declared terrorism losses.--For purposes of this
subsection--
``(A) In general.--The term `declared terrorism
losses' means, with respect to a taxable year--
``(i) the amount of net losses and loss
adjustment expenses incurred in commercial
lines of business that are attributable to 1 or
more declared terrorism events, plus
``(ii) any nonrecoverable assessments,
surcharges, or other liabilities that are borne
by the company and are attributable to such
events.
``(B) Declared terrorism event.--The term `declared
terrorism event' means any event declared by the
Secretary of the Treasury to be an act of terrorism
against the United States for purposes of this section.
``(5) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out this subsection,
and shall prescribe such regulations after consultation with
the National Association of Insurance Commissioners.''
(b) Conforming Amendments.--
(1) Paragraph (1) of section 832(b) of such Code is amended
by striking ``and'' at the end of subparagraph (D), by striking
the period at the end of subparagraph (E) and inserting in lieu
thereof ``, and'', and by adding at the end the following new
subparagraph:
``(F) each net decrease in reserves which is required
by paragraph (1) or (3) of subsection (h) to be taken
into account under this subparagraph.''
(2) Subsection (c) of section 832 of such Code is amended by
striking ``and'' at the end of paragraph (12), by striking the
period at the end of paragraph (13) and inserting in lieu
thereof ``; and'', and by adding at the end the following new
paragraph:
``(14) each net increase in reserves which is required by
subsection (h)(1) to be taken into account under this
paragraph.''
(c) Effective Date.--The amendments made by this subsection shall
apply to taxable years beginning after December 31, 2001.
SEC. 12. STATE PREEMPTION.
(a) Covered Perils.--A commercial insurer shall be considered to have
complied with any State law that requires or regulates the provision of
insurance coverage for acts of terrorism if the insurer provides
coverage in accordance with the definitions regarding acts of terrorism
under this Act or under any regulations issued by the Secretary.
(b) Rate Laws.--If any provision of any State law prevents an insurer
from increasing its premium rates in an amount necessary to recover any
assessments pursuant to section 7, such provision is preempted only to
the extent necessary to provide for such insurer to recover such
losses.
(c) File and Use.--With respect only to commercial property and
casualty insurance covering acts of terrorism, any provision of State
law that requires, as a condition precedent to the effectiveness of
rates or policies for such insurance that is made available by an
insurer licensed to transact such business in the State, any action
(including prior approval by the State insurance regulator for such
State) other than filing of such rates and policies and related
information with such State insurance regulator is preempted to the
extent such law requires such additional actions for such insurance
coverage. This subsection shall not be considered to preempt a
provision of State law solely because the law provides that rates and
policies for such insurance coverage are, upon such filing, subject to
subsequent review and action, which may include actions to disapprove
or discontinue use of such rates or policies, by the State insurance
regulator.
SEC. 13. CONSISTENT STATE GUIDELINES FOR COVERAGE FOR ACTS OF
TERRORISM.
(a) Sense of Congress Regarding Covered Perils.--It is the sense of
the Congress that--
(1) the NAIC, in consultation with the Secretary, should
develop appropriate definitions for acts of terrorism and
appropriate standards for making determinations regarding
occurrences of acts of terrorism;
(2) each State should adopt the definitions and standards
developed by the NAIC for purposes of regulating insurance
coverage made available in that State;
(3) in consulting with the NAIC, the Secretary should
advocate and promote the development of definitions and
standards that are appropriate for purposes of this Act; and
(4) after consultation with the NAIC, the Secretary should
adopt definitions for acts of terrorism and standards for
determinations that are appropriate for this Act.
(b) Insurance Reserve Guidelines.--
(1) Sense of congress regarding adoption by states.--It is
the sense of the Congress that--
(A) the NAIC should develop appropriate guidelines
for commercial insurers and pools regarding maintenance
of reserves against the risks of acts of terrorism; and
(B) each State should adopt such guidelines for
purposes of regulating commercial insurers doing
business in that State.
(2) Consideration of adoption of national guidelines.--Upon
the expiration of the 6-month period beginning on the date of
the enactment of this Act, the Secretary shall make a
determination of whether the guidelines referred to in
paragraph (1) have, by such time, been developed and adopted by
nearly all States in a uniform manner. If the Secretary
determines that such guidelines have not been so developed and
adopted, the Secretary shall consider adopting, and may adopt,
such guidelines on a national basis in a manner that would
supercede any State law regarding maintenance of reserves
against such risks.
(c) Guidelines Regarding Disclosure of Pricing and Terms of
Coverage.--
(1) Sense of congress.--It is the sense of the Congress that
the States should require, by laws or regulations governing the
provision of commercial property and casualty insurance that
includes coverage for acts of terrorism, that the price of any
such terrorism coverage, including the costs of any terrorism
related assessments or surcharges under this Act, be separately
disclosed.
(2) Adoption of national guidelines.--If the Secretary
determines that the States have not enacted laws or adopted
regulations adequately providing for the disclosures described
in paragraph (1) within a reasonable period of time after the
date of the enactment of this Act, the Secretary shall, after
consultation with the NAIC, adopt guidelines on a national
basis requiring such disclosure in a manner that supercedes any
State law regarding such disclosure.
SEC. 14. CONSULTATION WITH STATE INSURANCE REGULATORS AND NAIC.
(a) In General.--The Secretary shall consult with the State insurance
regulators and the NAIC in carrying out this Act.
(b) Financial Assistance, Assessments, and Surcharges.--The Secretary
may take such actions, including entering into such agreements and
providing such technical and organizational assistance to insurers and
State insurance regulators, as may be necessary to provide for the
distribution of financial assistance under section 6 and the collection
of assessments under section 7 and surcharges under section 8.
(c) Investigating and Auditing Claims.--The Secretary may, in
consultation with the State insurance regulators and the NAIC,
investigate and audit claims of insured losses by commercial insurers.
SEC. 15. SOVEREIGN IMMUNITY PROTECTIONS.
(a) Federal Cause of Action for Damages From Terrorist Acts Resulting
in Triggering Determination.--
(1) In general.--If a triggering determination occurs
requiring an assessment under section 7 or a surcharge under
section 8, there shall exist a Federal cause of action, which
shall be the exclusive remedy, for damages claimed pursuant to,
or in connection with, any acts of terrorism that caused the
insured losses resulting in such triggering determination.
(2) Substantive law.--The substantive law for decision in any
such action shall be derived from the law, including choice of
law principles, of the State in which such act of terrorism
occurred, unless such law is inconsistent with or preempted by
Federal law.
(3) Jurisdiction.--Pursuant to each triggering determination,
the Judicial Panel on Multidistrict Litigation shall designate
one or more district courts of the United States which shall
have original and exclusive jurisdiction over all actions
brought pursuant to this subsection that arise out of the
triggering event involved.
(4) Offset for relief payments.--Any recovery by a plaintiff
in an action under this subsection shall be offset by the
amount, if any, received by the plaintiff from the United
States pursuant to any emergency or disaster relief program, or
from any other collateral source, for compensation of losses
related to the act of terrorism involved.
(b) Damages in Actions Regarding Insurance Claims.--In an action
brought under this section for damages or coverage claimed by or
against an insured pursuant to, or in connection with, any commercial
property and casualty insurance providing coverage for acts of
terrorism that resulted in a triggering determination:
(1) Prohibition of punitive damages.--No punitive damages
intended to punish or deter may be awarded.
(2) Noneconomic damages.--
(A) In general.--Each defendant in such an action
shall be liable only for the amount of noneconomic
damages allocated to the defendant in direct proportion
to the percentage of responsibility of the defendant
for the harm to the claimant.
(B) Definition.--For purposes of subparagraph (A),
the term ``noneconomic damages'' means damages for
losses for physical and emotional pain, suffering,
inconvenience, physical impairment, mental anguish,
disfigurement, loss of enjoyment of life, loss of
society and companionship, loss of consortium, hedonic
damages, injury to reputation, and any other
nonpecuniary losses.
Nothing in this subsection may be construed to limit an action by an
injured party for damages other than a claim for commercial property
and casualty insurance resulting from an act of terrorism causing a
triggering determination.
(c) Right of Subrogation.--The United States shall have the right of
subrogation with respect to any claim paid by the United States under
this Act.
(d) Protective Orders.--The United States or the Secretary may seek
protective orders or assert privileges ordinarily available to the
United States to protect against the disclosure of classified
information, including the invocation of the military and State secrets
privilege.
(e) Exclusion.--Nothing in this section shall apply to, or in any way
limit, the liability of any person who--
(1) attempts to commit, knowingly participates in, knowingly
and intentionally aids and abets, or commits, any act of
terrorism or any criminal act related to or resulting from an
act of terrorism that caused the insured losses resulting in
the triggering determination; or
(2) knowingly participates in a conspiracy to commit any act
of terrorism or any criminal act resulting from or related to
an act of terrorism that caused the insured losses resulting in
the triggering determination.
(f) Satisfaction of Judgments From Seized Assets of Terrorists.--All
assets of terrorists or terrorist organizations seized or frozen by the
United States in accordance with law shall be liable for satisfaction
of judgments rendered for acts of terrorism, in proportions determined
by the courts.
SEC. 16. STUDY OF POTENTIAL EFFECTS OF TERRORISM ON LIFE INSURANCE
INDUSTRY.
(a) Establishment.--Not later than 30 days after the date of
enactment of this Act, the President shall establish a commission (in
this section referred to as the ``Commission'') to study and report on
the potential effects of an act or acts of terrorism on the life
insurance industry in the United States and the markets served by such
industry.
(b) Membership and Operations.--
(1) Appointment.--The Commission shall consist of 7 members,
as follows:
(A) The Secretary of the Treasury or the designee of
the Secretary.
(B) The Chairman of the Board of Governors of the
Federal Reserve System or the designee of the Chairman.
(C) The Assistant to the President for Homeland
Security.
(D) 4 members appointed by the President, who shall
be--
(i) a representative of direct underwriters
of life insurance within the United States;
(ii) a representative of reinsurers of life
insurance within the United States;
(iii) an officer of the NAIC; and
(iv) a representative of insurance agents for
life underwriters.
(2) Operations.--The chairperson of the Commission shall
determine the manner in which the Commission shall operate,
including funding, staffing, and coordination with other
governmental entities.
(c) Study.--The Commission shall conduct a study of the life
insurance industry in the United States, which shall identify and make
recommendations regarding--
(1) possible actions to encourage, facilitate, and sustain
provision by the life insurance industry in the United States
of coverage for losses due to death or disability resulting
from an act or acts of terrorism, including in the face of
threats of such acts; and
(2) possible actions or mechanisms to sustain or supplement
the ability of the life insurance industry in the United States
to cover losses due to death or disability resulting from an
act or acts of terrorism in the event that--
(A) such acts significantly affect mortality
experience of the population of the United States over
any period of time;
(B) such losses jeopardize the capital and surplus of
the life insurance industry in the United States as a
whole; or
(C) other consequences from such acts occur, as
determined by the Commission, that may significantly
affect the ability of the life insurance industry in
the United States to independently cover such losses.
(d) Recommendations.--The Commission may make a recommendation
pursuant to subsection (c) only upon the concurrence of a majority of
the members of the Commission.
(e) Report.--Not later than 120 days after the date of enactment of
this Act, the Commission shall submit to the House of Representatives
and the Senate a report describing the results of the study and any
recommendations developed under subsection (c).
(f) Termination.--The Commission shall terminate 60 days after
submission of the report as provided for in subsection (e).
SEC. 17. RAILROAD INSURANCE STUDY.
The Secretary of the Treasury shall conduct a study to determine how
the Federal Government can address a possible crisis in the
availability and affordability of railroad insurance by making such
insurance for acts of terrorism available on commercially reasonable
terms. Not later than 120 days after the date of the enactment of this
Act the Secretary shall submit to the Congress a report regarding the
results and conclusions of the study.
SEC. 18. STUDY OF REINSURANCE POOL SYSTEM FOR FUTURE ACTS OF TERRORISM.
(a) Study.--The Secretary of the Treasury, the Board of Governors of
the Federal Reserve System, and the Comptroller General of the United
States shall jointly conduct a study on--
(1) the advisability and effectiveness of establishing a
reinsurance pool system relating to future acts of terrorism to
replace the Program provided for under this Act; and
(2) the potential effects of the amendments made by section
11 of this Act on the availability of terrorism insurance
coverage.
(b) Consultation.--In conducting the study under subsection (a), the
Secretary of the Treasury, the Board of Governors of the Federal
Reserve System, and the Comptroller General shall consult with (1)
academic experts, (2) the United Nations Secretariat for Trade and
Development, (3) representatives from the property and casualty
insurance industry, (4) representatives from the reinsurance industry,
(5) the NAIC, and (6) such consumer organizations as the Secretary
considers appropriate.
(c) Report.--Not later than 6 months after the date of the enactment
of this Act, the Secretary, the Board of Governors of the Federal
Reserve System, and the Comptroller General shall jointly submit a
report to the Congress on the results of the study under subsection
(a).
SEC. 19. DEFINITIONS.
