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108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     108-780

======================================================================
 
           TERRORISM INSURANCE BACKSTOP EXTENSION ACT OF 2004

                                _______
                                

 November 18, 2004.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 4634]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 4634) to extend the terrorism insurance program of 
the Department of the Treasury, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................     4
Background and Need for Legislation..............................     4
Hearings.........................................................     6
Committee Consideration..........................................     6
Committee Votes..................................................     6
Committee Oversight Findings.....................................     7
Performance Goals and Objectives.................................     7
New Budget Authority, Entitlement Authority, and Tax Expenditures     7
Committee Cost Estimate..........................................     7
Congressional Budget Office Estimate.............................     7
Federal Mandates Statement.......................................    13
Advisory Committee Statement.....................................    13
Constitutional Authority Statement...............................    13
Applicability to Legislative Branch..............................    14
Section-by-Section Analysis of the Legislation...................    14
Changes in Existing Law Made by the Bill, as Reported............    14
Dissenting Views.................................................    22

                               Amendment

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Terrorism Insurance Backstop Extension 
Act of 2004''.

SEC. 2. EXTENSION OF TERRORISM INSURANCE PROGRAM.

  (a) Program Years 4 and 5.--Paragraph (11) of section 102 of the 
Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note) is amended 
by adding at the end the following new subparagraphs:
                  ``(E) Program year 4.--The term `Program Year 4' 
                means the period beginning on January 1, 2006 and 
                ending on December 31, 2006.
                  ``(F) Program year 5.--The term `Program Year 5' 
                means the period beginning on January 1, 2007 and 
                ending on December 31, 2007.''.
  (b) Insurer Deductible.--Paragraph (7) of section 102 of the 
Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note) is amended--
          (1) by redesignating subparagraph (E) as subparagraph (G);
          (2) in subparagraph (D), by striking ``and'' at the end;
          (3) by inserting after subparagraph (D) the following new 
        subparagraphs:
                  ``(E) for Program Year 4, the value of an insurer's 
                direct earned premiums over the calendar year 
                immediately preceding Program Year 4, multiplied by 15 
                percent;
                  ``(F) for Program Year 5, the value of an insurer's 
                direct earned premiums over the calendar year 
                immediately preceding Program Year 4, multiplied by 20 
                percent; and''; and
          (4) in subparagraph (G) (as so redesignated by paragraph (1)) 
        of this subsection--
                  (A) by striking ``(D)'' and inserting ``(F)''; and
                  (B) by striking ``or Program Year 3'' and inserting 
                ``Program Year 3, Program Year 4, or Program Year 5''.
  (c) Mandatory Availability.--Subsection (c) of section 103 of the 
Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note) is amended--
          (1) by striking all of the matter that precedes subparagraph 
        (A) of paragraph (1) and inserting the following:
  ``(c) Mandatory Availability.--During the Program, each entity that 
meets the definition of an insurer under section 102--'';
          (2) by striking paragraph (2); and
          (3) by redesignating subparagraphs (A) and (B) as paragraphs 
        (1) and (2) and realigning such paragraphs, as so redesignated, 
        so as to be indented 2 ems from the left margin.
  (d) Insured Loss Shared Compensation.--Subsection (e) of section 103 
of the Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note) is 
amended
          (1) in paragraph (2)(A), by striking ``or Program Year 3'' 
        and inserting ``, Program Year 3, Program Year 4, or Program 
        Year 5'';
          (2) in paragraph (3), by striking ``or Program Year 3'' and 
        inserting ``, Program Year 3, Program Year 4, or Program Year 
        5'';
          (3) in paragraph (6)--
                  (A) in subparagraph (B), by striking ``and'' at the 
                end;
                  (B) in subparagraph (C) by striking the period at the 
                end and inserting a semicolon; and
                  (C) by adding at the end the following new 
                subparagraphs:
                  ``(D) for Program Year 4, the lesser of--
                          ``(i) $17,500,000,000; and
                          ``(ii) the aggregate amount, for all 
                        insurers, of insured losses during such Program 
                        Year;
                  ``(E) for Program Year 5, the lesser of--
                          ``(i) $20,000,000,000; and
                          ``(ii) the aggregate amount, for all 
                        insurers, of insured losses during such Program 
                        Year; and''; and
          (4) in paragraph (7)--
                  (A) in subparagraph (A), by striking ``and (C)'' and 
                inserting ``(C), (D), and (E)''; and
                  (B) in subparagraphs (B) and (C), by striking ``or 
                (C)'' each place such term appears and inserting ``(C), 
                (D), or (E)''.
  (e) Coverage of Group Life Insurance.--
          (1) In general.--Paragraph (5) of section 102 of the 
        Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note) is 
        amended in the matter that precedes subparagraph (A) by 
        inserting ``or group life'' after ``property and casualty''.
          (2) Technical and conforming amendments.--The Terrorism Risk 
        Insurance Act of 2002 (15 U.S.C. 6701 note) is amended--
                  (A) in section 102--
                          (i) in paragraph (1)--
                                  (I) in subparagraph (B)(i), by 
                                inserting ``or group life insurance'' 
                                after ``workers' compensation''; and
                                  (II) in subparagraph (B)(ii), by 
                                inserting ``and group life insurance'' 
                                after ``property and casualty 
                                insurance'';
                          (ii) in paragraph (4)--
                                  (I) by inserting ``or for group life 
                                insurance'' after ``property and 
                                casualty insurance''; and
                                  (II) by striking ``paragraph (5)'' 
                                and inserting ``paragraph (6)'';
                          (iii) in paragraph (5), by inserting ``and 
                        group life insurance'' after ``workers' 
                        compensation''; and
                          (iv) in paragraph (6)--
                                  (I) in subparagraph (A)(i), by 
                                inserting ``property and casualty or 
                                group life'' after ``excess'';
                                  (II) in subparagraph (B), by 
                                inserting ``or group life insurance 
                                coverage'' after ``property and 
                                casualty insurance coverage'';
                          (v) by redesignating paragraphs (5) through 
                        (16) as paragraphs (6) through (17), 
                        respectively; and
                          (vi) by inserting after paragraph (4), the 
                        following new paragraph:
          ``(5) Group life insurance.--The term `group life insurance' 
        means an insurance contract that provides term life insurance 
        coverage, accidental death coverage, or a combination thereof, 
        for a number of persons under a single contract, on the basis 
        of a group selection of risks.'';
                  (B) in section 103--
                          (i) in subsection (b)(1), by inserting 
                        ``(including a named beneficiary in the case of 
                        a group life insurance policy)'' before the 
                        second comma;
                          (ii) in subsection (c)--
                                  (I) in paragraph (1) (as so 
                                redesignated by subsection (c)(3) of 
                                this section), by inserting ``and group 
                                life'' after ``property and casualty''; 
                                and
                                  (II) in paragraph (2) (as so 
                                redesignated by subsection (c)(3) of 
                                this section), by inserting ``and group 
                                life'' after ``property and casualty'';
                          (iii) in subsection (e)--
                                  (I) in paragraph (6), by striking 
                                ``For '' and inserting ``Except as 
                                provided in subparagraph (F) of this 
                                paragraph, for'';
                                  (II) in paragraph (6), by inserting 
                                after subparagraph (E) (as added by 
                                subsection (d)(3)(C) of this section) 
                                the following new subparagraph:
                  ``(F) for each of the periods referred to in 
                subparagraphs (A) through (E), the amounts provided 
                under such subparagraphs, as such amounts shall be 
                increased by the Secretary before the expiration of the 
                90-day period beginning on the date of the enactment of 
                the Terrorism Insurance Backstop Extension Act of 2004, 
                based on the increase in the size of the Program caused 
                by the inclusion of group life insurance pursuant to 
                such Act, in proportion to the increased premiums 
                involved.'';
                                  (III) in paragraph (7)(C), by 
                                inserting ``or group life insurance'' 
                                after ``workers compensation'';
                                  (IV) in paragraph (8)(A)(i), by 
                                inserting ``and group life'' after 
                                ``property and casualty''; and
                                  (V) in paragraph (8), by inserting 
                                ``or group life'' after ``property and 
                                casualty'' each place such term appears 
                                in subparagraphs (A)(iii) and (C); and
                          (iv) by striking subsection (h);
                  (C) in section 105(c), by inserting ``or group life'' 
                after ``property and casualty''; and
                  (D) in section 108(d)(1), by inserting ``and the 
                group life insurance industry'' after ``property and 
                casualty insurance industry''.
          (3) Required rulemaking.--Not later than 90 days after the 
        date of the enactment of this Act, the Secretary of the 
        Treasury shall issue final regulations to carry out this 
        subsection.
  (f) Study on Long-Term Solutions.--Section 103 of the Terrorism Risk 
Insurance Act of 2002 (15 U.S.C. 6701 note) is amended by striking 
subsection (i) and inserting the following new subsection:
  ``(h) Study on Long-Term Solutions.--By June 1, 2005, the Secretary 
shall conduct a study and submit a report to the Congress on 
alternatives for expanding the availability and affordability of 
terrorism insurance after the termination of the Program that do not 
involve a Federal financial backstop.''.
  (g) Termination of Program.--
          (1) Termination.--Subsection (a) of section 108 of the 
        Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 note) is 
        amended by striking ``December 31, 2005'' and inserting 
        ``December 31, 2007''.
          (2) Final gao study and report.--Subsection (d) of section 
        108 of the Terrorism Risk Insurance Act of 2002 (15 U.S.C. 6701 
        note) is amended by adding at the end the following new 
        paragraph:
          ``(3) Final gao study and report.--The Comptroller General of 
        the United States shall conduct an assessment of the matters 
        referred to in paragraph (1) and shall submit a report to the 
        Congress, not later than June 30, 2007, on the results of such 
        study.''.

