SECTION: PREPARED TESTIMONY

LENGTH: 1464 words

HEADLINE: PREPARED STATEMENT OF THOMAS J. DONOHUE
 
BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
 
SUBJECT - THE AVAILABILITY OF TERRORISM INSURANCE COVERAGE

BODY:
Good morning, Mr. Chairman and members of the committee, I am Thomas J. Donohue, President and Chief Executive Officer of the United States Chamber of Commerce and Chief Executive Officer of the U.S. Chamber Institute for Legal Reform, The U.S. Chamber is the world's largest business federation, representing more than three million businesses and professional organizations of every size, in every business sector, and in every region of the country. The central mission of the Chamber is to zealously represent the interests of the entire business community before Congress, the Administration, the independent agencies of the federal government, and the courts. The mission of the Institute for Legal Reform is to reform the nation's state and federal civil justice systems to make them simpler, fairer and faster while maintaining access to our courts for legitimate lawsuits. I welcome this opportunity to testify before you on the regent need for prompt Congressional action to help make sure that insurance coverage for terrorism is available. I also ask that my full statement be inserted into the record. The terrorists who attacked our nation September 11 deliberately struck at the center of U.S. finance and commerce. Congress has acted promptly to help address a number of the immediate needs raised by the September 11th attacks by passing the Air Transportation Safety and System Stabilization Act as well as providing much needed emergency funding to help with the immediate recovery. Unfortunately, more work is needed to help shore up our economy, and passage of Trade Promotion Authority and an adequate economic stimulus package would represent significant steps. However, even those efforts will be inadequate if American business is unable to move forward secure in the knowledge that the potential risks associated with future terrorist attacks will not cripple them beyond the point of recovery.

The attacks have had a significant impact, on the insurance industry.

September 11th will result in the largest insured loss in U.S, history. It has been estimated that the insurance industry will pay between $30 billion and $58 billion in claims, and some estimates are even higher. To put the magnitude of this event in perspective, it easily surpasses the $30 billion (without adjusting for inflation) paid for claims because of Hurricane Andrew. The insurance industry has indicated that it remains, committed to meeting its obligations to policyholders for the events of September 11th. These claims for terrorist losses will be paid directly by the primary insurers operating in the United States, with a major portion of the costs ultimately shared throughout the global insurance and reinsurance community.

The problem, however, is that in the wake of these events, insurers and reinsurers are examining how to manage the heightened level of terrorism risk they are facing and arc re-evaluating what coverage, if any, they may provide for it. The September 11th attacks fundamentally changed assumptions about the scope of risks and losses associated with terrorism. It now seems that any commercial enterprise, from Main Street-type small businesses to multinational American "icon" corporations, could become targets of or affected by the next terrorist attack on American soil. As a result of the potentially astronomical increase in liability, the insurance industry has begun to indicate that it cannot cover losses associated with future terrorist attacks.

A single day event of the magnitude experienced on September 11th is a substantial hit to the capital base of many companies as well as the worldwide insurance industry as a whole. While the attack may strain many insurance companies, current indications are that the majority of companies will be able to meet their obligations. However, in the short run, the U.S. and global reinsurance industry does not have the capacity to provide protection against another major incident, or a continuing series of incidents. Companies with significant losses stemming from the terrorist attack will need to raise fresh capital in order to maintain their capacity to insure against all other risks covered by their contracts. Uncertainties regarding losses from future terrorist attacks will likely make raising fresh capital problematic, As a result, because of the unprecedented scope and nature of the losses sustained last month and the unpredictability of future liabilities, insurance coverage against future acts of terrorism will become virtually unobtainable for the vast majority of policyholders.

Major reinsurers have already alerted their clients that they intend to sharply reduce or eliminate their coverage for terrorist attacks, particularly policies on large commercial risks such as office towers, transportation hubs, sports arenas, and the aviation industry. The lack of reinsurance would leave primary insurance companies on the hook for all of the risk of a terrorist attack, a position they cannot assume. This, in turn, will force primary insurers to eliminate the availability of such coverage. Therefore, because the majority of American businesses traditionally renew their insurance contracts each January 1st, businesses of all sizes and kinds could be left without insurance against terrorist acts.

What does that mean? If not corrected, this market disruption in insurance coverage will have deep, widespread and potentially devastating ripple effects throughout the entire U.S. economy. (Businesses that cannot secure full insurance coverage, including coverage for terrorist acts, may decide that risks from a lack of complete coverage leave them too vulnerable thus forcing them to reduce operations that would be considered too likely to be terrorist targets, This would result in layoffs and the elimination or decreased availability of a variety of products and services. For example, without adequate coverage, trucking firms, railroads, airlines and ships may be unable to transport many types of cargo or limit their destinations,

In addition, a lack of terrorism insurance coverage could significantly harm the ability of many businesses to obtain financing or otherwise buy or sell properties, businesses or projects. Furthermore, it is important to note that this is not only a prospective problem. For example, the terms of most loans require evidence of adequate insurance. If adequate insurance is no longer available, borrowers may find themselves in technical default of their loan terms. As a result, lenders would be in the position of potentially having to try to find adequate insurance coverage for their borrower that may not exist or either accelerating payments under the terms of the loan or culling-in the loan in its entirety. They may also be forced to cut down on the amount of available credit as they build their reserves in the event of additional terrorist attacks. Finally, if businesses decide to self-insure the risk of future terrorist attacks, they may find it difficult, if not impossible, to attract their own reinsurance or even new capital.

The principle upon which insurance rests is the ability to spread risk so that no single person or entity is forced to bear the full impact of an economic loss. Without this ability to spread risk, individual American businesses cannot afford to take on the potentially unlimited exposure to loss arising from uninsured terrorist attacks. Without some sort of appropriate partnership between the insurance industry and the federal government, the looming constriction in the insurance and reinsurance markets threatens to inflict serious injury to the U.S. economy. This would potentially result in American businesses and citizens incurring substantial losses even if we do not suffer a future terrorist, attack.

It is critical that the business community, the Administration and Congress come together before the end of this year's Congressional session to develop and implement an appropriate federal financial backstop for terrorism exposure. If such a backstop is not created, our nation's economic recovery be seriously jeopardized. Whatever approach is developed, it should support ongoing, efforts of the private insurance and reinsurance markets to return to their proper role of underwriting risks while recognizing that a government backstop may be necessary for a period of time.

The Chamber recognizes that there are a number of ways in which this issue could be addressed and we stand ready to work with all of the stakeholders to ensure that a workable mechanism is developed so that we can avoid a widespread economic crisis and keep American businesses in business. I would be happy to answer any questions you may have. Thank you.

END

LOAD-DATE: October 31, 2001