For purposes of this Act, the following definitions shall apply:
(1) Act of terrorism.--
(A) In general.--The term ``act of terrorism'' means
any act that the Secretary determines meets the
requirements under subparagraph (B), as such
requirements are further defined and specified by the
Secretary in consultation with the NAIC.
(B) Requirements.--An act meets the requirements of
this subparagraph if the act--
(i) is unlawful;
(ii) causes harm to a person, property, or
entity, in the United States, or in the case of
a domestic United States air carrier or a
United States flag vessel, in or outside the
United States;
(iii) is committed by a person or group of
persons or associations who are recognized,
either before or after such act, by the
Department of State or the Secretary as a
terrorist group or have conspired with such a
group or the group's agents or surrogates;
(iv) has as its purpose to overthrow or
destabilize the government of any country or to
influence the policy or affect the conduct of
the government of the United States by
coercion; and
(v) is not considered an act of war.
(2) Affiliate.--The term ``affiliate'' means, with respect to
an insurer, any company that controls, is controlled by, or is
under common control with the insurer.
(3) Aggregate written premium.--The term ``aggregate written
premium'' means, with respect to a year, the aggregate premium
amount of all commercial property and casualty insurance
coverage written during such year for persons or properties in
the United States under all lines of commercial property and
casualty insurance.
(4) Commercial insurer.--The term ``commercial insurer''
means any corporation, association, society, order, firm,
company, mutual, partnership, individual, aggregation of
individuals, or any other legal entity that provides commercial
property and casualty insurance. Such term includes any
affiliates of a commercial insurer.
(5) Commercial property and casualty insurance.--
(A) In general.--The term ``commercial property and
casualty insurance'' means insurance or reinsurance, or
retrocessional reinsurance, for persons or properties
in the United States against--
(i) loss of or damage to property;
(ii) loss of income or extra expense incurred
because of loss of or damage to property;
(iii) third party liability claims caused by
negligence or imposed by statute or contract,
including workers compensation; or
(iv) loss resulting from debt or default of
another.
(B) Exclusions.--Such term does not include--
(i) insurance for homeowners, tenants,
private passenger nonfleet automobiles, mobile
homes, or other insurance for personal, family,
or household needs;
(ii) insurance for professional liability,
including medical malpractice, errors and
omissions, or directors' and officers'
liability; or
(iii) health or life insurance.
(6) Control.--A company has control over another company if--
(A) the company directly or indirectly or acting
through one or more other persons owns, controls, or
has power to vote 25 percent or more of any class of
voting securities of the other company;
(B) the company controls in any manner the election
of a majority of the directors or trustees of the other
company; or
(C) the Secretary determines, after notice and
opportunity for hearing, that the company directly or
indirectly exercises a controlling influence over the
management or policies of the other company.
(7) Covered period.--The term ``covered period'' has the
meaning given such term in section 5(b).
(8) Industry-wide losses.--The term ``industry-wide losses''
means the aggregate insured losses sustained by all insurers,
from coverage written for persons or properties in the United
States under all lines of commercial property and casualty
insurance.
(9) Insured loss.--The term ``insured loss'' means any loss
in the United States covered by commercial property and
casualty insurance.
(10) NAIC.--The term ``NAIC'' means the National Association
of Insurance Commissioners.
(11) Net premium.--The term ``net premium'' means, with
respect a commercial insurer and a year, the aggregate premium
amount collected by such commercial insurer for all commercial
property and casualty insurance coverage written during such
year for persons or properties in the United States under all
lines of commercial property and casualty insurance by such
commercial insurer, less any premium paid by such commercial
insurer to other commercial insurers to insure or reinsure
those risks.
(12) Secretary.--The term ``Secretary'' means the Secretary
of the Treasury.
(13) State.--The term ``State'' means the States of the
United States, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands,
Guam, the Virgin Islands, American Samoa, and any other
territory or possession of the United States.
(14) State insurance regulator.--The term ``State insurance
regulator'' means, with respect to a State, the principal
insurance regulatory authority of the State.
(15) Triggering determination.--The term ``triggering
determination'' has the meaning given such term in section
5(a).
(16) Triggering event.--The term ``triggering event'' means,
with respect to a triggering determination, the occurrence of
an act of terrorism, or the occurrence of such acts, that
caused the insured losses resulting in such triggering
determination.
(17) United states.--The term ``United States'' means,
collectively, the States (as such term is defined in this
section).
SEC. 20. EXTENSION OF PROGRAM.
(a) Authority.--If the Secretary determines that action under this
section is necessary to ensure the adequate availability in the United
States of commercial property and casualty insurance coverage for acts
of terrorism, the Secretary may, subject to subsection (c), provide
that the provisions of this Act shall continue to apply with respect to
calendar year 2003. If the Secretary extends such applicability to
2003, the Secretary may, in addition, extend such applicability to
calendar year 2004.
(b) Covered Period.--If the Secretary exercises the authority under
subsection (a), notwithstanding section 5(b) and 19(7), each of the
calendar years to which the Secretary extends the applicability of this
Act shall be considered to be a covered period for purposes of this
Act.
(c) Report.--The Secretary may exercise the authority under
subsection (a) to extend the applicability of this Act to 2003 or 2004
only if the Secretary submits a report to the Congress providing notice
of and setting forth the reasons for such extension for such specific
year.
SEC. 21. REGULATIONS.
The Secretary shall issue any regulations necessary to carry out this
Act.
Purpose and Summary
H.R. 3210, The Terrorism Risk Protection Act of 2001, will
create a temporary industry risk spreading program to ensure
the continued availability of commercial property and casualty
insurance and reinsurance for terrorism-related risks to limit
immediate market disruptions, encourage economic stabilization,
and facilitate a transition to a viable market for private
terrorism risk insurance.
Modeled in part on existing State insurance programs for
solvency guarantee funds and catastrophic disaster pools, when
the Secretary of the Treasury determines that losses from one
or more acts of terrorism result in insurance claims industry
wide of over $1 billion and up to $20 billion during the
coverage period of the Act, the Treasury will pay 90 percent of
the claims (with 10 percent of losses retained by the insurers)
on the first dollar of the coverage. The Secretary of the
Treasury must thereafter assess all commercial property and
casualty insurers to recoup the costs of the Treasury payments.
If losses in the coverage period are less than $1 billion
industry wide, the bill provides company specific trigger
levels for cost sharing with a per company deductible to
protect smaller insurance companies. If losses exceed $20
billion industry-wide, the Treasury will pay 90 percent of all
claims up to financial assistance of $100 billion over the
covered period. The legislation gives the Secretary the power
to recoup these payments through surcharges on commercial
property and casualty policy premiums upon a weighing of
economic conditions and other factors. These provisions expire
at the end of 2002, although the Secretary may extend the
program through 2004.
Further, the legislation establishes a Federal cause of
action which is the exclusive remedy for actions brought under
this legislation. Additionally, actions may only be brought in
certain courts and additional protections are provided to limit
the obligations of the United States only to actual damages in
the case of a terrorist incident that results in a triggering
determination.
The legislation also amends portions of the tax law which
discourage the insurance market from developing the necessary
reserves to handle possible future losses due to acts of
terrorism. Finally, the bill includes 3 studies on the effects
of terrorism on various sectors of the insurance industry.
Background and Need for Legislation
The terrorist attacks of September 11, 2001, resulted in a
tragic number of deaths and injuries, destruction and damage to
buildings, and the interruption of business operations. In
addition to the incalculable loss of human resources, the
attacks inflicted possibly the largest losses ever incurred by
insurers and reinsurers from a single set of events, with
estimates of losses currently ranging from $25-60 billion.
For the most part, these losses are being borne by the
commercial property and casualty insurance industry. Commercial
property and casualty insurance covers a wide range of risk
exposure for businesses, including without limitation: damage
to property, third party liability, workers compensation, and
business interruption. The policies written for commercial
property and casualty insurance only pay claims for ``covered
perils,'' meaning there are only certain causes of loss for
which the insurer will reimburse the business owner.
Traditionally, acts of war have been excluded as covered
perils, while acts of terrorism have been included as part of
the comprehensive commercial property and casualty insurance
coverage.
More broadly speaking, property and casualty insurance is a
mechanism by which economies respond efficiently to risks in
the environment. Insurance allows businesses to reduce large,
relatively incalculable risks (in terms of dollars and timing)
to a set of smaller, known premium payments. Insurers examine
the risks of individual businesses and use actuarial methods to
assess these risks in light of like risks of other businesses
and the historical frequency and severity of loss to determine
premiums.
In order to meet regulatory capital requirements and
further spread risk so that they can continue to write
coverage, primaryinsurance companies buy reinsurance, i.e.
insurance for insurance companies. In 2000, the entire property and
casualty insurance industry ceded over 26 percent of its written
premium to reinsurers.
The events of September 11, 2001 have caused great
uncertainty for insurance underwriters. The commercial property
and casualty insurance companies have little to no experience
in underwriting for the type or severity of terrorist attacks
experienced. In particular, the ongoing uncertainty in the
current United States war against terrorism significantly
impairs the ability of underwriters to forecast either the
likely frequency or magnitude of future attacks.
Commercial property and casualty insurance is usually
written on a one or two year basis, with approximately 70
percent of reinsurance contracts up for renewal on January 1,
2002. Unable to forecast and account for losses due to
terrorist attacks, commercial property and casualty insurers
and reinsurers have indicated to brokers and insureds that they
plan either to exclude terrorism coverage entirely or offer
only very limited coverage at very high costs. They simply
cannot insure against infinite risk with finite capital.
The potential unavailability of terrorism risk coverage for
businesses comes at precisely the time of greatest demand for
the insurance. While some businesses might choose to go without
terrorism risk insurance in this environment, many businesses,
large and small, do not have this choice. Insurance coverage is
almost universally a requirement of any commercial lending
contract. Lenders will simply not provide financing for new or
existing construction without certainty that the properties and
businesses that they are funding have adequate insurance to
protect the lenders' investment. Thus, the lack of available
insurance for terrorism risk has adverse consequences that
would spread throughout the entire economy and stifle its
growth.
There is a high probability that the economy as a whole
would suffer tremendously without meaningful and affordable
terrorism coverage. Accordingly, the Committee believes that
Congress must create the temporary program established by this
legislation to provide a bridge between today and the time when
the private market has developed the mechanisms to provide
terrorism risk coverage and reinsurance at reasonable cost and
sufficient levels. The insurance industry in the past has
demonstrated a remarkable resiliency in adapting to changing
circumstances and, given time, will diversify and spread risks
in such a way that they will be able to underwrite affordable
terrorist risk insurance at a profit. Until that time comes,
however, the Federal government can assist the industry by
providing liquidity and creating a short term industry risk
spreading program.
While there is a clear need to act to create this bridge,
it is essential that it is done while providing the utmost
protection for taxpayers. While the insurance industry might be
facing an underwriting conundrum, it is healthy and well
capitalized. Accordingly, there is no need for any government
assistance prior to a significant loss of industry capital or
individual company capital due to a terrorist attack.
Additionally, this legislation does not create an unnecessary
preoccurrence Federal bureaucracy to administer a program prior
to a triggering determination by the Secretary. To prevent a
moral hazard, the commercial property and casualty insurance
industry must share in the losses paid by any program offering
temporary assistance. Funds paid by the Federal government
under any program must be repaid by the insurance industry over
time as economic circumstances permit, and the beneficiaries of
the insurance product, i.e. the commercial insurers and
insureds, not the taxpayer, should bear the ultimate financial
costs.
The Committee also responded to requests by the State
insurance commissioners to improve the current tax policy
governing long term reserving for terrorism risk, to help the
industry improve its capacity to provide terrorism coverage in
the future. Specifically, the National Association of Insurance
Commissioners (NAIC) stated in its governing principles for
Federal terrorism insurance legislation that ``tax law changes
should be encouraged to avoid penalties on and encourage the
accumulation of reserves for the portion of terrorism losses
insurable in the private marketplace.'' Furthermore, at a
hearing before the Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises on October 24, 2001, Scott
Harrington, Professor of Insurance and Finance, Moore School of
Business, University of South Carolina, testified that allowing
insurers and reinsurers to accumulate some amount of capital
reserves on a tax-deferred basis would expand private sector
capacity to insure potentially large losses from terrorism. Tax
deferred reserving and a temporary system of ex post
assessments to help private insurers spread the risk of loss
from terrorist attacks comprised Professor Harrington's two-
pronged approach to mitigate the inherent problems of funding
potentially large losses from terrorism.
The fact that most reinsurance capacity is offshore is due
in no small part to the fact that the United States Tax Code
prevents insurers from reserving funds for more than one year
without paying taxes on those funds as income unless they are
used to pay claims. Manyforeign jurisdictions permit insurance
companies to set aside long term reserves without tax penalties for
discrete catastrophic purposes. Removing this prohibition in the tax
code to allow insurers to reserve funds solely for terrorism risk (and
to avoid insolvency) with stringent restrictions and caps would allow
the United States insurance industry to build up and pool with other
insurers private reserves to respond to large terrorism losses without
any Federal involvement or taxpayer liability. Because insurance
companies have not previously reserved for terrorism risks to any
significant degree and because what reinsurance capacity exists is
primarily overseas, the establishment of tax-free terrorist risk
reserves would discourage capital flight resulting from tax avoidance
and make it more difficult for underwriting capacity to exit the United
States market in times of distress. Further, because reserve funds may
only be used for terrorism losses, there is a built-in disincentive for
private insurers to ``game'' these reserves funds. This long term
solution should be coupled with any short term program to foster
private sector solutions to terrorism coverage and obviate the need for
the Federal government to return to this issue in the future.