                          Purpose and Summary

    H.R. 4634, the Terrorism Insurance Backstop Extension Act 
of 2004, extends the Terrorism Risk Insurance Act (TRIA) for 
two years while maintaining a gradual increase in TRIA's 
taxpayer protections. H.R. 4634 also adds group life insurers 
to the TRIA program and requires the Treasury Department to 
report on long-term alternative solutions for expanding the 
availability and affordability of terrorism insurance. The bill 
also requires the Government Accountability Office (GAO) to 
report to Congress by June 30, 2007 on TRIA's effectiveness and 
the capacity of insurers to offer terrorism insurance after 
TRIA expires, as well as the availability of terrorism 
insurance for various policyholders.

                  Background and Need for Legislation

    The terrorist attacks of September 11, 2001 resulted in a 
tragic number of deaths and injuries, along with the 
destruction of the World Trade Center and other buildings and 
businesses. After sustaining approximately $40 billion in 
losses on that day, many insurers and reinsurers began to 
exclude terrorism coverage from commercial policies. 
Architects, engineers, construction workers, real estate 
professionals and other Americans whose jobs depended on the 
availability of insurance coverage faced work stoppages and 
unemployment.
    Congress passed the Terrorism Risk Insurance Act of 2002 
(Public Law 107-297) to address concerns that the lack of 
terrorism insurance could have significant adverse effects on 
jobs and economic growth. The purpose of TRIA was twofold: to 
make terrorism insurance widely available and affordable for 
the duration of the Act, and to provide a transition period 
during which insurance market participants could diversify 
their exposure and develop resources and mechanisms that would 
enable them to offer terrorism insurance after TRIA expired on 
December 31, 2005.
    TRIA is a public-private partnership designed to allow the 
private market to develop mechanisms to provide terrorism risk 
coverage while guaranteeing that any Federal assistance in the 
interim is partly repaid by the insurance industry and 
beneficiaries of the program. The bill established the 
Terrorism Risk Insurance Program in the Department of the 
Treasury, through which the Federal government would share the 
risk of loss from future terrorist attacks with the insurance 
industry for a temporary period of time. TRIA expires on 
December 31, 2005.
    Under TRIA, the Federal government shares 90 percent of 
each insurer's covered terrorism losses beyond a per company 
deductible. The insurance marketplace as a whole is then 
required to pay back a portion of the Government share over 
time (the ``retention''). The insurer deductibles are gradually 
increased each year (10 percent to 12.5 percent to 15 percent), 
as are the retention levels ($10 billion to $12.5 billion to 
$15 billion). This annual increase in the insurer deductibles 
and retentions is intended to ensure that TRIA does not become 
permanent by slowly phasing out the Government share and 
thereby encouraging the development of alternative terrorism 
coverages.
    The GAO found that TRIA has improved the availability of 
terrorism insurance and has prompted reinsurers to offer a 
limited amount of coverage for terrorist events. In particular, 
terrorism coverage has been made available for high-risk 
properties. Additionally, TRIA has contributed to better credit 
ratings for some commercial mortgage-backed securities.
    Despite TRIA's impending expiration, no viable alternatives 
to the Federal backstop have been developed. According to the 
GAO, ``Most industry experts are tentative about predictions of 
the level of reinsurer and insurer participation in the 
terrorism market after TRIA expires * * * [Also,] to date there 
has been little discussion of possible alternatives for 
ensuring the availability and affordability of terrorism 
coverage after TRIA expires.'' This view was echoed by Gregory 
Serio, Superintendent of Insurance for the State of New York, 
at a joint hearing held in the Subcommittee on Capital Markets, 
Insurance, and Government Sponsored Enterprises and the 
Committee on Oversight and Investigations on April 28, 2004. 
According to Superintendent Serio, ``Current marketplace 
dynamics will be seriously and adversely impacted if TRIA, in 
some form or another, is not reauthorized or if reinsurers that 
vacated the market for terrorism insurance coverage after 
September 11th, do not reenter the market. This is borne out by 
the fact that since September 11th there has been no meaningful 
coverage available for non-certified acts of terrorism.''
    The bill as ordered reported extends TRIA for two years and 
requires terrorism insurance coverage to be ``made available'' 
for the entire duration of the Program. It maintains the 
gradual increase in TRIA's taxpayer protections, continuing to 
slowly phase out the Program by increasing the taxpayer 
reimbursement from $15 billion in Program Year 3 to $17.5 
billion in Year 4 and $20 billion in Year 5. The legislation 
also maintains steady increases in insurer deductibles, holding 
the deductible at 15 percent in Program Year 4, but continuing 
to phase out the program with a 20 percent deductible in 
Program Year 5.
    To further ensure the development of alternatives to TRIA, 
the bill requires the Treasury Department to report on long-
term solutions for expanding the availability and affordability 
of terrorism insurance without a Federal backstop. 
Additionally, the bill also requires the GAO to report to 
Congress by June 30, 2007 on TRIA's effectiveness and the 
capacity of insurers to offer terrorism insurance after TRIA 
expires, as well as the availability of terrorism insurance for 
various policyholders. A one-time extension to TRIA will 
provide the additional time needed for the insurance 
marketplace and Congress to develop long-term solutions while 
preventing potential market disruptions that might otherwise 
occur if TRIA was allowed to expire before the terrorism 
