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June 13, 2002

       Mr. SARBANES. Mr. President, I commend my colleague, Senator Dodd, for his leadership on this very important issue. I have joined with him in cosponsoring the legislation he has introduced, S. 2600, which is now before the body. I thank Senator
Daschle and Senator Reid for moving the Senate to this issue, and we appreciate the willingness of the other side of the aisle to cooperate in that endeavor.

        This bill is now open to amendment, and we hope as we move forward today, in short order, that those who have amendments will be offering them and that we will be able to consider them as we address the important issue contained in the legislation.

        This legislation is designed to ensure the continued financial capacity of insurers to provide coverage for risks from terrorism. It obviously stems from the attacks of September 11 which raised a very large question about the future availability of property and casualty insurance for terrorism risk.

        Shortly after those attacks, the administration, interacting with the Congress, put forward certain ideas for addressing this issue, and there has been an effort to try to deal with this issue over the intervening months. It is a difficult and complex question. A number of questions have been raised with respect to it. Hearings have been held by more than one committee in the Congress on both the House and the Senate side. The Banking Committee held hearings in late October in which the witnesses who appeared acknowledged the need for legislation and agreed that the future availability and affordability of terrorism insurance would be placed in jeopardy absent congressional action.

        Many have outlined the potential negative consequences for the U.S. economy from the financial instability which would arise if terrorism insurance were not available.

        That view is reflected in the congressional findings on which the Terrorism Insurance Act rests. Let me quote briefly from those findings. It is very important to lay the basis as to why we are trying to move this legislation. I quote:

        Widespread financial market uncertainties have arisen following the terrorist attacks of September 11, 2001, including the absence of information from which financial institutions can make statistically valid estimates of the probability and the cost of future terrorist events and, therefore, the size, funding, and allocation of the risk of loss caused by such acts of terrorism.         A decision by property and casualty insurers to deal with such uncertainties, either by terminating property and casualty coverage for losses arising from terrorist events or by radically escalating premium coverage to compensate for risks of loss that are not readily predictable, could seriously hamper ongoing and planned construction, property acquisition, and other business projects, and generate a dramatic increase in rents and otherwise suppress economic activity.

        The findings go on to say:

        The United States Government should provide temporary financial compensation to insured parties, contributing to the stabilization of the U.S. economy in a time of national crisis, while the financial services industry develops the systems, mechanisms, products, and programs necessary to create a viable financial services market for private terrorism risk insurance.

        That basically sets out the problem we are trying to address with this legislation.

        There is recent evidence that property and casualty insurers are excluding terrorism coverage from the policies they write. The U.S. General Accounting Office recently analyzed the terrorism insurance market and found that, and I quote:

..... some sectors of the economy--notably real estate and commercial lending--are beginning to experience difficulties because some properties and businesses are unable to find sufficient terrorism coverage, at any price.

        Furthermore, where terrorism insurance is available, it is often expensive and significantly limited in both the amount and the scope of the coverage.

        The consequence of all of this is that you have a number of properties currently either uninsured or underinsured. And the potential consequences of this situation, if left unaddressed, are cause for serious concern. That is why we are here today.

        In the event of another attack, a widespread lack of insurance coverage could hinder recovery efforts as property owners struggle to meet the costs of rebuilding without the support of insurance. As the GAO nted, property owners ``lack the ability to spread such risks among themselves the way insurers do,'' and, as a result, I am quoting the GAO:

..... another terrorist attack similar to that experienced on September 11th could have significant economic effects on the marketplace and the public at large. These effects could include bankruptcies, layoffs, and loan defaults.

        The GAO also found that even in the absence of further terrorist activity, even in the absence of it, inadequate insurance coverage could have an adverse effect on the willingness of lenders to finance new construction projects as well as the sale of existing property. Already the GAO found:

        [s]ome examples of large projects canceling or experiencing delays have surfaced with a lack of terrorism coverage being cited as a principal contributing factor.