Hearings
The House Committee on Financial Services held a hearing on
September 26, 2001, entitled, ``America's Insurance Industry:
Keeping the Promise.'' The Committee received testimony from:
Gregory V. Serio, Superintendent, New York Insurance
Department; Kathleen Sebelius, Commissioner, Kansas Department
of Insurance, President, National Association of Insurance
Commissioners, on behalf of the National Association of
Insurance Commissioners; Sy Sternberg, Chairman, President and
CEO, New York Life Insurance Company; Robert H. Benmosche,
Chairman and CEO, MetLife, Inc.; Dean R. O'Hare, Chairman and
CEO, The Chubb Corporation; Matthew C. Mosher, Group Vice
President, Property-Casualty Rating, A.M. Best Company; Ronald
Ferguson, Chairman and CEO, General Reinsurance Corporation
The Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises held a hearing October 24,
2001, entitled, ``Protecting Policyholders from Terrorism:
Private Sector Solutions.'' The Subcommittee received testimony
from: Paul H. O'Neill, Secretary, Department of the Treasury;
Mr. Glenn Hubbard, Chairman, Council of Economic Advisors;
David B. Mathis, Chairman and CEO, Kemper Insurance Companies;
Richard J. Hillman, Director, Financial Markets and Community
Investment, U.S. General Accounting Office; Marjorie S.
Nordlinger, Senior Attorney, Office of the General Counsel,
Nuclear Regulatory Commission; Constantinos Iordanou, Senior
Executive Vice President of Group Operations and Business
Development, Zurich Financial Services Group; Scott Harrington,
Professor of Insurance and Finance, Moore School of Business,
University of South Carolina; J. David Cummins, Harry J. Loman
Professor of Insurance & Risk Management at The Wharton School,
University of Pennsylvania; David Keating, Senior Counselor,
National Taxpayers Union; John T. Sinnott, CEO, Marsh, Inc.;
Roy A. Williams, Director of Aviation, Louis Armstrong New
Orleans International Airport.
The Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises held a Roundtable Discussion
on Terrorism Risk Insurance on October 31, 2001. Participating
in the Roundtable were: Sheila C. Bair, Assistant Secretary,
Financial Institutions, Department of the Treasury; Bill
Pollard, Executive Vice President & General Manager, North
Carolina Farm Bureau Mutual Insurance Company, on behalf of the
National Association of Mutual Insurance Companies and the
National Association of Independent Insurers; Tom Gallagher,
Treasurer, Insurance Commissioner and State Fire Marshal, State
of Florida, Member of the National Association of Insurance
Commissioners; Edmund F. Kelly, President & CEO, Liberty Mutual
Group; John T. Sinnott, Chairman & CEO, Marsh, Inc.; Franklin
W. Nutter, President, Reinsurance Association of America; Terry
Broderick, President & CEO, Royal SunAlliance USA, Inc.; Travis
Plunkett, Consumer Federation of America; Larry Cluff,
Government Accounting Office; Tom Miller, Cato Institute; David
Keating, Senior Counselor & Board of Directors Member, National
Taxpayers Union; Steve Wechsler, President and CEO, National
Association of Real Estate Investment Trusts.
Committee Consideration
The Committee met in open session on November 7, 2001, and
ordered H.R. 3210 reported to the House with a favorable
recommendation, with an amendment, by a voice vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. A
motion by Mr. Oxley to report the bill to the House with a
favorable recommendation was agreed to by a voice vote.
Record votes were taken on the following amendments. The
names of Members voting for and against follow:
An amendment to the amendment in the nature of a substitute
by Mr. Cox, no. 1a, clarifies the application of the liability
protections to an insured party, was agreed to by a record vote
of 26 yeas and 21 nays (Record vote no. 18).
YEAS NAYS
Mr. Oxley Mr. LaFalce
Mr. Leach Mr. Kanjorski
Mrs. Roukema Mr. Sanders
Mr. Bereuter Mrs. Maloney of New York
Mr. Baker Ms. Velazquez
Mr. Bachus Mr. Watt of North Carolina
Mr. Castle Mr. Ackerman
Mr. Royce Mr. Bentsen
Mr. Ney Mr. Maloney of Connecticut
Mrs. Kelly Ms. Hooley of Oregon
Mr. Cox Mr. Sherman
Mr. Weldon of Florida Mr. Sandlin
Mr. Ryun of Kansas Ms. Lee
Mr. LaTourette Mr. Inslee
Mr. Manzullo Mr. Moore
Mr. Jones of North Carolina Mr. Gonzalez
Mrs. Biggert Mr. Capuano
Mr. Green of Wisconsin Mr. Shows
Mr. Toomey Mr. Crowley
Mr. Shadegg Mr. Israel
Mr. Gary G. Miller of California Mr. Ross
Mr. Cantor
Ms. Hart
Mrs. Capito
Mr. Tiberi
Mr. Lucas of Kentucky
An amendment to the amendment in the nature of a substitute
by Mr. LaFalce, no. 1b, striking the liability provisions, was
not agreed to by a record vote of 24 yeas and 32 nays, 1 member
voting present (Record vote no. 19).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Kanjorski Mr. Leach
Ms. Waters Mrs. Roukema
Mr. Sanders Mr. Bereuter
Mrs. Maloney of New York Mr. Baker
Ms. Velazquez Mr. Bachus
Mr. Watt of North Carolina Mr. Castle
Mr. Ackerman Mr. Royce
Mr. Bentsen Mr. Lucas of Oklahoma
Mr. Maloney of Connecticut Mr. Barr of Georgia
Ms. Hooley of Oregon Mrs. Kelly
Ms. Carson of Indiana Mr. Gillmor
Mr. Sherman Mr. Cox
Mr. Sandlin Mr. Weldon of Florida
Ms. Lee Mr. Ryun of Kansas
Mr. Mascara Mr. Riley
Mr. Inslee Mr. LaTourette
Ms. Schakowsky Mr. Manzullo
Mr. Moore Mr. Jones of North Carolina
Mr. Gonzalez Mrs. Biggert
Mr. Capuano Mr. Green of Wisconsin
Mr. Shows Mr. Toomey
Mr. Israel Mr. Shays
Mr. Ross Mr. Shadegg
present Mr. Cantor
Mr. King Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Lucas of Kentucky
An amendment to the amendment in the nature of a substitute
by Ms. Lee, no. 1h, conditioning the assistance in the bill on
the agreement of the recipient to provide certain information
to the Administrator, was not agreed to by a record vote of 24
yeas and 35 nays (Record vote no. 20).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Ms. Waters Mrs. Roukema
Mr. Sanders Mr. Bereuter
Mrs. Maloney of New York Mr. Baker
Ms. Velazquez Mr. Bachus
Mr. Watt of North Carolina Mr. Castle
Mr. Ackerman Mr. King
Mr. Bentsen Mr. Royce
Mr. Maloney of Connecticut Mr. Lucas of Oklahoma
Ms. Hooley of Oregon Mr. Ney
Ms. Carson of Indiana Mr. Barr of Georgia
Mr. Sherman Mrs. Kelly
Mr. Sandlin Mr. Gillmor
Ms. Lee Mr. Cox
Mr. Mascara Mr. Weldon of Florida
Mr. Inslee Mr. Ryun of Kansas
Ms. Schakowsky Mr. Riley
Mr. Moore Mr. LaTourette
Mr. Gonzalez Mr. Manzullo
Mr. Capuano Mr. Jones of North Carolina
Mr. Shows Mrs. Biggert
Mr. Crowley Mr. Green of Wisconsin
Mr. Clay Mr. Toomey
Mr. Ross Mr. Shays
Mr. Shadegg
Mr. Gary G. Miller of California
Mr. Cantor
Mr. Grucci
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Kanjorski
Mr. Lucas of Kentucky
An amendment to the amendment in the nature of a substitute
by Mr. LaTourette, no. 1i, allocating the amount of punitive
damages to be in proportion to the percentage of the harm to
the claimant for which the defendant was responsible, was not
agreed to by a record vote of 28 yeas and 29 nays (Record vote
no. 21).
YEAS NAYS
Mr. King Mr. Oxley
Mr. LaTourette Mr. Leach
Mr. Grucci Mrs. Roukema
Mr. LaFalce Mr. Bereuter
Mr. Kanjorski Mr. Baker
Ms. Waters Mr. Bachus
Mr. Sanders Mr. Royce
Mrs. Maloney of New York Mr. Lucas of Oklahoma
Ms. Velazquez Mr. Barr of Georgia
Mr. Watt of North Carolina Mrs. Kelly
Mr. Ackerman Mr. Gillmor
Mr. Bentsen Mr. Cox
Mr. Maloney of Connecticut Mr. Weldon of Florida
Ms. Hooley of Oregon Mr. Ryun of Kansas
Ms. Carson of Indiana Mr. Riley
Mr. Sherman Mr. Manzullo
Mr. Sandlin Mr. Jones of North Carolina
Ms. Lee Mrs. Biggert
Mr. Mascara Mr. Green of Wisconsin
Mr. Inslee Mr. Toomey
Mr. Moore Mr. Shays
Mr. Gonzalez Mr. Shadegg
Mr. Capuano Mr. Gary G. Miller of
Mr. Lucas of Kentucky California
Mr. Shows Mr. Cantor
Mr. Crowley Ms. Hart
Mr. Clay Mrs. Capito
Mr. Israel Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
An amendment to the amendment in the nature of a substitute
by Mr. Watt, no. 1j, striking recovery from other collateral
sources from offsetting relief payments under the Act and
allowing punitive damages to be awarded, was not agreed to by a
record vote of 24 yeas and 32 nays (Record vote no. 22).
YEAS NAYS
Mr. LaFalce Mr. Oxley
Mr. Kanjorski Mr. Leach
Ms. Waters Mrs. Roukema
Mr. Sanders Mr. Bereuter
Mrs. Maloney of New York Mr. Baker
Ms. Velazquez Mr. Bachus
Mr. Watt of North Carolina Mr. Castle
Mr. Ackerman Mr. King
Mr. Bentsen Mr. Royce
Mr. Maloney of Connecticut Mr. Lucas of Oklahoma
Ms. Hooley of Oregon Mr. Barr of Georgia
Ms. Carson of Indiana Mrs. Kelly
Mr. Sherman Mr. Cox
Mr. Sandlin Mr. Weldon of Florida
Ms. Lee Mr. Ryun of Kansas
Mr. Mascara Mr. Riley
Mr. Inslee Mr. LaTourette
Mr. Moore Mr. Manzullo
Mr. Gonzalez Mr. Jones of North Carolina
Mr. Capuano Mrs. Biggert
Mr. Shows Mr. Green of Wisconsin
Mr. Crowley Mr. Toomey
Mr. Clay Mr. Shays
Mr. Israel Mr. Shadegg
Mr. Gary G. Miller of California
Mr. Cantor
Ms. Hart
Mrs. Capito
Mr. Ferguson
Mr. Rogers of Michigan
Mr. Tiberi
Mr. Lucas of Kentucky
A motion to reconsider the vote on amendment no. 1d by Mr.
Barr was not agreed to by a record vote of 27 yeas and 32 nays
(Record vote no. 23)
YEAS NAYS
Mr. Leach Mr. Oxley
Mrs. Roukema Mr. Bachus
Mr. Bereuter Mr. Castle
Mr. Baker Mr. King
Mr. Royce Mr. LaTourette
Mr. Lucas of Oklahoma Mr. LaFalce
Mr. Ney Mr. Kanjorski
Mr. Barr of Georgia Ms. Waters
Mrs. Kelly Mr. Sanders
Mr. Gillmor Mrs. Maloney of New York
Mr. Cox Ms. Velazquez
Mr. Weldon of Florida Mr. Watt of North Carolina
Mr. Ryun of Kansas Mr. Ackerman
Mr. Riley Mr. Bentsen
Mr. Manzullo Mr. Maloney of Connecticut
Mr. Jones of North Carolina Ms. Hooley of Oregon
Mrs. Biggert Ms. Carson of Indiana
Mr. Green of Wisconsin Mr. Sherman
Mr. Toomey Mr. Sandlin
Mr. Shays Mr. Meeks of New York
Mr. Shadegg Ms. Lee
Mr. Cantor Mr. Mascara
Ms. Hart Mr. Inslee
Mrs. Capito Mr. Moore
Mr. Ferguson Mr. Gonzalez
Mr. Rogers of Michigan Mr. Capuano
Mr. Tiberi Mr. Lucas of Kentucky
Mr. Shows
Mr. Crowley
Mr. Clay
Mr. Israel
Mr. Ross
The following amendments were also considered by the
Committee:
An amendment in the nature of a substitute by Mr. Oxley,
no. 1, making various technical changes, was agreed to by a
voice vote.