insurance marketplace has stabilized.
    It is important to note that the only major change to the 
program contained in the Committee's amendment is the addition 
of coverage for group life insurance. Group life was included 
in the Committee's amendment because two years after TRIA's 
implementation, the catastrophic reinsurance market for group 
life has not reemerged as originally hoped. Another 9/11-sized 
terrorist event could significantly impact the solvency of the 
group life insurance marketplace. Expanding the TRIA backstop 
for group life insurance ensures that America's workers will 
continue to have more options for protecting their families 
from future terrorist attacks.

                                Hearings

    The Subcommittee on Capital Markets, Insurance, and 
Government Sponsored Enterprises and the Subcommittee on 
Oversight and Investigations held a hearing on April 28, 2004 
on H.R. 4634, the Terrorism Insurance Backstop Extension Act of 
2004. The following witnesses testified: The Honorable Wayne A. 
Abernathy, Assistant Secretary for Financial Institutions, 
United States Department of the Treasury; The Honorable Gregory 
V. Serio, Superintendent, New York State Insurance Department; 
and Mr. Richard J. Hillman, Director, Financial Markets and 
Community Investment, United States Government Accountability 
Office.

                        Committee Consideration

    Pursuant to rule 5(b)(3) of the Rules of the Committee on 
Financial Services for the 108th Congress, the Chair discharged 
the Subcommittee on Capital Markets, Insurance, and Government 
Sponsored Enterprises from the further consideration of the 
bill on September 24, 2004.
    The Committee on Financial Services met in open session on 
September 29, 2004 and ordered H.R. 4634, the Terrorism 
Insurance Backstop Extension Act of 2004, favorably reported to 
the House, 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. No 
record votes were taken with in conjunction with the 
consideration of this legislation. A motion by Mr. Oxley to 
report the bill to the House with a favorable recommendation 
was agreed to by a voice vote.
    The following other amendments were also considered by the 
Committee:
    An amendment by Mr. Oxley, No. 1, to include group life 
coverage under the Terrorism Risk Insurance Program and direct 
GAO to conduct a study on terrorism insurance, was agreed to by 
a voice vote.
    An amendment by Mr. Sherman, No. 2, requiring annual 
reports on the availability of homeowner's insurance for losses 
resulting from catastrophic disasters, was withdrawn.
    An amendment by Mr. Capuano, No. 3, requiring a ``soft 
landing'' in the year following Program Year 5, was withdrawn.

                      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 Department of the Treasury will use the authority 
        granted in this legislation to extend the Terrorism 
        Risk Insurance Program until December 31, 2007 and to 
        expand TRIA to include group life insurers.

   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 budget authority, entitlement 
authority, or tax expenditures or revenues consistent with the 
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 18, 2004.
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. 4634, the 
Terrorism Insurance Backstop Extension Act of 2004.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Megan 
Carroll and Melissa E. Zimmerman.
            Sincerely,
                                         Elizabeth Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

H.R. 4634--Terrorism Insurance Backstop Extension Act of 2004

    Summary: H.R. 4634 would extend the Terrorism Risk 
Insurance Act (TRIA) through calendar year 2007 and would add 
group life insurance to the lines of coverage offered under 
TRIA. Enacted in 2002, TRIA requires insurance firms that sell 
commercial property and casualty insurance to offer clients 
insurance coverage for damages caused by terrorist attacks. 
Under the act, the government would help insurers cover losses 
in the event of a terrorist attack. Under current law, TRIA 
will expire at the end of the calendar year 2005.
    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. 4634 represents an 
expected value of payments from the program--a weighted 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 government's average annual loss from providing this 
insurance, although firms do not pay any premium for the 
assistance offered by TRIA.
    On this basis, CBO estimates that enacting H.R. 4634 would 
increase direct spending by about $1.1 billion over the 2005-
2009 period and by $1.3 billion over the next 10 years. Under 
TRIA, the Treasury Department would recoup some or all of the 
costs of providing financial assistance through 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 (i.e., revenues). We assume, however that the 
Secretary would not impose any surcharges until one year after 
federal assistance is provided and that those amounts would be 
collected over several years. Thus, CBO estimates that enacting 
H.R. 4634 would increase governmental receipts by about $70 
million over the 2005-2009 period and by $480 million over the 
next 10 years.
    H.R. 4634 would extend or expand several intergovernmental 
and private-sector mandates as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the aggregate costs of 
complying with those mandates would not exceed the annual 
thresholds established by UMRA ($60 million for 
intergovernmental mandates and $120 million for private-sector 
mandates in 2004, adjusted annually for inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 4634 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--
                                           ---------------------------------------------------------------------
                                             2005   2006   2007   2008   2009   2010   2011   2012   2013   2014
----------------------------------------------------------------------------------------------------------------
                                           CHANGES IN DIRECT SPENDING