        The GAO concluded that ``the resulting economic drag could slow economic recovery and growth,'' even if the terrorist attack does not materialize.

        So we have a problem either way. If the terrorist attack should materialize, the lack of coverage would markedly hinder recovery efforts. But even if it doesn't, you have an economic drag taking place because of the unwillingness of lenders to finance new construction projects as well as the sale of existing projects.

        Most people seem to believe that in time, the insurance industry will be able to underwrite the terrorist risk. But they don't now, at this point, have the experience and the factual basis on which to make those calculations. In the meantime, a short-term Federal backstop for terrorism insurance would help to stabilize the marketplace and forestall the potential negative consequences which I have just quoted, identified by the GAO.

        The legislation we have before us, which Senator Dodd has brought to the body, works off of the proposals that were developed by the administration late last year. This Terrorism Risk Insurance Act establishes a shared compensation program that will split the cost of property and casualty claims from any acts of terrorism during the next year between the Federal Government and the insurance industry.

        The act would terminate at the end of the year, unless the Treasury Secretary determines that the program should be in place for an additional year. So it is, by its very definition, short term. The premise of it is that over that period of time the insurance
industry will be able to develop the knowledge, the expertise, and the capability to underwrite the terrorist risk. Under this legislation, the definition of an act of terrorism will be uniform across the country. Insurance companies providing commercial property and casualty insurance are required to participate in the program; voluntary participation is allowed with respect to personal lines of property and casualty insurance. Participating insurance companies must offer terrorism insurance coverage in all of their property and casualty policies for all participating lines. Each participating insurance company will be responsible for paying a deductible before Federal assistance becomes available. So the first dollar will come from the insurance industry.

        In the first year of the program, the amount of the deductible is determined by dividing $10 billion among participating insurance companies based on their market share. If the Secretary calls for a second year, the deductible will be determined by dividing $15 billion among participating insurance companies based on their market share.

        For losses above the companies' deductibles, but not exceeding $10 billion, the Federal Government will pay 80 percent, and the companies will pay 20 percent. For any portion of total losses that exceeds $10 billion, the Government will cover 90 percent and the companies will cover 10 percent.

        Losses covered by the program will be capped at $100 billion. Above this amount, it will be up to Congress to determine the procedures for and the source of any payments.

        This framework provides to the insurance industry the ability to calculate at the top level what they may have to cover in damage. Therefore, it gives them the ability to calculate what the premiums ought to be and to structure a properly arranged financial system. We do that, of course, by providing that above certain levels the Federal Government will assume 80 or 90 percent--depending on the figure--of the losses.

        I think this is a fairly simple program. We have had a lot of complex suggestions made to us--some extremely complex, I may say. I think this is pretty straightforward on its face. It is limited in its duration.

        One of the guiding principles in the bill that I think is important is that, to the extent possible, State insurance law should not be overridden. We seek to respect the role of the State insurance commissioners as the appropriate regulators of policy terms and rates. We are anxious to try to keep the State insurance commissioners in the picture. That is where the responsibility has heretofore been. There is not an effort in this bill to make any radical change in that existing arrangement.

        In conclusion, I think the Congress needs to act on this issue. We run the risk of serious damage to our economy. I know there are many steps between now and final enactment of the legislation. We look forward to continuing to consult with the administration over this matter, as we have been doing. But, again, I commend Senator Dodd for his extraordinary work in crafting the bill that is before us and getting it before the Senate.

        Yesterday some reference was made to some of the procedural problems that we encountered on the way to the floor. But through the actions of Senator Daschle and the concurrence of Senator Lott, we are here now with the legislation before us, and the Senate now has an opportunity to address this very important issue. I hope we will now be able to consider amendments on their merits, dispose of them, and then move to final
action on this legislation.

        Again, I underscore the fine work that Senator Dodd has done on this legislation from the very beginning and, certainly, in bringing us to this point today.

        I yield the floor.