An amendment to the amendment in the nature of a substitute
by Mrs. Roukema, no. 1c, limiting the liability for damages
arising out of the crashes on September 11, 2001, was
withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. Bachus, no. 1e, directing the Secretary of the Treasury
to conduct a study on a possible crisis in the availability and
affordability of railroad insurance, was agreed to by a voice
vote.
An amendment to the amendment in the nature of a substitute
by Mr. Ackerman, no. 1f, extending the definition of a
terrorist act to include acts against domestic air carriers and
U.S. flagged vessels overseas, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Weldon of Florida, no. 1g, directing the General
Accounting Office to conduct a study of natural disasters on
insurer solvency, was withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. Watt, no. 1k, permitting the satisfaction of judgments
from seized assets of terrorists and terrorist organizations,
was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Manzullo, no. 1m, excluding terrorists from liability
protections, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Bentsen, no. 1l, enabling the Administrator to extend
the authorities of the Act on a yearly basis for 3 years after
reporting to Congress on the reasons and need for the
extension, was agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Inslee, no. 1n, establishing a 2 percent interest rate
for all assessments paid by commercial insurers to the
appropriate administrator, was withdrawn.
An amendment to the amendment in the nature of a substitute
by Mr. Crowley, no. 1o, expanding the scope of the legislation
to include personal lines of property and casualty insurance,
was withdrawn by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Capuano, no. 1p, extending authority to the
Administrator to direct the use of the terrorism business
reserve to pay claims as part of a plan of a company to avoid
insolvency, an amendment to the amendment in the nature of a
substitute by Mr. Capuano, no. 1q, striking recovery from other
collateral sources from offsetting relief payments under the
Act, and an amendment to the amendment in the nature of a
substitute by Mr. Capuano, no. 1r, directing the Administrator
to take into consideration the effect of assessments and
surcharges on urban commercial centers, were offered en bloc
and were withdrawn. Amendment no. 1r was later offered again,
and agreed to by a voice vote.
An amendment to the amendment in the nature of a substitute
by Mr. Baker, Mr. LaFalce, and Mr. Kanjorski no. 1s, empowering
the Secretary of the Treasury to carry out the authorities of
the Act and establishing the structure for terrorism less
repayment surcharges, was agreed to by a voice vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee held a hearing and made
findings that are reflected in this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
The Secretary of the Treasury will establish a temporary
risk spreading program to ensure the continued availability of
commercial property and casualty insurance and reinsurance for
terrorism-related risks. The Secretary will make every effort
to ensure that insurers use the tools provided by this
legislation to reserve properly for these risks and eliminate
the need for this or similar programs in the future.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee finds that this
legislation would result in new budget authority, entitlement
authority, or tax expenditures or revenues consistent with the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Committee Cost Estimate
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
Congressional Budget Office Estimate
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 16, 2001.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3210, the
Terrorism Risk Protection Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Mark Hadley
and Megan Carroll (for federal costs), Susan Sieg Tompkins (for
the state and local impact), and Jean Talarico (for the
private-sector impact).
Sincerely,
Dan L. Crippen, Director.
Enclosure.
H.R. 3210--Terrorism Risk Protection Act
Summary: H.R. 3210 would require the Secretary of the
Treasury to provide up to $100 billion in financial assistance
to commercial property and casualty insurers for losses from
terrorist acts committed after enactment of the bill and prior
to January 1, 2003. (The Secretary would have the authority to
extend the program for two more years.) The Secretary would
provide such assistance only after insured losses exceed $1
billion for the entire industry (or lesser amounts if
individual insurance companies are particularly affected as
specified by the bill). After either threshold is met, the
Secretary would pay insurance companies 90 percent of
subsequent covered losses. Under the bill, if insured losses
from a terrorist act required the Secretary to provide
financial assistance, the Secretary could recoup that cost
through charges assessed on the insurance industry and
purchasers of commercial property and casualty insurance. In
addition, the bill would amend the Internal Revenue Code as it
applies to insurance companies.
CBO cannot predict how much insured damage terrorists would
cause in any specific year. Instead our estimate of the cost of
financial assistance provided under H.R. 3210 represents an
expected value of payments from the program--a weighed average
that reflects the probabilities of various outcomes, from zero
damages up to very large damages due to 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 risk of providing this insurance; indeed, our
estimate of the expected cost for H.R. 3210 is based on
premiums collected for terrorism insurance in the United
Kingdom and insurance practices in the United States.
On this basis, CBO estimates that enacting section 6 of
H.R. 3210 would increase direct spending by about $7.3 billion
over the 2002-2006 period and by $8.5 billion over the next 10
years. Under the bill, the Secretary could recoup the costs of
providing financial assistance through assessments and
surcharges; hence, over many years, CBO expects that an
increase in spending for financial assistance would be nearly
offset (on a cash basis) by a corresponding increase in
governmental receipts (revenues). We assume, however, that the
Secretary would not impose any assessments or surcharges until
one year after federal assistance is provided and that those
amounts would be collected over several years. Thus, CBO
estimates that sections 7 and 8 of H.R. 3210 would increase
governmental receipts by about $1.4 billion over the 2002-2006
period and by $5.3 billion over the next 10 years.
In addition, the Joint Committee on Taxation (JCT)
estimates that enacting section 10 of H.R. 3210 would reduce
revenues by $10.9 billion over the 2002-2006 period and by
$12.4 billion over the 2002-2011 period. In total, we estimate
the net reduction in revenues under H.R. 3210 would be $9.5
billion over the 2002-2006 period and $7.1 billion over the
2002-2011 period. Because H.R. 3210 would affect direct
spending and receipts, pay-as-you-go procedures would apply.
H.R. 3210 contains several intergovernmental and private-
sector mandates, as defined in the Unfunded Mandates Reform Act
(UMRA), on insurers and policyholders of commercial property
and casualty insurance. CBO estimates that the aggregate net
costs of complying with those mandates would not exceed the
annual thresholds established by UMRA ($56 million for
intergovernmental mandates and $113 million for private-sector
mandates in 2001, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 3210 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------
2002 2003 2004 2005 2006
----------------------------------------------------------------------------------------------------------------
CHANGES IN DIRECT SPENDING
Estimated budget authority............................... 800 1,700 2,200 1,700 900
Estimated outlays........................................ 800 1,700 2,200 1,700 900
CHANGES IN REVENUES
Assessments and surcharge................................ 0 100 200 500 600
Tax provisions\1\........................................ -1,600 -4,100 -3,100 -1,300 -800
------------------------------------------------------
Total changes in revenues.......................... -1,600 -4,000 -2,900 -800 -200
----------------------------------------------------------------------------------------------------------------
\1\ Estimate provided by JCT.
Basis of estimate
For this estimate, CBO assumes that H.R. 3210 will be
enacted by the end of 2001 and its provisions will remain in
effect until December 31, 2004. We estimate that H.R. 3210
would increase direct spending by $8.5 billion and would reduce
governmental receipts by $7.1 billion over 2002-2011 period.
Direct spending
H.R. 3210 would require the secretary of the treasury to
provide up to $100 billion in financial assistance to
commercial property and casualty insurers for losses above
certain thresholds due to future terrorist acts. Under the
bill, the Secretary would provide such assistance as a result
of terrorist acts that occur before January 1, 2003, but the
Secretary could extend the program to cover events through
calendar year 2004. (If the program is extended beyond 2002, we
interpret the $100 billion as being an annual limit.) For this
estimate, CBO assumes that the Secretary would extend the
program through 2004.
By offering financial assistance to commercial property and
casualty insurers for acts of terrorism, H.R. 3210 would expose
the federal government to potentially huge liabilities. For any
year, CBO has no basis for estimating the likelihood of
terrorist attacks or the amount of insured damage they may
cause. Instead, our estimate of the cost of these provisions
reflects how much the government might be expected to pay to
insurers on average.
In the following sections, we describe our method for
estimating the expected-value cost of providing financial
assistance under H.R. 3210, explain how we convert that
expected-value cost to annual estimates of cash outlays, and
discuss some of the reasons why the cost to the federal
government is so uncertain.
Terrorism Insurance in the United Kingdom.--Because very
limited information is available about how the insurance
industry would set premiums for terrorism insurance in the
United States, we examined the government-backed insurance pool
that spreads the risk of terrorist acts among insurers in the
United Kingdom (this program is called Pool Re).
CBO could not estimate the cost of H.R. 3210 to the federal
government by examining the U.S. insurance industry's
perception of the likelihood of terrorist acts. Representatives
of the insurance industry have testified that estimating the
risk of terrorist acts is nearly impossible because sufficient
historical data do not exist. We explored the possibility of
using premiums paid in the U.S. for terrorism insurance prior
to September 11, 2001, to estimate the minimum premium required
to compensate the government for its risk; however, such
information is not available. This led us to examine the United
Kingdom's experience with terrorism insurance.
In 1993, the British government created Pool Re to provide
terrorism reinsurance (insurance for insurance companies) to
the commercial property insurance market in the United Kingdom.
Participating insurers must offer terrorism coverage at risk-
based rates established by Pool Re and then remit any premiums
collected from their customers to the pool. After a small
deductible, Pool Re pays 100 percent of the costs of a
terrorist act. If claims from terrorist acts exhaust the pool's
resources, the British government is liable for the shortfall.
Calculating the Expected Value of Claims.--Over the 1993-
2000 period, annual premiums collected by Pool Re have ranged
from about $530 million in the early years of the program to
about $75 million in 2000. On average, annual premiums have
been roughly $325 million. The pool has reduced its premium
rates in recent years as the number of terrorist attacks in the
United Kingdom (and the perceived threat of future attacks)
dropped. For this estimate, CBO assumes that the average
premiums over the eight-year period accurately reflect the
terrorist risk to covered losses in the United Kingdom. In some
years, there may be many costly attacks; in others, there may
be none.
To compare premiums collected by Pool Re to those that
would be required to compensate the federal government for its
risk under H.R. 3210, we made adjustments to account for
differences between Pool Re and the proposed U.S. program. CBO
expects that, if premiums were charged to cover the potential
costs of H.R. 3210, they would have to be significantly larger
than those collected by Pool Re. Pool Re covers losses only for
property damage and business interruption, while the program
proposed under the bill also would cover casualty and related
risks. Based on information from the insurance industry about
the relative proportion of property and casualty insurance, we
estimate that including these lines would roughly double the
premiums required under Pool Re. In addition, CBO increased the
average premium amount for Pool Re by a factor of 7 to account
for differences in the sizes of the two countries' economies
and insurance markets. We did not make any adjustments for
differences in the risk of terrorist acts that each country
faces because we cannot quantify such differences.
After making the adjustments described above, CBO estimates
that the expected-value cost of a federal program that is
analogous to Pool Re would be about $4.5 billion a year.
However, two key differences between Pool Re and the program
outlined in H.R. 3210 require additional adjustments. First,
H.R. 3210 would require the industry to absorb losses of $1
billion before the Secretary would provide any assistance. By
comparison, deductibles required by Pool Re are negligible.
Second, H.R. 3210 would cap federal assistance at $100 billion
a year; coverage under Pool Re has no cap.
To make these further adjustments, we assumed that the
probability of terrorist attacks is skewed toward events that
would cost less than $4.5 billion a year. After taking into
account the $1 billion industry-wide deductible and the $100
billion cap on federal assistance, CBO estimates that the
Secretary would need to charge about $3 billion annually for
coverage over the 2002-2004 period to fully compensate the
government for the risk it would assume under H.R. 3210.
Assuming the program operates for three years, the expected
cost to the government would total $9 billion. Those outlays,
however, would be spread out over many years, as explained
below.
Timing of Federal Spending.--To estimate federal spending
for this program on a cash basis, CBO used information from
insurance experts on historical rates at which property and
casualty claims are paid. Based on such information, CBO
estimates that the expected value of federal spending under
H.R. 3210 would total $8.5 billion over the 2002-2011 period,
and about $500 million after 2011. 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 property and casualty insurers
would be paid over several years, with most of the spending
occurring within the first five years.
Costs Are Uncertain.--While this estimate reflects CBO's
best judgment on the basis of available information, costs are
a function of inherently unpredictable future terrorist
attacks. As such, actual costs could cover an extremely broad
range. Moreover, these is a greater risk that our estimated
costs are too low rather than too high.
Our expected losses under this program could be too low
because we assumed losses would have to exceed $1 billion
before the Secretary would provide assistance. Under the bill,
however, the Secretary also could provide assistance if
aggregate losses exceed $100 million and at least one company
is particularly adversely affected. In addition, there are a
number of differences between Pool Re and the program that
would be established under this legislation that are unknown--
for example, the difference between U.S. and British tort law--
but these differences would push the likely cost of the bill
higher.
Revenues
CBO estimates that under H.R. 3210 the Secretary of the
Treasury would collect $5.3 billion over the 2002-2011 period
through assessments on the insurance industry and surcharges on
policy holders. In addition, the JCT estimates that the bill's
changes to the Internal Revenue Code would reduce revenues by
$12.4 billion over the next 10 years.