Estimated Budget Authority................     10    200    390    310    170     80     50     30     20     20
Estimated Outlays.........................     10    200    390    310    170     80     50     30     20     20

                                               CHANGES IN REVENUES

Estimated Revenues........................      0      0      0     20     50     70     80     80     90     90
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: For this estimate, CBO assumes that H.R. 
4634 will be enacted by the end of calendar year 2004. We 
estimate that enacting H.R. 4634 would increase direct spending 
by about $1.3 billion and would increase governmental revenues 
by $480 million over the 2005-2014 period. While this estimate 
reflects CBO's best judgment on the basis of available 
information, the cost of this federal program is a function of 
inherently unpredictable future terrorist attacks. As such, 
actual costs could vary greatly from the estimated amounts.
    H.R. 4634 would extend the Terrorism Risk Insurance Act 
through calendar year 2007. TRIA will expire under current law 
on December 31, 2005. TRIA provides up to $100 billion in 
financial assistance to commercial property and casualty 
insurers for losses above certain thresholds due to certain 
types of future terrorist acts. Upon enactment, H.R. 4634 would 
add group life insurance to the lines of insurance that are 
included in this program.Under TRIA, federal assistance is 
provided if the Secretary of the Treasury certifies that a terrorist 
attack has occurred in the United States or other specifically covered 
location. Generally, for a terrorist attack to be certified, it must 
have been committed by a foreign interest and cause insured damages of 
at least $5 million. Furthermore, property and casualty insurance 
policies may exclude losses due to events involving nuclear, 
biological, or chemical materials. Thus, insurance coverage may not be 
available to policyholders for terrorist attacks involving those 
materials. An insurer suffering losses as a result of an attack would 
first pay claims up to a deductible, calculated as a specified 
percentage of its aggregate property and casualty insurance premiums 
for the preceding calendar year. Those deductible amounts increase each 
year under TRIA and would continue to increase under H.R. 4634, 
reaching 20 percent of premiums by 2007.
    Once insurers have met their individual deductibles for 
damage claims due to a terrorist attack, the federal government 
would pay 90 percent of claims above the deductible amount up 
to the $100 billion in total insured losses. Insurers would be 
responsible for the remaining 10 percent. The federal 
government would be required to make future surcharges on the 
insurance industry to recoup some of the costs of federal 
assistance and would have the discretion to impose surcharges 
sufficient to recover all federal payments.

Direct Spending

    By extending financial assistance to commercial property 
and casualty insurers for future acts of terrorism against 
insured private property, enacting H.R. 4634 would expose the 
federal government to potentially huge liabilities for two more 
years (2006 and 2007). 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 this program reflects how much, on average, the 
government could be expected to pay to insurers.
    In the following sections, we describe our method for 
estimating the expected-value cost of providing financial 
assistance under H.R. 4634 and explain how we convert the 
expected-value cost to annual estimates of spending.
    Estimating the Expected Cost of Federal Assistance. For 
this estimate, CBO discussed the concepts involved in 
estimating insured losses with industry actuaries and reviewed 
the models used by firms to set premiums for the terrorism 
component of property and casualty insurance they offer. State 
insurance regulators generally require such premiums to be 
grounded in a widely accepted model of expected losses from 
covered events. After the terrorist attacks on September 11, 
2001, the insurance industry began efforts to get premiums for 
insurance coverage for terrorist events using such models.
    Although estimating losses associated with terrorist events 
is difficult because of the lack of meaningful historical data, 
the insurance industry has experience setting premiums for 
catastrophic events--namely, natural disasters. Setting 
premiums for hurricanes and earthquakes, for example, involves 
determining potential areas that could sustain damage, the 
value of the losses resulting from various types of events with 
different levels of severity, and the frequency of such events.
    Similarly, estimating premiums for losses resulting from 
terrorist attacks involves judgments regarding potential 
targets and the frequency of such attacks. Because there is a 
limited history of terrorist attacks in the United States, many 
of the parameters needed by the insurance industry to set 
premiums are based on expert opinion regarding terrorist 
activities and capabilities rather than on historical data.
    Estimating potential insured losses. Based on discussions 
with insurers and information provided by the insurance 
industry, CBO estimates that the expected or average annual 
loss subject to coverage under TRIA would be about $1.5 
billion, including $100 million from the inclusion of group 
life insurance policies under TRIA. This estimate incorporates 
industry expectations of the probabilities of terrorist 
attacks, encompassing the possibility of ones that result in 
enormous loss of life and property damage as well as the 
likelihood that no such attacks would occur.
    CBO's estimate assumes that, in most years, terrorist 
attacks would cost less than $1.5 billion. We expect that there 
is a significant probability--approaching 50 percent--that no 
terrorist attacks that would be covered by TRIA would occur in 
a given year. Clearly, since enactment of TRIA, no covered 
events have occurred; we do not know whether attacks have been 
planned or attempted but were prevented by law enforcement and 
other security measures. Although the risk of a terrorist 
attack with many lives lost and substantial property damage 
still remains, based on industry models, CBO assumes for this 
estimate that attacks similar in scale to losses sustained on 
September 11, 2001, in New York City (an estimated $20 billion) 
are likely to occur very rarely.\1\
---------------------------------------------------------------------------
    \1\Industry estimates of losses on September 11, 2001, range from 
$30 billion to $40 billion, including about $20 billion in losses in 
New York City that would have qualified for coverage under TRIA had the 
law been in effect on that date.
---------------------------------------------------------------------------
    Adjusting insured losses to determine federal payments. To 
determine federal payments under TRIA, CBO made two adjustments 
to the expected value of estimated insured losses from a future 
terrorist attack. First, because federal payments under TRIA 
would not apply to losses that exceed $100 billion per event, 
we excluded potential costs about that level. Second, we 
decreased estimated losses to account for the deductible that 
would be paid byaffected insurers in the event of a covered 
attack. Individual insurers would pay such deductibles before the 
federal government would make any payments under TRIA, and the total 
deductible paid by individual insurers could range from zero to several 
billion dollars depending on the number of insurers affected by a 
particular event.
    CBO estimates that the Secretary would need to charge 
almost $700 million in each of calendar years 2006 and 2007 to 
fully compensate the government for the average annual cost of 
having to help pay for losses due to terrorist attacks under 
H.R. 4634. In addition, in calendar year 2005, the bill would 
add coverage for group life insurance policies to the current 
TRIA program. We estimate that provision would cost about $50 
million.
    In total, CBO estimates that the expected cost to the 
government of enacting H.R. 4634 would be about $1.4 billion. 
Actual spending, however, would be spread out over many years 
and would repaid, at least in part, by surcharges imposed on 
policyholders.
    Timing of Federal Spending. To estimate federal spending 
for this program on a cash basis, CBO used information from 
insurance experts on historical rates of payment for property 
and casualty claims following catastrophic events. Based on 
such information, CBO estimates that additional outlays under 
H.R. 4634 would total about $1.3 billion over the 2005-2014 
period and about $100 million after 2014. 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.

