99 006
107 th 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
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 Expenditures22
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, primary
insurance 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. Many
foreign 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 such
risk 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 the
insured 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 to
designate 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 small
businesses 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 be
removed 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.
\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 a
triggering 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.
\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.
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.
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