Assessments.--If a terrorist act requires the Secretary to
provide financial assistance, the Secretary would recoup that
cost through charges paid by the insurance industry and
purchasers of commercial property and casualty insurance. The
first $20 billion of financial assistance could be recovered by
assessing each insurer based on its portion of aggregate
property and casualty insurance premiums for the preceding
calendar year. Each company's assessment would be limited to 3
percent of net premiums (the company's premiums less any amount
paid to reinsurers to assume a portion of the risk). The
Secretary could delay when a company would be required to pay
the assessment if such a delay were necessary to prevent the
insurer from becoming insolvent. Because we assume the
probability of terrorist attacks would be skewed toward events
that would cost less than $4.5 billion, we anticipate that
assessments would account for most of the amounts the Secretary
would collect. On an expected-value basis, CBO estimates that
assessments to recover the cost of federal assistance would
generate revenues totaling $4.5 billion over the next 10 years.
Surcharges.--The Secretary would recover any assistance
provided between $20 billion and $100 billion by imposing a
surcharge on all premiums for commercial property and casualty
insurance. Surcharges would apply to insurance sold following a
terrorist attack that necessitated federal assistance and could
not exceed 3 percent of the annual premium for such coverage.
H.R. 3210 would require the Secretary to impose surcharges for
as long as is necessary to recover the aggregate financial
assistance. Thus, the government could collect surcharges for
many years depending on the level of financial assistance. We
estimate that surcharges would total $800 million over the next
10 years.
Timing.--CBO expects that the Secretary probably would not
recoup the entire cost of financial assistance during the 2002-
2011 period. Based on information from the insurance industry
on aggregate premiums collected in recent years, CBO estimates
that the Secretary could recoup no more than about $10 billion
a year. The bill would allow the Secretary to reduce annual
charges to avoid unreasonable economic disruption, excessive
market instability, or undue burdens on small businesses.
Therefore, if annual losses are very high, we expect that the
Secretary would limit annual collections by spreading them over
many years. CBO assumes it would take the Secretary at least 10
years to recoup the costs of any financial assistance provided
under H.R. 3210. Thus, we estimate that many of the collections
from assessments and surcharges would occur after 2011.
Risk of Insolvency.--In addition, although the bill would
allow the Secretary to delay when an insurance company pays its
assessment, the bill would not provide the Secretary with the
authority to increase the assessment on the remaining insurance
companies if a company is unable to pay. Thus, the federal
government also would bear the risk that an insurance company
would become insolvent during the assessment period.
Historically, the credit risk of insurance companies has been
very low, but the government would be exposed to suchrisk only
following a very costly attack. Because we expect the probability of
such a costly attack is very low, we included a small adjustment for
the risk of insolvency in our estimate.
Credit Reform Does Not Apply.--The provisions of the
Federal Credit Reform Act do not apply to H.R. 3210. Under the
act, a direct loan is defined as a disbursement of funds to a
nonfederal borrower under a contract that requires the
repayment. A disbursement cannot be considered a direct loan,
however, if the duty to repay the government arises from an
exercise of sovereign power, tort liability, or some other
noncontract obligation. H.R. 3210 would require insurance
companies and potential policyholders to compensate the
government for its costs, but it would do so through an
exercise of sovereign power, not through loan repayment
contracts. Therefore, CBO believes that the financial
assistance and subsequent collections would not constitute a
loan program.
Other Tax Provisions.--H.R. 3210 would amend the Internal
Revenue Code to permit non-life insurance companies to
establish reserves for terrorism coverage. The JCT estimates
these provisions would reduce revenues by $12.4 billion over
the next 10 years.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in outlays and governmental receipts that are subject
to pay-as-you-go procedures are shown in the following table.
Only the effects in the current year and the following four
years are counted for pay-as-you-go purposes.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays................................................ 800 1,700 2,200 1,700 900 500 300 200 100 100
Changes in receipts............................................... -1,600 -4,000 -2,900 -800 -200 400 500 500 500 500
--------------------------------------------------------------------------------------------------------------------------------------------------------
Intergovernmental and private-sector impact
H.R. 3210 contains several intergovernmental and private-
sector mandates as defined by UMRA. CBO estimates that the net
costs to comply with all of the mandates in the bill would not
exceed the thresholds established by UMRA ($56 million for
intergovernmental mandates and $113 for private-sector mandates
in 2001, adjusted annually for inflation).
Assessments and surcharges
The bill would require the Secretary, through the use of
the federal government's sovereign power, 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 pay the federal government for financial
assistance received would be both an intergovernmental and
private-sector mandate under UMRA because both private entities
and state and local governments would be affected.
Specifically, section 7 would require commercial property
and casualty insurers as well as self-insured risk pools to pay
back the first $20 billion in federal assistance provided under
the bill through an assessment. Taken individually, some
insurers might benefit from the financial assistance while
others would face only the cost of the assessment. But for the
insurance industry 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, section 8 would require purchasers of
commercial property and casualty insurance to repay, in the
form of a surcharge, any federal assistance provided to certain
insurers between $20 billion and $100 billion. Some purchasers
of commercial property and casualty insurance would not receive
a direct benefit under the bill or protection from higher
premiums in its absence. Therefore, the surcharge would be a
mandate that imposes costs on both private-sector purchasers
and state and local governments (in their capacity as
purchasers of insurance). CBO estimates that the expected value
of the surcharges on policyholders would total less than $90
million annually over the next five years.
Preemptions
Section 12 would preempt certain state insurance laws by
providing that any insurer that complies with the provisions of
the bill would be deemed to comply with any state law that
regulates insurance for acts of terrorism. This section also
would expressly preempt any state laws that limit the amount an
insurer could add to premiums to recover any assessments, and
laws that require certain actions by insurers in order for
rates or policies to be effective.
Section 13 of the bill would require states to adopt
uniform guidelines for maintaining certain reserves and
disclosing premium costs. Should states fail to adopt these
guidelines, the Secretary of the Treasury could adopt them on a
national basis, superseding any related state laws. Neither the
preemptions in section 12 nor the requirements of section 13,
which are intergovernmental mandates as defined by UMRA, would
impose significant costs on state, local, or tribal
governments.
Other impacts
Section 11 would amend the Internal Revenue Code to
authorize and account for the financial activities of a
commercial reserve for terrorism losses. This provision would
provide a significant benefit to certain commercial insurers by
lowering the amount of income used to compute taxes owed to the
federal government.
Estimate prepared by: Federal costs: Mark Hadley, Megan
Carroll, and Ken Johnson; Impact on State, local, and tribal
governments: Susan Sieg Tompkins; impact on the private sector:
Jean Talarico.
Estimate approved by: Robert A. Sunshine, Assistant
Director for Budget Analysis.
Federal Mandates Statement
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Constitutional Authority Statement
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional Authority of Congress to enact this legislation
is provided by Article 1, section 8, clause 1 (relating to the
general welfare of the United States) and clause 3 (relating to
the power to regulate interstate commerce).
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
Section-by-Section Analysis of the Legislation
Section 1. Short title and table of contents
This section sets forth the short title of the bill, the
``Terrorism Risk Protection Act,'' and provides a table of
contents.
Section 2. Congressional findings
This section provides Congressional findings about the
damage from the September 11, 2001 terrorist attack, the
resulting market disruption and potential unavailability of
future terrorism insurance coverage, and the need for a
temporary industry risk sharing program to facilitate
transition back to a viable private insurance and reinsurance
market.
Section 3. Authority of Secretary of the Treasury
This section provides that the Secretary of the Treasury
will be responsible for carrying out the temporary risk-sharing
program for the commercial property and casualty insurance
industry.
Section 4. Submission of premium information to Secretary
This section recognizes that insurance premium information
is already provided to State insurance commissioners and the
NAIC, but allows the Secretary, to the extent that such
information is not otherwise available, to require insurers to
submit their aggregate U.S. commercial property and casualty
insurance premium data to the NAIC or the Secretary.
Section 5. Triggering determination and covered period
This section directs the Secretary to determine whether
insured losses from acts of terrorism over a 12 month period
exceed the triggering thresholds. The section provides for an
industry-wide trigger and an individual insurer trigger. The
Secretary will make a triggering determination for the entire
commercial property and casualty insurance industry if
industry-wide losses exceed $1 billion. The Secretary will make
a company specific triggering determination if industry-wide
losses exceed $100 million and the portion of those losses for
any one commercial insurer exceed both 10 percent of the
company's capital surplus and net premiums. The lower $100
million threshold does not apply to any commercial insurer that
was not providing commercial property and casualty coverage
prior to September 11, 2001.
Subsection (b) provides that the period covered by this
trigger is from the date of enactment to the end of 2002,
although section 20 allows the Secretary the option of
extending the application of this bill by up to 2 years.
Subsection (c) gives the Secretary sole authority to
determine whether a loss was caused by an act of terrorism,
whether the losses were caused by one or multiple occurrences,
and whether the terrorist attack occurred during the period of
time covered by this legislation. The ability of the Secretary
to make such determinations under this subsection is not
limited to commercial property and casualty insurance, but
rather is intended to apply for all lines of insurance.
Section 6. Federal cost-sharing for commercial insurers
Once the Secretary makes an industry-wide triggering
determination in section 5, then financial cost sharing is
provided to cover 90 percent of any insured terrorist losses
(without respect to any trigger amounts). If the industry-wide
triggering determination is not reached, but the Secretary
makes a company specific triggering determination, then
financial cost-sharing is provided to that insurer in an amount
equal to the difference of 90 percent of the amount of
theinsured losses of the insurer as a result of such triggering event
and 10 percent of the net commercial property and casualty premiums
written by such commercial insurer. Federal assistance is capped at
$100 billion. Any Federal assistance provided will be repaid through
the assessments and surcharges provided for in section 7 and 8, and may
be designated by the President as emergency budget authority and
outlays. Federal assistance received by an insurer should not be
treated as a loan for balance sheet purposes. Furthermore, Federal
assistance will be available for all commercial property and casualty
insurance companies with policies in force during the coverage period
of this legislation as long as the insurer was providing terrorism risk
coverage (or not excluding terrorism risk coverage) on or before
September 11, 2001.
Section 7. Assessments
This section is modeled after the State insurance guarantee
funds that exist in almost every State to address the
possibility of insurer insolvencies, as well as numerous State
catastrophic insurance funds. After the Secretary makes a
triggering determination in section 5, every commercial insurer
is subject to an assessment of up to 3 percent of its
commercial premiums for that year. The assessments go back into
the general fund of the Treasury to repay any Federal cost-
sharing assistance provided under section 6. If the amount
assessed is insufficient to cover that Federal assistance, then
the Secretary will make a new assessment in each following year
until the amount is recouped. The aggregate amount assessed
will be equal to the lesser of $20 billion (which would take
approximately 4 years to recoup in its entirety based on
premium data from calendar year 2000) or the amount of
financial assistance paid under section 6. Each year's
assessments are to be based on an insurer's commercial
insurance premiums for that year, thus applying to new entrants
as well based on their market share. The Secretary may delay
the assessment of an insurer to avoid an insolvency and may
adjust or delay assessments generally as provided in Section 9.
Section 8. Terrorism loss repayment surcharge
This section applies only to terrorist losses that exceed
$20 billion, and is modeled after several State catastrophic
insurance programs. To recoup Federal assistance provided in
section 6 for amounts above the Federal share of the $20
billion, the Secretary has the authority to impose a commercial
policyholder surcharge to the extent that economic and market
conditions permit. The factors to be weighed in determining the
extent of the surcharge are the ultimate costs to taxpayers if
a surcharge is not established, the economic conditions in the
commercial marketplace, the affordability of commercial
insurance for small and medium-sized business, and such other
factors the Secretary considers appropriate. The terrorism
repayment surcharge will be on all commercial insurance
premiums based on a percentage of any coverage amounts but in
any given year may not exceed the amount equal to 3 percent of
the premium charged for such coverage. For purposes of this
section, commercial property and casualty insurance does not
include any reinsurance provided to primary insurance
companies, so as to avoid a double surcharge.
Section 9. Administration of assessments and surcharges
This section provides the Secretary with significant
flexibility in establishing the manner and method of carrying
out any assessments or surcharges, in particular as necessary
to protect the national interest, avoid unreasonable economic
disruption and market instability, and avoid undue burdens on
small businesses. The Secretary must also take into
consideration the economic impact of any of these assessments
and surcharges on commercial centers of urban areas. The
Secretary may also make special adjustments to provide for
commercial insurers and policies that are not based on a
calendar year.
Section 10. Application to self-insurance arrangements and offshore
insurers and reinsurers
In consultation with the NAIC, the Secretary may apply the
provisions of this bill to self-insurance arrangements by
municipalities and other entities, but only if that
determination is made before the occurrence of a triggering
event and all of the provisions of this legislation are applied
uniformly to such entities. The Committee expects that many
types of self-insuring entities may desire or need risk-sharing
coverage for terrorism attacks, while for others participation
may be inappropriate. The Secretary is given authority to
determine which of these entities should be participating, so
long as application of the benefits and costs are applied
equally. The Secretary must also ensure that the provisions of
this bill are applied as appropriate to any offshore or non-
admitted entities that provide commercial property and casualty
insurance. Both provisions of this section are intended in part
to prevent evasion of assessments.