Revenues

    Under H.R. 4634, CBO estimates that the Secretary of the 
Treasury would impose surcharges on policyholders that would 
increase revenues by $480 million over the 2005-2014 period. 
Surcharges would continue for many years beyond 2014.
    Surcharges. If a terrorist attack were to require the 
Treasury Secretary to provide financial assistance, the 
government would recoup some of that cost through surcharges 
paid by the insurance industry and purchasers of commercial 
property and casualty insurance. H.R. 4634 would require the 
Secretary to recoup federal assistance up to a fixed 
``retention amount'' set in the bill, less the amount already 
paid by insurers through the insurer deductibles and the 10 
percent share of losses over the deductibles assigned to 
insurance firms. Under TRIA, that retention amount is $15 
billion in 2005. Under H.R. 4634, the retention amounts would 
be $17.5 billion in 2006 and $20 billion in 2007, plus a slight 
adjustment upward to accountfor the increased exposure from the 
addition of group life insurance. Under H.R. 4634 (as under current 
law), the Secretary of the Treasury also would have the option to 
recover any federal assistance above the retention amount up to the 
total amount of federal assistance provided.
    Under TRIA, the recoupment of financial assistance would be 
recovered by assessing each insurer based on its portion of 
aggregate property and casualty or group life insurance 
premiums for the preceding calendar year. Surcharges would 
apply to insurance sold following a terrorist attack that 
necessitated federal assistance, and each company's surcharge 
would be limited to 3 percent of aggregate premiums. H.R. 4634 
would direct the Secretary to impose surcharges for as long as 
is necessary to recover the required portion of financial 
assistance. Thus, the government could collect surcharges for 
many years depending on the amount of financial assistance. CBO 
estimates that surcharges would total $480 million over the 
next 10 years for a two-year extension of TRIA and the addition 
of group life insurance coverage under the program.
    Timing. CBO expects that the Secretary probably would not 
recoup the entire cost of financial assistance during the 2005-
2014 period. Based on information from the insurance industry 
on aggregate premiums collected in recent years, CBO estimates 
that the administrator would recoup no more than about $100 
million a year. The bill would allow the Secretary to reduce 
annual charges considering the effect on taxpayers, the 
economy, or burdens on small and medium-sized businesses. 
Therefore, if annual losses were 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. 4634. Thus, we estimate that around half of the 
surcharge collections would occur after 2014.
    Intergovernmental and private-sector impact: H.R. 4634 
would extend or expand several integovernmental and private-
sector mandates. However, CBO estimates that the aggregate 
costs of complying with those mandates would not exceed the 
annual thresholds established by UMRA ($60 million for 
intergovernmental mandates and $120 million for private-sector 
mandates in 2004, adjusted annually for inflation).

Extension and Expansion of Mandates

    The bill would extend several mandates contained in the 
2002 Terrorism Risk Insurance Act and expand two of those 
mandates to group life insurers. Those mandates would:
           Require that certain insurers offer 
        terrorism insurance;
           Require that certain insurers and their 
        policyholders repay the federal government for the cost 
        of assistance (in the form of surcharges); and
           Preempt state laws regulating insurance.

Requirement To Offer Insurance

    Current law requires certain insurance companies to offer 
terrorism insurance as part of a property and casualty 
insurance policy through calendar year 2005. H.R. 4634 would 
extend the requirement to offer terrorism insurance through 
calendar year 2007. Under the bill, insurers that offer group 
life insurance would be required to include coverage of 
terrorist incidents. According to industry representatives, the 
direct cost for insurance companies to continue making 
terrorism insurance available under property and casualty 
policies and for group life insurers to offer such insurance 
would be minimal. The bill would only require that firms offer 
terrorism insurance, but they would set their own premium rates 
and policyholders could choose whether or not to purchase such 
insurance. Insurers who offer terrorism insurance would receive 
financial assistance to cover a portion of their losses in the 
event of a terrorist attack.

Repayment of Assistance

    The bill would extend the requirement that the federal 
government recoup some of the costs of such financial 
assistance provided to certain insurers and the government's 
authority to make assessments sufficient to recover all federal 
payments. Those costs would be recouped through future 
surcharges paid by the insurance industry. The bill also would 
expand the requirement to include purchasers of group life 
insurance.
    Taken individually, some insurers might benefit from the 
financial assistance, while others might face only the cost of 
the surcharges. But for the insurance industry as a whole, the 
cost of the surcharges would be no greater than the financial 
assistance received, so the net cost of this mandate would be 
zero.

Preemption of State Law

    The bill also would preempt some state laws regulating 
insurance. Based on information from state insurance 
regulators, CBO estimates that the cost of extending those 
preemptions would be minimal.
    Estimate prepared by: Federal Costs: Megan Carroll and 
Melissa E. Zimmerman; Impact on State, Local, and Tribal 
Governments: Sarah Puro; and Impact on the Private Sector: 
Paige Piper/Bach.
    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

    This section establishes the short title of the bill, the 
``Terrorism Insurance Backstop Extension Act of 2004.''

Section 2. Extension of Terrorism Insurance Program

    This section extends TRIA for two years and maintains the 
gradual increase in taxpayer protections in the Program. 
Subsection (a) adds Years 4 and 5 to the Program. Subsection 
(b) maintains the steady increases in insurer deductibles, with 
a deductible set at 15 percent in Program Year 4 and set at 20 
percent in Program Year 5. Subsection (c) requires terrorism 
insurance coverage to be ``made available'' for the entire 
duration of the Program. Subsection (d) maintains the gradual 
increase in TRIA's taxpayer protections, continuing to phase 
out the Program with an increase in the taxpayer reimbursement 
from $15 billion in Program Year 3 to $17.5 billion in Year 4 
and $20 billion in Year 5. Subsection (e) expands TRIA to 
include group life insurance, which Congress intends to mean an 
insurance contract that solely provides term life insurance 
coverage, accidental death coverage, or a combination of both 
for a number of persons under a single contract and that 
provides such coverage on the basis of a group of selection 
risks. Subsection (f) requires the Treasury Secretary to report 
on alternatives for expanding the availability and 
affordability of terrorism insurance without a Federal 
backstop. Subsection (g) terminates the TRIA Program on 
December 31, 2007 and requires the GAO to report to Congress by 
June 30, 2007 on TRIA's effectiveness and the capacity of 
insurers to offer terrorism insurance after TRIA expires, as 
well as the availability of terrorism insurance for various 
policyholders.