Section 11. Reserve for terrorism coverage under commercial lines of
business
This section amends section 832 of the Internal Revenue
Code of 1986 by eliminating the adverse tax consequences of
long term insurance reserving, but only to the extent that such
reserves are set aside in a segregated account and used only
for the purposes of paying a terrorist-caused loss (including
assessments) or as directed by a State insurance commissioner
as part of a plan to avoid insolvency. The rationale for
creating company-specific reserve funds is to encourage self-
sufficiency in the marketplace by allowing insurers with
commercial terrorism exposure to set aside and potentially pool
with other insurers their own capital (on a tax-deferred basis)
to pay any future claims from terrorism losses. The terrorism
reserves are required to be held in segregated accounts from
insurers' other reserves, although they may be pooled together
in the same account as other insurers' terrorism reserves. Each
company's reserves are limited by the ratio of an insurer's
commercial insurance premiums that provide terrorism coverage
to the entire commercial insurance market (regardless or
terrorism coverage), as a percentage of $40 billion, the
national aggregate cap for the life of the fund. Thus, if no
commercial insurer were to exclude coverage for terrorism, and
a company underwrites 1 percent of the commercial insurance
market, the company could over the long-term set aside up to
$400 million in a segregated terrorism-losses-only account
without incurring any tax consequences on such reserves. Only
one-third of this amount may be reserved in 2002. Any reduction
in an insurer's terrorism reserves for terrorist losses or
insolvency is included in a company's gross income.
Furthermore, if an insurer's terrorism reserves exceed its
eligible amount because of interest income or a reduction in
market share, the excess amount must be included in income for
tax purposes. The $40 billion industry-wide cap is indexed for
inflation.
Section 12. State preemption
This section preempts certain State laws to ensure uniform
compliance with the bill. Subsection (a) preempts State laws
that would conflict with the provision of coverage for acts of
terror under the definitions of this legislation. Subsection
(b) establishes a narrow preemption to allow insurers to adjust
premiums only as necessary to recover the amounts of any
assessments under section 7. Subsection (c) preempts State pre-
filing approval requirements for commercial property and
casualty insurance policies covering acts of terrorism due to
the insufficient time between enactment of this legislation and
January 1, 2002, but expressly preserves the ability of the
States to undertake any subsequent review or action on those
policies.
Section 13. Consistent State guidelines for coverage for acts of
terrorism
This section establishes the sense of Congress that the
NAIC and the Secretary should consult with each other and
develop appropriate definitions for acts of terrorism and
standards for determining the number of terrorist events or
occurrences. Each State and the Secretary should then adopt
such definitions and standards. A further sense of the Congress
is provided that the NAIC should develop appropriate guidelines
governing insurers' terrorism reserves, including any pooling
of those reserves. The Secretary is directed to promulgate
those guidelines on a nationwide basis if the States have not
adopted guidelines in a uniform manner. A sense of the Congress
is also provided that the States should establish regulations
requiring separate disclosure to consumers of the costs of any
terrorism-related coverage. If the States have not adequately
adopted such disclosures within a reasonable period of time,
the Secretary is directed to consult with the NAIC and adopt
national guidelines requiring such disclosure.
Section 14. Consultation with State insurance regulators and the NAIC
The Secretary is directed to consult with the State
insurance regulators and the NAIC in carrying out this bill,
and may enter into agreements with the States and the NAIC to
provide for the distribution of financial assistance, or the
collection of any assessments or surcharges. The Secretary,
may, in consultation with the State insurance regulators and
the NAIC, investigate and audit claims of insured losses by
commercial insurers.
Section 15. Sovereign immunity protections
This section ensures that the United States will not be
liable for extraordinary damages in the case of a terrorist
incident. Subsection (a) creates a Federal cause of action for
lawsuits arising in connection with a terrorist event that
results in a triggering determination by the Secretary. This
cause of action will be the exclusive remedy for damages
claimed in connection with any such terrorist incident.
Paragraph (2) provides that the substantive law in any such
case shall be the law of the State in which the incident
occurs, unless that law is inconsistent with or preempted by
Federal law. Paragraph (3) of this subsection requires the
Judicial Panel on Multidistrict Litigation todesignate one or
more district courts of the United States to hear those actions, and
gives those courts original and exclusive jurisdiction over the
actions. Paragraph (4) invokes the ``collateral source'' rule and
provides that any recovery by a plaintiff in an action created by this
subsection will be offset by any payments received by the plaintiff,
whether such payments come under emergency or disaster relief programs,
or from any other source.
Subsection (b) involves actions arising pursuant to the
cause of action created by subsection (a) which involve claims
by or against an insured party which is insured under a
commercial property or casualty policy that provides coverage
for acts of terrorism of a kind that caused the triggering
determination. In such a cause of action, paragraph (1) states
that no punitive damages may be awarded. This paragraph
protects the Federal taxpayers and insurers from subsidizing
punitive damage awards relating to acts of terrorism. Most
States already either prohibit or impose at least some limits
on the insurability of punitive damages. This paragraph limits
the application of punitive damages where the costs of an award
would be subject to the bill's risk-spreading mechanism.
Paragraph (2) similarly protects the Federal taxpayer from
awards of noneconomic damages that are not in amounts equal to
an insured's direct proportional percentage of responsibility
for harm to the claimant. This paragraph essentially prevents
an award and pass through of joint-and-several liability for
noneconomic ``pain and suffering'' damages, particularly to
avoid having responsibility for damages caused primarily by
actions of terrorists passed through to the Federal risk-
sharing program.
Subsection (b) also contains a provision stating that the
subsection does not limit actions by injured parties for
damages other than a claim for commercial property and casualty
insurance.
Subsection (c) gives the United States the right of
subrogation with respect to any claim paid by the United States
under the bill. Subsection (d) ensures that the United States,
or the Secretary, may seek protective orders or assert
privileges which are ordinarily available to the United States
to protect against the disclosure of classified information,
including military and State secrets privileges.
Subsection (e) excludes certain persons from liability
protection under section 15. Paragraph (1) states that section
15 does not limit the liability of persons who attempt to
commit, knowingly participate in, knowingly and intentionally
aid and abet, or commit any terrorist act or any criminal act
related to or resulting from a terrorist act that causes the
insured losses resulting in a triggering determination.
Paragraph (2) states that section 15 does not exclude from
liability any person who knowingly participates in any
terrorist act or any criminal act related to or resulting from
a terrorist act that causes the insured losses resulting in a
triggering determination.
Subsection (f) provides that all assets of terrorists or
terrorist organizations seized or frozen by the United States
shall be liable for satisfaction of judgments rendered for acts
of terrorism, in proportions determined by the court.
Section 16. Study of potential effects of terrorism on life insurance
industry
This section directs the President to establish a
commission to study and report within 120 days after the
enactment of the bill on the potential effects of acts of
terrorism on the life insurance industry in the U.S. and
markets served by such industry. The membership of this
commission shall include: the Secretary of the Treasury; the
Chairman of the Federal Reserve System; the Assistant to the
President for Homeland Security; and four members appointed by
the President from the insurance community.
Section 17. Railroad insurance study
This section directs the Secretary of the Treasury to
conduct a study to determine the availability of commercially
reasonable railroad insurance for acts of terrorism. The
Secretary must submit a report to Congress within 120 days
after enactment of this legislation.
Section 18. Study of reinsurance pool system for future acts of
terrorism
This section directs the Secretary of the Treasury, the
Federal Reserve Board of Governors, and the Comptroller General
to jointly conduct a study on (1) the advisability and
effectiveness of establishing a terrorism reinsurance pool
system in lieu of the program created by this bill, and (2) the
effects of creating terrorism reserve funds on the availability
of terrorism insurance coverage. The study must utilize a
variety of informational sources and be jointly submitted to
Congress not later than 6 months after enactment.
Section 19. Definitions
This section establishes various definitions. The term
``Act of terrorism'' is defined as an act that is unlawful,
causes harm to persons or property in the United States or to
any U.S. air carrier of U.S. flagged vessel outside the United
States committed by persons who are recognized (prior or
subsequently) by the Department of State or the Secretary as a
terrorist group, or who conspire with the surrogates of a
recognized terrorist group, and has the purpose of
destabilizing any country or to influence the United States by
coercion. As defined, an act of terrorism is not an act of war.
The Secretary is directed to consult with the NAIC to further
refine this definition. This section further provides that the
bill only applies to commercial property and causality
insurance.
Section 20. Extension of program
This section grants the Secretary authority to extend the
coverage period of the bill through the 2004 calendar year, if
the extension is necessary to ensure the adequate availability
in the United States of commercial property and casualty
insurance coverage for acts of terror. Extensions are to be
made on a year-by-year basis and the Secretary is required to
report to Congress on the reasons for any extensions beyond the
2002 calendar year.
Section 21. Regulations
This section grants the Secretary authority to issue
regulations as necessary to implement this legislation.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
SECTION 832 OF THE INTERNAL REVENUE CODE OF 1986
SEC. 832. INSURANCE COMPANY TAXABLE INCOME.
(a) * * *
(b) Definitions.--In the case of an insurance company subject
to the tax imposed by section 831--
(1) Gross income.--The term ``gross income'' means
the sum of--
(A) * * *
* * * * * * *
(D) in the case of a mutual fire or flood
insurance company whose principal business is
the issuance of policies--
(i) * * *
* * * * * * *
an amount equal to 2 percent of the premiums
earned on insurance contracts during the
taxable year with respect to such policies
after deduction of premium deposits returned or
credited during the same taxable year, [and]
(E) in the case of a company which writes
mortgage guaranty insurance, the amount
required by subsection (e)(5) to be subtracted
from the mortgage guaranty account[.], and
(F) each net decrease in reserves which is
required by paragraph (1) or (3) of subsection
(h) to be taken into account under this
subparagraph.
* * * * * * *
(c) Deductions Allowed.--In computing the taxable income of
an insurance company subject to the tax imposed by section 831,
there shall be allowed as deductions:
(1) * * *
* * * * * * *
(12) the special deductions allowed by part VIII of
subchapter B (sec. 241 and following, relating to
dividends received); [and]
(13) in the case of a company which writes mortgage
guaranty insurance, the deduction allowed by subsection
(e)[.]; and
(14) each net increase in reserves which is required
by subsection (h)(1) to be taken into account under
this paragraph.
* * * * * * *
(h) Terrorism Reserve for Commercial Lines of Business.--In
the case of an insurance company subject to tax under section
831(a)--
(1) Inclusion for decreases, and deduction for
increases, in balance of reserve.--
(A) Decrease treated as gross income.--If for
any taxable year--
(i) the opening balance for the
terrorism commercial business reserve
exceeds
(ii) the closing balance for such
reserve,
such excess shall be included in gross income
under subsection (b)(1)(F).
(B) Increase treated as deduction.--If for
any taxable year--
(i) the closing balance for the
terrorism commercial business reserve
exceeds
(ii) the opening balance for such
reserve,
such excess shall be taken into account as a
deduction under subsection (c)(14).
(2) Terrorism commercial business reserve.--For
purposes of this section, the term ``terrorism
commercial business reserve'' means amounts held in a
segregated account (or other separately identifiable
arrangement or joint pooled account) which are set
aside exclusively--
(A) to mature or liquidate, either by payment
or reinsurance, future unaccrued claims arising
from declared terrorism losses under commercial
lines of business, and
(B) if so directed by the insurance
commissioner of any State, to pay other claims
as part of a plan of the company to avoid
insolvency.
(3) Limitation on amount of reserve.--
(A) In general.--If the closing balance of
any terrorism commercial business reserve for
any taxable year exceeds such reserve's limit
for such year--
(i) such excess shall be included in
gross income under subsection (b)(1)(F)
for the following taxable year, and
(ii) if such excess is distributed
during such following taxable year, the
opening balance of such reserve for
such following taxable year shall be
determined without regard to such
excess.
(B) Reserve limit.--
(i) In general.--For purposes of
subparagraph (A), a reserve's limit for
any taxable year is such reserve's
allocable share of the national limit
for the calendar year in which such
taxable year begins.
(ii) National limit.--The national
limit is $40,000,000,000
($13,340,000,000 for 2002).
(iii) Allocation of limit.--
(I) In general.--A reserve's
allocable share of the national
limit for any calendar year is
the amount which bears the same
ratio to the national limit for
such year as the company's net
premium for insurance for
commercial lines of business which
does not exclude coverage for acts of
terrorism bears to the aggregate
written premium for insurance
(without regard to terrorism coverage)
for all companies for commercial
lines of business.
(II) Determination of net
written premiums.--Except as
otherwise provided in this
section, all determinations
under this subsection shall be
made on the basis of the
amounts required to be set
forth on the annual statement
approved by the National
Association of Insurance
Commissioners.
(III) Aggregate written
premiums and net premiums.--For
purposes of this clause, the
terms ``aggregate written
premium'' and ``net premium''
have the meanings given such
terms in section 19 of the
Terrorism Risk Protection Act.