         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):

TERRORISM RISK INSURANCE ACT OF 2002

           *       *       *       *       *       *       *


TITLE I--TERRORISM INSURANCE PROGRAM

           *       *       *       *       *       *       *


SEC. 102. DEFINITIONS.

  In this title, the following definitions shall apply:
          (1) Act of terrorism.--
                  (A) * * *
                  (B) Limitation.--No act shall be certified by 
                the Secretary as an act of terrorism if--
                          (i) the act is committed as part of 
                        the course of a war declared by the 
                        Congress, except that this clause shall 
                        not apply with respect to any coverage 
                        for workers' compensation or group life 
                        insurance; or
                          (ii) property and casualty insurance 
                        and group life insurance losses 
                        resulting from the act, in the 
                        aggregate, do not exceed $5,000,000.

           *       *       *       *       *       *       *

          (4) Direct earned premium.--The term ``direct earned 
        premium'' means a direct earned premium for property 
        and casualty insurance or for group life insurance 
        issued by any insurer for insurance against losses 
        occurring at the locations described in subparagraphs 
        (A) and (B) of paragraph [(5)] (6).
          (5) Group life insurance.--The term ``group life 
        insurance'' means an insurance contract that provides 
        term life insurance coverage, accidental death 
        coverage, or a combination thereof, for a number of 
        persons under a single contract, on the basis of a 
        group selection of risks.
          [(5)] (6) Insured loss.--The term ``insured loss'' 
        means any loss resulting from an act of terrorism 
        (including an act of war, in the case of workers' 
        compensation and group life insurance) that is covered 
        by primary or excess property and casualty or group 
        life insurance issued by an insurer if such loss--
                  (A) occurs within the United States; or
                  (B) occurs to an air carrier (as defined in 
                section 40102 of title 49, United States Code), 
                to a United States flag vessel (or a vessel 
                based principally in the United States, on 
                which United States income tax is paid and 
                whose insurance coverage is subject to 
                regulation in the United States), regardless of 
                where the loss occurs, or at the premises of 
                any United States mission.
          [(6)] (7) Insurer.--The term ``insurer'' means any 
        entity, including any affiliate thereof--
                  (A) that is--
                          (i) licensed or admitted to engage in 
                        the business of providing primary or 
                        excess property and casualty or group 
                        life insurance in any State;
                  (B) that receives direct earned premiums for 
                any type of commercial property and casualty 
                insurance coverage or group life insurance 
                coverage, other than in the case of entities 
                described in sections 103(d) and 103(f); and

           *       *       *       *       *       *       *

          [(7)] (8) Insurer deductible.--The term ``insurer 
        deductible'' means--
                  (A) * * *

           *       *       *       *       *       *       *

                  (D) for Program Year 3, the value of an 
                insurer's direct earned premiums over the 
                calendar year immediately preceding Program 
                Year 3, multiplied by 15 percent; [and]
                  (E) for Program Year 4, the value of an 
                insurer's direct earned premiums over the 
                calendar year immediately preceding Program 
                Year 4, multiplied by 15 percent;
                  (F) for Program Year 5, the value of an 
                insurer's direct earned premiums over the 
                calendar year immediately preceding Program 
                Year 4, multiplied by 20 percent; and
                  [(E)] (G) notwithstanding subparagraphs (A) 
                through [(D)] (F), for the Transition Period, 
                Program Year 1, Program Year 2, [or Program 
                Year 3] Program Year 3, Program Year 4, or 
                Program Year 5, if an insurer has not had a 
                full year of operations during the calendar 
                year immediately preceding such Period or 
                Program Year, such portion of the direct earned 
                premiums of the insurer as the Secretary 
                determines appropriate, subject to appropriate 
                methodologies established by the Secretary for 
                measuring such direct earned premiums.
          [(8)] (9) NAIC.--The term ``NAIC'' means the National 
        Association of Insurance Commissioners.
          [(9)] (10) Person.--The term ``person'' means any 
        individual, business or nonprofit entity (including 
        those organized in the form of a partnership, limited 
        liability company, corporation, or association), trust 
        or estate, or a State or political subdivision of a 
        State or other governmental unit.
          [(10)] (11) Program.--The term ``Program'' means the 
        Terrorism Insurance Program established by this title.
          [(11)] (12) Program years.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (E) Program year 4.--The term ``Program Year 
                4'' means the period beginning on January 1, 
                2006 and ending on December 31, 2006.
                  (F) Program year 5.--The term ``Program Year 
                5'' means the period beginning on January 1, 
                2007 and ending on December 31, 2007.
          [(12)] (13) Property and casualty insurance.--The 
        term ``property and casualty insurance''--
                  (A) * * *

           *       *       *       *       *       *       *

          [(13)] (14) Secretary.--The term ``Secretary'' means 
        the Secretary of the Treasury.
          [(14)] (15) State.--The term ``State'' means any 
        State of the United States, the District of Columbia, 
        the Commonwealth of Puerto Rico, the Commonwealth of 
        the Northern Mariana Islands, American Samoa, Guam, 
        each of the United States Virgin Islands, and any 
        territory or possession of the United States.
          [(15)] (16) United states.--The term ``United 
        States'' means the several States, and includes the 
        territorial sea and the continental shelf of the United 
        States, as those terms are defined in the Violent Crime 
        Control and Law Enforcement Act of 1994 (18 U.S.C. 
        2280, 2281).
          [(16)] (17) Rule of construction for dates.--With 
        respect to any reference to a date in this title, such 
        day shall be construed--
                  (A) to begin at 12:01 a.m. on that date; and
                  (B) to end at midnight on that date.

SEC. 103. TERRORISM INSURANCE PROGRAM.

  (a) * * *
  (b) Conditions for Federal Payments.--No payment may be made 
by the Secretary under this section with respect to an insured 
loss that is covered by an insurer, unless--
          (1) the person that suffers the insured loss, or a 
        person acting on behalf of that person (including a 
        named beneficiary in the case of a group life insurance 
        policy), files a claim with the insurer;

           *       *       *       *       *       *       *

  [(c) Mandatory Availability.--
          [(1) Initial program periods.--During the period 
        beginning on the first day of the Transition Period and 
        ending on the last day of Program Year 2, each entity 
        that meets the definition of an insurer under section 
        102--]
  (c) Mandatory Availability.--During the Program, each entity 
that meets the definition of an insurer under section 102--
          [(A)] (1) shall make available, in all of its 
        property and casualty and group life insurance 
        policies, coverage for insured losses; and
          [(B)] (2) shall make available property and casualty 
        and group life insurance coverage for insured losses 
        that does not differ materially from the terms, 
        amounts, and other coverage limitations applicable to 
        losses arising from events other than acts of 
        terrorism.
          [(2) Program year 3.--Not later than September 1, 
        2004, the Secretary shall, based on the factors 
        referred to in section 108(d)(1), determine whether the 
        provisions of subparagraphs (A) and (B) of paragraph 
        (1) should be extended through Program Year 3.]

           *       *       *       *       *       *       *

  (e) Insured Loss Shared Compensation.--
          (1) * * *
          (2) Cap on annual liability.--
                  (A) In general.--Notwithstanding paragraph 
                (1) or any other provision of Federal or State 
                law, if the aggregate insured losses exceed 
                $100,000,000,000, during the period beginning 
                on the first day of the Transition Period and 
                ending on the last day of Program Year 1, or 
                during Program Year 2 [or Program Year 3] , 
                Program Year 3, Program Year 4, or Program Year 
                5 (until such time as the Congress may act 
                otherwise with respect to such losses)--
                          (i) * * *

           *       *       *       *       *       *       *

          (3) Notice to congress.--The Secretary shall notify 
        the Congress if estimated or actual aggregate insured 
        losses exceed $100,000,000,000 during the period 
        beginning on the first day of the Transition Period and 
        ending on the last day of Program Year 1, or during 
        Program Year 2 [or Program Year 3], Program Year 3, 
        Program Year 4, or Program Year 5, and the Congress 
        shall determine the procedures for and the source of 
        any payments for such excess insured losses.

           *       *       *       *       *       *       *

          (6) Insurance marketplace aggregate retention 
        amount.--[For] Except as provided in subparagraph (F) 
        of this paragraph, for purposes of paragraph (7), the 
        insurance marketplace aggregate retention amount shall 
        be--
                  (A) * * *
                  (B) for Program Year 2, the lesser of--
                          (i) $12,500,000,000; and
                          (ii) the aggregate amount, for all 
                        insurers, of insured losses during such 
                        Program Year; [and]
                  (C) for Program Year 3, the lesser of--
                          (i) $15,000,000,000; and
                          (ii) the aggregate amount, for all 
                        insurers, of insured losses during such 
                        Program Year[.];
                  (D) for Program Year 4, the lesser of--
                          (i) $17,500,000,000; and
                          (ii) the aggregate amount, for all 
                        insurers, of insured losses during such 
                        Program Year;
                  (E) for Program Year 5, the lesser of--
                          (i) $20,000,000,000; and
                          (ii) the aggregate amount, for all 
                        insurers, of insured losses during such 
                        Program Year; and
                  (F) for each of the periods referred to in 
                subparagraphs (A) through (E), the amounts 
                provided under such subparagraphs, as such 
                amounts shall be increased by the Secretary 
                before the expiration of the 90-day period 
                beginning on the date of the enactment of the 
                Terrorism Insurance Backstop Extension Act of 
                2004, based on the increase in the size of the 
                Program caused by the inclusion of group life 
                insurance pursuant to such Act, in proportion 
                to the increased premiums involved.
          (7) Recoupment of federal share.--
                  (A) Mandatory recoupment amount.--For 
                purposes of this paragraph, the mandatory 
                recoupment amount for each of the periods 
                referred to in subparagraphs (A), (B), [and 
                (C)] (C), (D), and (E) of paragraph (6) shall 
                be the difference between--
                          (i) * * *

           *       *       *       *       *       *       *

                  (B) No mandatory recoupment if uncompensated 
                losses exceed insurance marketplace 
                retention.--Notwithstanding subparagraph (A), 
                if the aggregate amount of uncompensated 
                insured losses referred to in clause (ii) of 
                such subparagraph for any period referred to in 
                subparagraph (A), (B), [or (C)] (C), (D), or 
                (E) of paragraph (6) is greater than the 
                insurance marketplace aggregate retention 
                amount under paragraph (6) for such period, the 
                mandatory recoupment amount shall be $0.
                  (C) Mandatory establishment of surcharges to 
                recoup mandatory recoupment amount.--The 
                Secretary shall collect, for repayment of the 
                Federal financial assistance provided in 
                connection with all acts of terrorism (or acts 
                of war, in the case of workers compensation or 
                group life insurance) occurring during any of 
                the periods referred to in subparagraph (A), 
                (B), [or (C)] (C), (D), or (E) of paragraph 
                (6), terrorism loss risk-spreading premiums in 
                an amount equal to any mandatory recoupment 
                amount for such period.

           *       *       *       *       *       *       *

          (8) Policy surcharge for terrorism loss risk-
        spreading premiums.--
                  (A) Policyholder premium.--Any amount 
                established by the Secretary as a terrorism 
                loss risk-spreading premium shall--
                          (i) be imposed as a policyholder 
                        premium surcharge on property and 
                        casualty and group life insurance 
                        policies in force after the date of 
                        such establishment;

           *       *       *       *       *       *       *

                          (iii) be based on a percentage of the 
                        premium amount charged for property and 
                        casualty or group life insurance 
                        coverage under the policy.

           *       *       *       *       *       *       *

                  (C) Percentage limitation.--A terrorism loss 
                risk-spreading premium (including any 
                additional amount included in such premium on a 
                discretionary basis pursuant to paragraph 
                (7)(D)) may not exceed, on an annual basis, the 
                amount equal to 3 percent of the premium 
                charged for property and casualty or group life 
                insurance coverage under the policy.