(iv) Inflation adjustment of limit.--
In the case of any calendar year after
2002, the $40,000,000,000 amount in
clause (ii) shall be increased by an
amount equal to the product of--
(I) such dollar amount, and
(II) the cost-of-living
adjustment determined under
subsection (f)(3) for such
calendar year, determined by
substituting ``calendar year
2001'' for ``calendar year
1992'' in subparagraph (B)
thereof.
If any amount after adjustment under
the preceding sentence is not a
multiple of $1,000,000, such amount
shall be rounded to the nearest
multiple of $1,000,000.
(4) Declared terrorism losses.--For purposes of this
subsection--
(A) In general.--The term ``declared
terrorism losses'' means, with respect to a
taxable year--
(i) the amount of net losses and loss
adjustment expenses incurred in
commercial lines of business that are
attributable to 1 or more declared
terrorism events, plus
(ii) any nonrecoverable assessments,
surcharges, or other liabilities that
are borne by the company and are
attributable to such events.
(B) Declared terrorism event.--The term
``declared terrorism event'' means any event
declared by the Secretary of the Treasury to be
an act of terrorism against the United States
for purposes of this section.
(5) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out this
subsection, and shall prescribe such regulations after
consultation with the National Association of Insurance
Commissioners.
ADDITIONAL VIEWS
As a result of the September 11th attacks, we are faced
with numerous economic dislocations that could have devastating
consequences for our economy. In particular, the withdrawal of
terrorism coverage by reinsurers may force primary insurers to
increase premiums for policyholders radically or to withdraw
coverage entirely. Without such insurance, banks and investors
will also likely become reluctant to lend or invest in many
types of businesses and specific areas of the country,
exacerbating an already slowing economy. The shortage of
terrorism reinsurance is therefore not an insurance industry
problem, but rather an economic problem with potentially
devastating consequences for our Nation.
Given the implications for our economy, the bill we are
considering is of enormous significance. We also believe that
Congress must act to address this problem before we finish our
business for the year. While we would strongly prefer the
development of a comprehensive, long-term solution that will
ensure that terrorism insurance is available and affordable for
all consumers, we recognize that time constraints prevent us
from crafting such an approach. Consequently, action before
adjournment means that we must devise a short-term fix that
will keep terrorism insurance coverage against any future
attacks available and affordable, until either private
reinsurance markets stabilize or we can determine the necessity
and appropriateness of a longer-term policy response.
While the Committee made some improvements to the bill
during our deliberations, we continue to have serious
reservations about the approach taken in H.R. 3210. The bill in
some respects contains components more closely resembling a
loan program than an insurance program. Of the several
countries that have extensive experience with terrorism
insurance programs, none has chosen the type of model reflected
in the underlying bill. There is uncertainty as to how
accounting firms and rating agencies would assess the
liabilities of companies under such a model. We also believe
that at the present time there is a very strong case for
developing a private-public partnership to share and spread the
risks of terrorist attacks broadly as the private markets
discern how to price and manage this new menace to our economy.
In our view, an appropriate risk-sharing plan must require
the insurance industry to pay the first dollar associated with
any additional terrorist attacks, before any federal program
comes into play. After all, most home, automobile, and health
insurance policies require individuals to exceed a specified
deductible level before an insurance company will cover any of
the costs. These deductibles reduce moral hazard by ensuring
that policyholders have an incentive to protect themselves. The
insurance industry must also continue to bear a tangible share
of the risk of any future terrorist event through cost-sharing
arrangements with the federal government. We believe that this
retention of risk by insurers remains essential to the
development of sound underwriting standards and the re-
emergence of a private market for terrorism risks. In the days
ahead, we will continue to work diligently to incorporate these
sensible insurance principles into any product that we will
enact.
The insurance industry has indicated that it is willing and
able to assume an obligation to cover as much as $10 billion of
losses from future terrorism events before the federal
government steps in as a backstop. As reported out of
Committee, however, H.R. 3210 does not impose such an
obligation on the industry. The insurance industry is well-
capitalized and profitable, and it must assume a fair and
substantial burden. While the Oxley-Baker bill purports to
ensure that the government is paid back for what it expends,
the terms and timing of repayment are totally indefinite. In
the original bill, a substantial portion of that burden was
passed on to consumers, calling the availability and
affordability of insurance into question, particularly for
small and medium-sized businesses.
We are committed to working with Chairman Oxley and Mr.
Baker to include such a mechanism in the bill that goes to the
floor. As part of that mechanism, we would seek to include
safeguards to ensure that losses due to an act of terrorist do
not fall disproportionately on individual companies.
We are further pleased that the legislation approved by the
Committee includes several improvements over the introduced
bill as the result of acceptance of Democratic amendments:
The bill now designates the Secretary of the
Treasury as Administrator of the program and clearly authorizes
auditing powers. We believe these changes will help ensure that
the program is subject to an appropriate level of meaningful
regulatory oversight and accountability.
The authority to impose a surcharge on commercial
policyholders has now been made discretionary, and the amount
of surcharge that can be imposed has been capped, which should
help ensure that terrorism coverage remains broadly available
and affordable. The Secretary will now be required to take into
consideration the condition of the economy, the availability of
insurance, and the impact on smallbusinesses before imposing
such surcharges. Providing the Secretary with this discretion will help
to mitigate the potential effects of imposing such charges on consumers
of insurance at a time when the economy may already be experiencing
enormous pressures.
The bill also calls for a study by the Secretary
and others within six months of enactment regarding the
advisability of structuring a terrorism reinsurance pool to
ensure the availability of terrorism insurance in the long
term. The bill contains a provision giving the insurance
industry greater authority to accumulate tax-free reserves to
help cover losses related to further terrorism attacks. We
opposed the inclusion of the tax provisions. The study which
has now been included must also assess whether this new
authority to accumulate tax-free reserves is being abused and
whether it is in fact essential to the development of a pooling
mechanism. Such a study will help Congress to take a more
serious look at such proposals when we return next year.
Given the need for swift and resolute action on this
problem, however, we remain dismayed about the extraneous
measures contained in the bill. From our perspective, we should
develop a narrowly crafted bill designed to address only the
problem at hand. The approach must be straightforward,
streamlined, and workable. We therefore should analyze every
element in our proposed bill to ensure that it is either needed
to keep terrorism insurance available, to provide appropriate
oversight, or to help us gather information to develop a long-
term response to this problem.
The Democratic substitute we proposed took this approach.
This substitute would have provided for an appropriate private/
public risk sharing, required the insurance industry to be
responsible for a significant level of losses associated with
any future terrorist attack before any taxpayer funds were
committed, and provided appropriate protections to ensure that
an individual insurer would not be disproportionately affected.
While ensuring that an undue level of costs were not passed on
to consumers, the substitute omitted the tax provisions of H.R.
3210, as well as those provisions concerning victims' recovery
rights. Although certain important features of the substitute
have been included in the provisions of the bill, more should
be done.
In particular, while H.R. 3210 purports to recover money
from industry, the tax provision can be seen as providing the
industry with a long-term subsidy that could well exceed what
it pays. While we are pleased by the addition of provisions to
protect against the fraudulent use of such reserves to manage
earnings, we believe that the sections of the bill that
establish tax-free reserves for terrorism risks should
beremoved from the bill. It may prove necessary to include such
provisions in a long-term solution to reestablish stability in the
terrorism risk reinsurance marketplace, but we should not hastily write
into law such advantages without first seriously considering their
costs and benefits. The study on a terrorism pool included in the bill
is the appropriate mechanism for determining whether maintaining such a
reserve mechanism is advisable as part of a longer term solution, and
we are pleased that it will examine whether the tax-free reserves
provided by this bill should be retained or eliminated.
It is important to note that the insurance industry has not
asked for this tax benefit and it is not asking to be, and does
not need to be, bailed out. We must be certain that in our
creation of a government backstop we do not inadvertently
``bail them out'' through unnecessary tax relief. Moreover, the
establishment of sizable tax-free reserves could have the
effect of hindering the re-emergence of the private reinsurance
market. We therefore should think carefully before taking this
step.
We also have very serious concerns with section 15 of the
bill, the misnamed ``Sovereign Immunity'' section. Section
15(a) would force every legal action involving a terrorism-
related claim (including those which are not seeking insurance
coverage) into federal court, and mandate collateral source
offset in all such cases. Section 15(b) would eliminate
punitive damages and joint and several liability for non-
economic damages in insurance coverage cases for property and
casualty insurance. We are concerned that, rather than
protecting the insurance market, these changes will harm the
legitimate legal rights of the victims of terrorism.
Section 15(a) is problematic for several reasons. First,
federalizing all terrorism related cases \1\ does not appear to
be justified. What this provision does is take hundreds and
thousands of potential tort actions that would ordinarily go
into state court and funnel them into already overburdened
federal courts having little or no expertise in the state law
subject matter of the tort claim. We have seen no evidence that
the current system of federalism, which has served our nation
well for over two hundred years, is not able to deal with
future terrorism related cases. Certainly, there have been
precedents for federalizing very limited forms of legal
actions. That has generally been limited, however, to
situations where the federal government is also assuming direct
liability for the legal action. This was the case in the
recently enacted Air Transportation Safety and System
Stabilization Act, which federalized legal actions arising from
the September 11 terrorist attack against airlines, but did so
in the context of creating a federal fund to pay for the
victims' damages. In the present legislation, the federal
government will not be assuming any direct liability for victim
claims, so there is no clear quid pro quo that would justify
the federal intrusion into traditional state law prerogatives.
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\1\ The proposed change is written so broadly that it would limit
victims' rights in every terrorism-related civil action, whether state
or Federal, even if the insurer is not a party to the action. This is
because almost all losses are subject to insurance, even if the
coverage is negligible or the cost to the insurer minimal.
---------------------------------------------------------------------------
Second, we are concerned the critical term ``act of
terrorism'' is undefined within the text of the legislation and
thus grants far too much bureaucratic latitude to the
administrator to designate an event an ``act of terrorism.''
For example, under the bill the administrator could go too far
in making such designations, such that losses incurred due to a
hoax or practical joke could be considered acts of terrorism.
Third, we have concerns regarding the collateral offset
provision which overrides state law to require that a victim's
recovery for any terrorism-related loss be offset by any funds
received pursuant to an emergency or disaster relief program,
or other collateral source. Under this provision losses caused
by negligence or wrongdoing would be shifted from negligent
defendants to private insurers or others who made the
``collateral source'' payment. In our view, mandating offsets
for collateral source benefits is just plain bad public policy.
Such offsets (1) allow a negligent defendant to profit from the
victims prudent investment in insurance; (2) undermine the
deterrent effect of our civil justice system by allowing
defendants to escape full liability for their negligence; and
(3) provide a disincentive for persons to obtain and maintain
adequate insurance or other protections. Moreover, the
provision overreaches because any funding given to the victim,
even funds from a voluntary organization, would have to be used
to offset relief payments made by culpable defendants. We see
no reason why victim relief funds received from the Red Cross
or other humanitarian group should be used to offset damage
payments and reduce a wrongdoer's culpability. Such a system
could only discourage the efforts of disaster relief and other
non-profit organizations at times when they are desperately
needed.
At the outset we note that section 15(b) was improved at
the markup through the Bentsen amendment to specify that the
damage limitations would apply only to ``a claim for commercial
property and casualty insurance resulting from an act of
terrorism causing atriggering determination.'' \2\ This means
that the damage limits of section 15(b) would not apply to non-
insurance claims. Nonetheless, it is still difficult to justify the
damage limitations set forth in this section.
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\2\ The Bentsen amendment superseded the Cox amendment also added
at the markup. The Cox amendment appeared to say that the bill affords
its protections not only to insurers but also to businesses insured by
them.
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As amended by the Bentsen amendment, the subsection would
prohibit a business from buying insurance to protect itself
from liability for punitive damages and joint and several
liability for non-economic damages in actions against insurers.
Under the American system of insurance regulation and the
American legal regime governing tort actions, the authority to
restrict the types of losses that may be insured have been left
to the states. In fact, only about half of the states prohibit
a person from purchasing insurance to cover claims from
punitive damages. States also permit a business to purchase
insurance to protect itself from joint and several liability
for non-economic damages. Section 15(b) would overturn several
states' laws that permit businesses to protect themselves from
these types of claims.
The premise of the bill is that the taxpayers will be
repaid any financial assistance by the insurers and the
purchases of commercial policies. As a result, there is no
justification for overturning state law under the guise of
protecting the Federal taxpayers. We are concerned that these
limitations on insurance policies will deprive businesses of
protection that they can purchase today. Ultimately, this will
unfairly penalize victims that are harmed by defendants without
sufficient assets to pay punitive or non-economic damages.
Given our concerns, it is difficult to understand the
justification for section 15 of the legislation, other than
perhaps creating a new precedent for broad ``tort reform.''
Unfortunately, in pursuing that objective the majority has
created a confused and awkward new legal regime, which is very
likely to cause more harm than good. We hope that these
provisions are deleted on the floor or in conference with the
Senate.
In sum, we believe that we must temporarily intervene in
the reinsurance marketplace to safeguard against a cascading
economic crisis, and we must quickly act on this legislation.