           *       *       *       *       *       *       *

  [(h) Group Life Insurance Study.--
          [(1) Study.--The Secretary shall study, on an 
        expedited basis, whether adequate and affordable 
        catastrophe reinsurance for acts of terrorism is 
        available to life insurers in the United States that 
        issue group life insurance, and the extent to which the 
        threat of terrorism is reducing the availability of 
        group life insurance coverage for consumers in the 
        United States.
          [(2) Conditional coverage.--To the extent that the 
        Secretary determines that such coverage is not or will 
        not be reasonably available to both such insurers and 
        consumers, the Secretary shall, in consultation with 
        the NAIC--
                  [(A) apply the provisions of this title, as 
                appropriate, to providers of group life 
                insurance; and
                  [(B) provide such restrictions, limitations, 
                or conditions with respect to any financial 
                assistance provided that the Secretary deems 
                appropriate, based on the study under paragraph 
                (1).
  [(i) Study and Report.--
          [(1) Study.--The Secretary, after consultation with 
        the NAIC, representatives of the insurance industry, 
        and other experts in the insurance field, shall conduct 
        a study of the potential effects of acts of terrorism 
        on the availability of life insurance and other lines 
        of insurance coverage, including personal lines.
          [(2) Report.--Not later than 9 months after the date 
        of enactment of this Act, the Secretary shall submit a 
        report to the Congress on the results of the study 
        conducted under paragraph (1).]
  (h) Study on Long-Term Solutions.--By June 1, 2005, the 
Secretary shall conduct a study and submit a report to the 
Congress on alternatives for expanding the availability and 
affordability of terrorism insurance after the termination of 
the Program that do not involve a Federal financial backstop.

           *       *       *       *       *       *       *


SEC. 105. PREEMPTION AND NULLIFICATION OF PRE-EXISTING TERRORISM 
                    EXCLUSIONS.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Reinstatement of Terrorism Exclusions.--Notwithstanding 
subsections (a) and (b) or any provision of State law, an 
insurer may reinstate a preexisting provision in a contract for 
property and casualty or group life insurance that is in force 
on the date of enactment of this Act and that excludes coverage 
for an act of terrorism only--
          (1) * * *

           *       *       *       *       *       *       *


SEC. 108. TERMINATION OF PROGRAM.

  (a) Termination of Program.--The Program shall terminate on 
December 31, [2005] 2007.

           *       *       *       *       *       *       *

  (d) Study and Report on the Program.--
          (1) Study.--The Secretary, in consultation with the 
        NAIC, representatives of the insurance industry and of 
        policy holders, other experts in the insurance field, 
        and other experts as needed, shall assess the 
        effectiveness of the Program and the likely capacity of 
        the property and casualty insurance industry and the 
        group life insurance industry to offer insurance for 
        terrorism risk after termination of the Program, and 
        the availability and affordability of such insurance 
        for various policyholders, including railroads, 
        trucking, and public transit.

           *       *       *       *       *       *       *

          (3) Final gao study and report.--The Comptroller 
        General of the United States shall conduct an 
        assessment of the matters referred to in paragraph (1) 
        and shall submit a report to the Congress, not later 
        than June 30, 2007, on the results of such study.

           *       *       *       *       *       *       *


                            DISSENTING VIEWS

    Three years ago, when the Committee on Financial Services 
considered the bill creating the terrorism reinsurance program, 
I urged my colleagues to reject it. One of the reasons I 
opposed the bill was my concern that, contrary to the claims of 
the bill's supporters, terrorism insurance would not be allowed 
to sunset after three years. As I said then:

          The drafters of H.R. 3210 claim that this creates a 
        ``temporary'' government program. However, Mr. Speaker, 
        what happens in three 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 refuse to reauthorize this ``temporary'' 
        insurance program or provide some other form of 
        taxpayer help to the insurance industry? I would like 
        to remind my colleagues that the federal budget is full 
        of expenditures for long-lasting programs that were 
        originally intended to be ``temporary.''

    I am disappointed to see that the Committee on Financial 
Services has proven my words prophetic.
    As the committee considers extending this program, I renew 
my opposition to it for substantially the same reasons I stated 
three years ago. However, I do have a suggestion on how to 
improve the program. Since one claimed problem with allowing 
the private market to provide terrorism insurance is the 
difficulty of quantifying the risk of an attack, the taxpayers' 
liability under the terrorism reinsurance program should be 
reduced for attack occurring when the country is under orange 
or red alert. After all, the point of the alert system is to 
let Americans know when there is an increased likelihood of an 
attack, so it is reasonable to expect insurance companies to 
demand that their clients take extra precautionary measures 
during periods of high alert. Reducing taxpayer subsidies will 
provide an incentive to ensure private parties take every 
possible precaution to minimize the potential damage from 
possible terrorist attack.
    Since my main objections to the program remain the same as 
three years ago, I am attaching my statement regarding H.R. 
3210, which created the terrorist insurance program in the 
106th Congress:

          Mr. Speaker, 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 
        90 percent of the costs of a terrorist incident when 
        the total cost of that incident exceeds a certain 
        threshold. While insurance companies technically are 
        responsible under the bill for paying back monies 
        received from the Treasury, the administrator of this 
        program may defer repayment of the majority of the 
        subsidy in order to ``avoid the likely insolvency of 
        the commercial insurer,'' or avoid ``unreasonable 
        economic disruption and market instability.'' This 
        language may cause administrators to defer indefinitely 
        the repayment of the loans, thus causing taxpayers to 
        permanently bear the loss. This scenario is especially 
        likely when one considers that ``avoid * * * likely 
        insolvency, unreasonable economic disruption, and 
        market instability'' are highly subjective standards, 
        and that any administrator who attempts to enforce a 
        strict repayment schedule likely will 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. However, Mr. Speaker, 
        what happens in three 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 refuse to reauthorize this ``temporary'' 
        insurance program or provide some other form of 
        taxpayer help to the insurance industry? I would like 
        to remind my colleagues that the federal budget is full 
        of expenditures for long-lasting programs that were 
        originally intended to be ``temporary.''
          H.R. 3210 compounds the danger to taxpayers 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 this private activity. The 
        bill does not even recognize 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 inadvertently 
        increases 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, the moral hazard 
        problems associated with federally funded insurance is 
        avoided.
          The version of H.R. 3210 passed by the Financial 
        Services Committee took a good first step in this 
        direction by repealing the tax penalty which prevents 
        insurance companies from properly reserving funds for 
        human-created catastrophes. I am disappointed that this 
        sensible provision was removed from the final bill. 
        Instead, H.R. 3210 instructs the Treasury Department to 
        study the benefits of allowing insurers to establish 
        tax-free reserves to cover losses from terrorist 
        events. The perceived need to study the wisdom of 
        cutting taxes while expanding the federal government 
        without hesitation demonstrates much that is wrong with 
        Washington.
          In conclusion, Mr. Speaker, H.R. 3210 may reduce the 
        risk to insurance companies from future losses, but it 
        increases the costs incurred by American taxpayers. 
        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.