Although we are pleased that the Committee made a number of
substantial and perfecting modifications to the bill during its
deliberations, we can and should make additional improvements
to H.R. 3210 as it continues its path through the legislative
process. Time is of the essence, and we will continue to work
with all interested parties on these matters in the upcoming
days.
John J. LaFalce.
Paul E. Kanjorski.
Carolyn B. Maloney.
Luis V. Gutierrez.
Brad Sherman.
Barbara Lee.
Janice D. Schakowsky.
Stephanie Tubbs Jones.
Michael E. Capuano.
Harold E. Ford, Jr.
Joseph Crowley.
Steve Israel.
ADDITIONAL VIEWS OF MESSRS. CROWLEY, WATT, AND GUTIERREZ
We are pleased that the Committee has recognized the
importance of expedited action on the issue of terrorism
insurance coverage. Additionally, while we have some concerns
about the Oxley-Baker proposal that passed through the
Committee, it did represent a solid, bipartisan start to
crafting a workable piece of legislation to address this
insurance crisis in America.
One of the key faults, though, with the Oxley-Baker
proposal is the lack of language stipulating inclusion of
personal property and casualty lines, as opposed to just
commercial P&C lines, in this back-stop legislation.
The goal of the underlying legislation is to ensure that
commercial insurance carriers do not attach a terrorism
exclusion in their policies, price insurance for terrorism out
of reach, or depart the market all together. This represents a
serious and legitimate concern. Unfortunately, these same
problems will exist with respect to personal P&C lines without
any Federal action.
To this end, an amendment was offered and withdrawn at
mark-up on this issue. While the understanding at the time was
that the Chairman was unprepared to accept any such language,
he was open to the idea.
It is imperative that personal lines be included in this
legislation.
The basic purpose of this legislation is to serve as a
Federal back-stop for the property and casualty insurance
industry; thereby keeping coverage accessible and premiums
affordable.
Excluding personal lines will lead to increased costs for
policy holders and a potential lack of accessibility for
coverage, particularly for those Americans living in high-risk
areas.
As our nation braces itself for possible future attacks on
our soil, we could be exposed to millions of dollars in
personal P&C claims if another urban area is attacked and
results in great damage to the neighborhoods surrounding that
targeted area.
Congress cannot advance legislation where large commercial
enterprises can afford insurance and their residential
neighbors are left exposed.
Additionally, as the reinsurance industry often does not
differentiate between personal or commercial lines, without a
Federal back stop for personal P&C, insurance risks for
personal P&C coverage will significantly increase, inviting
possible exclusions from terrorism for personal lines, greatly
increased premiums to homeowners or a complete fleeing from the
market--the same justified fears we have about the commercial
lines.
While insurance itself is a concept based on risk, the
insurance industry is based on risk avoidance, hence the
reasoning behind actuarial models and reinsurance.
Without enveloping personal P&C into any back-stop
legislation, there is little chance that the insurance industry
will continue to provide personal lines of coverage at an
affordable price, as carriers will not know the risks
associated with this coverage and would lack any Federal back-
stop protections.
To support this argument, the Independent Insurance Agents
Association of New York specifically requested that both
commercial and personal lines be covered under any terrorism
insurance package, stating that without such, Americans could
see large increases in personal line premiums.
Furthermore, without the inclusion of personal lines,
personal P&C carriers would not be subject to the uniform
definition of terrorism outlined in H.R. 3210. Again, this
would threaten personal policy holders.
While the point is made by some that inclusion of personal
lines in this legislation would drive up personal premiums, a
key fact to take note of is that personal, as well as
commercial, P&C premiums will increase next year.
The issue then becomes one where without the presence of a
Federal back-stop, personal P&C premiums, particularly in high-
risk areas, will not only increase but skyrocket.
Now is the time for Congress to work together for sound
legislation to ensure that terrorism insurance can and will be
both accessible and affordable to US commercial and personal
property and casualty holders.
Joseph Crowley.
Melvin L. Watt.
Luis V. Gutierrez.
ADDITIONAL VIEWS OF MS. LEE, AND MESSRS. ISRAEL, SANDERS, FORD,
CAPUANO, AND FRANK
During committee consideration of H.R. 3210, Representative
Lee offered an amendment, cosponsored by Representatives
Gutierrez, Frank, and Meeks, to require that any insurance
company wishing to benefit from the provisions in the bill
would have to first provide information on the policies they
provide on the basis of race, ethnicity, gender, and location
to ensure that minorities and individuals in low-income
communities are not discriminated against. While we are
disappointed that this amendment failed, on a mostly party-line
vote, we continue to believe that data disclosure by the
insurance industry is essential.
It is only logical that if we are to provide the insurance
industry with billions of taxpayer dollars that we should
require them to provide this important data which the
Administration, Congress, and American public can use to
determine if any insurance company is engaging in the
discriminatory practice of redlining.
The federal government currently has no access to this data
from the insurance industry. The data provisions in the 1977
Home Mortgage Disclosure Act (HMDA) that require banks and
other depository institutions to submit annual reports do not
apply to insurance. This HMDA data is an extremely valuable
tool in rooting out discriminatory practices by banks.
Currently, only 8 states (CA, IL, MD, MA, MN, MO, TX, and WI)
require this kind of beneficial data.
A number of civil rights, business, consumer, and labor
groups support data disclosure in as a condition of any
reinsurance legislation. Those groups are:
ACORN
Center for Community Change
Center for Public Dialog
Coalition for Indian Housing and Development
Consumers Union
The Enterprise Foundation
Filipino American Political Association
Greenlining Institute
International Union, UAW
Leadership Conference on Civil Rights
McAuley Institute
National Black Business Council
National Community Reinvestment Coalition
National Council of Asian American Business Associations
National Council of La Raza
National Fair Housing Alliance
National Housing Trust
National League of Cities
National Low Income Housing Coalition
National Neighborhood Coalition
National Puerto Rican Coalition
National Training and Information Center
Woodstock Institute
Opponents of the Lee amendment to H.R. 3210 in committee
stated that we could not require data collection from the
insurance industry because there was no federal role for
insurance. We would argue that H.R. 3210 in and of itself
creates a federal role in insurance and thus data disclosure is
appropriate and needed.
We hope that the Members of the Financial Services
Committee will consider adding the data disclosure provisions
in the Lee amendment in the final version of H.R. 3210.
Signed,
Barbara Lee.
Steve Israel.
Bernard Sanders.
Harold E. Ford, Jr.
Michael E. Capuano.
Barney Frank.
ADDITIONAL VIEWS OF MR. BENTSEN
I support H.R. 3210, the Terrorism Risk Protection Act,
because I believe that it balances the need to address the
impending crisis in the reinsurance market and its effect on
the economy while protecting the interests of the taxpayers.
The bill is not perfect legislation but it is the best that can
be accomplished in the short period of time available to
address the problem of pricing risk of terrorism without
catastrophic economic consequences. The bill combines aspects
of all proposals put forward including those of the
Administration and the reinsurance industry. Rather than
providing first dollar coverage by the taxpayers of insurance
company losses, the bill implements a deductible provision
which will not distort the market more so than necessary. The
bill additionally provides for taxpayers to recoup any losses
paid from the industry. These measures combine both the
immediate need for a federal backstop to insure that policies
are written this year along with recoupment not dissimilar from
the pooled premium model advanced by some in the industry.
While arguments concerning the low level of the deductible and
tax-exempt status of reserves are legitimate, they continue to
be outweighed by lack of viable alternatives to ensure equity
among insurers regardless of size and protection of the
taxpayers' interests.
Additionally, legitimate concerns are raised with respect
to the liability sections in the bill. Here again, balance is
necessary for the benefit of the taxpayers. Given the unique
nature of both the insured incident, terrorism, and the
underwriting of that risk by the taxpayers, some restrictions
may well be in order. In addition, it is assumed that this
legislation and the federal involvement will be temporary and
so should any limitation with respect to liability. Adoption of
the amendment I offered preserving the rights of injured
parties except with respect to claims against property and
casualty insurance policies covered under this act is necessary
in ensuring that balance. Limiting the exposure of the
taxpayers in return for underwriting the risk of terrorism
should not be assumed as limiting the exposure of property
owners or other defendants for negligent actions. The Bentsen
amendment clearly underscores the Committee's intent that
liability for negligent actions are not shielded. Nor should
any liability limitations contained in a final bill be
considered precedent setting or less extraordinary than the
underlying bill itself.
The Committee also adopted my amendment which would limit
any extension within the three-year period of the legislation
to no more than one year at a time. Given the uncertainty of
the reinsurance market in the aftermath of September 11, 2001
and the lack of time for Congress to fully study the
implications and structures of federal involvement, any measure
ultimately adopted must be short term.
The failure of Congress to act to ensure stability in the
reinsurance market for property and casualty insurance would be
devastating to many sectors of our economy. The inability to
price risk for terrorism insurance in the aftermath of
September 11 could very well lead to a wholesale withdrawal
from the marketplace or dramatic increase in costs with
negative consequences to the economy at exactly the wrong time.
Any characterization of this legislation as a ``bail out'' is
inaccurate. In fact, the Committee-adopted bill makes strong
provision toward ensuring against taxpayer bailout and loss.
The bill, while not perfect, strikes the appropriate balance
erring to benefit of the taxpayers.
Ken Bentsen.
DISSENTING VIEWS
No one doubts that the government has a role to play in
compensating American citizens who are victimized by terrorist
attacks. However, Congress should not lose sight of fundamental
economic and constitutional principles when considering how
best to provide the victims of terrorist attacks just
compensation. I am afraid that H.R. 3210, the Terrorism Risk
Protection Act, violates several of those principles and
therefore passage of this bill is not in the best interests of
the American people.
Under H.R. 3210, taxpayers are responsible for paying for
90% of the costs of a terrorist incident when the total cost of
those incidents exceeds a certain threshold. While insurance
companies are technically responsible for paying back monies
received from the Treasury, the administrator of this program
may defer the repayment in order to ``avoid the likely
insolvency of the commercial insurer.'' This language may cause
administrators to indefinitely defer paying back loans, thus
causing taxpayers to permanently bear this loss. This scenario
is especially likely when one considers that ``avoid . . .
likely insolvency'' is a highly subjective standard, and that
any administrator who attempts to enforce a strict repayment
schedule will likely come under heavy political pressure to be
more ``flexible'' in collecting debts owed to the taxpayers.
The drafters of H.R. 3210 claim that this creates a
``temporary'' government program. Those who my be persuaded to
vote for this bill on the grounds that is it only a
``temporary'' program should ask themselves what will happen in
two years if industry lobbyists come to Capitol Hill to explain
that there is still a need for this program because of the
continuing threat of terrorist attacks. Does anyone seriously
believe that Congress will fail to reauthorize this
``temporary'' insurance program or provide some other form of
taxpayer help to the insurance industry? My colleagues should
remember that the federal budget is full of expenditures for
long-lasting programs that were originally intended to be
``temporary.''
H.R. 3210 further compounds the danger to the taxpayer
because of what economists call the ``moral hazard'' problem. A
moral hazard is created when individuals have the costs
incurred from a risky action subsidized by a third party. In
such a case individuals may engage in unnecessary risks or fail
to take steps to minimize their risks. After all, if a third
party will bear the costs of negative consequences of risky
behavior why should individuals invest their resources in
avoiding or minimizing risk?
While no one can plan for terrorist attacks, individuals
and businesses can take steps to enhance security. For example,
I think we would all agree that industrial plants in the United
States enjoy reasonably good security. They are protected not
by the local police but by owners putting up barbed wire
fences, hiring guards with guns, and requiring identification
cards to enter. One reason private firms put these security
measures in place is because insurance companies provide them
with incentives, in the form of lower premiums, to adopt
security measures. H.R. 3210 contains no incentives for that
type of private activity. In fact, H.R. 3210 exacerbates the
potential moral hazard problem by not making insurance
companies pay a deductible before they can receive taxpayer
funds! This bill gives no indication of even recognizing the
important role insurance plays in providing incentives to
minimize risks. By removing an incentive for private parties to
avoid or at least mitigate the damage from a future terrorist
attack, the government is inadvertently increasing the damage
that will be inflicted by future attacks!
Instead of forcing taxpayers to subsidize the costs of
terrorism insurance, Congress should consider creating a tax
credit or deduction for premiums paid for terrorism insurance,
as well as a deduction for claims and other costs borne by the
insurance industry connected with offering terrorism insurance.
A tax credit approach reduces government's control over the
insurance market. Furthermore, since a tax credit approach
encourages people to devote more of their own resources to
terrorism insurance, a tax credit approach avoids the moral
hazard problems associated with federally-funded insurance.
H.R. 3210 does take a good first step in this direction by
repealing the tax penalty which prevents insurance companies
from properly reserving funds for human-created catastrophes,
however, Congress should do more to provide tax deductions and
credits for terrorism insurance.
In conclusion, H.R. 3210 may reduce the risk to insurance
companies from future losses, but it increases the costs
incurred by American taxpayer. More significantly, by ignoring
the moral hazard problem this bill may have the unintended
consequence of increasing the losses suffered in any future
terrorist attacks. Therefore, passage of this bill is not in
the long-term interests of the American people.
Ron Paul.