Phil Gramm

Mr. GRAMM

Mr. GRAMM. Mr. President, I believe my colleague is right on one point. You can't have it both ways. You can't say I am for fiscal restraint and then say we are going to make the President take $9 billion he doesn't want. I think this boils down to a question, Are you with the President or are you against him? The President asked us to hold the line on spending. I am with the President, and therefore I am going to vote against waiving the budget point of order. I urge my colleagues to do the same.

Mr. GRAMM. All right.

Mr. GRAMM. How much time do I have remaining?

Mr. GRAMM

Mr. GRAMM. Mr. President, we are coming down to a vote at 4:45. I intend to vote no. I don't expect many other Members to vote no, nor am I encouraging people to vote no. But I want to try to explain the problem I have and explain a little bit of the history of this bill so people know where we are coming from. I think we have about 14 minutes each. Is that right?

Mr. GRAMM. We might come to a point where we are ready to do this. We are not ready to do it now, and I object.

Mr. GRAMM. Reserving the right to object.

Mr. GRAMM. Will the Senator yield? Reserving the right to object.

Mr. GRAMM. Did the Senator include 3884?

Mr. GRAMM. I would just like to say that we do not have any objection. These are amendments that were agreed to.

Mr. GRAMM. Mr. President, when terrorism insurance was first proposed, the whole logic was that we were going to have the Federal Government step in to help provide insurance coverage and pay claims when there was a cataclysmic event. When we first started debating this issue in the House of Representatives, insurance companies had to pay back money that was paid by the Federal Government over $1 billion. When we debated it in the Senate, we concluded that if it had to be paid back, you were not providing the assistance we sought, but we were sure when we initially debated this subject we had a very substantial amount of money that the companies had to pay before the Federal Government got in the business of having to pay. The amount the companies have to pay before the Federal Government starts paying is called ``retention.'' When we first started to debate this issue, and when we reached an initial bipartisan agreement in October, I believe it was that companies were required to pay $10 billion before the Federal Government came in to pay claims. Above that $10 billion, the Federal Government was to pay 90 percent of the next $90 billion. The logic of the retention--the amount that the insurance companies had to pay--was basically, No. 1, that the insurance companies are selling this insurance and collecting premiums. The fact that they would cover the initial cost was imminently logical. No. 2, we wanted to protect the taxpayer unless there was a cataclysmic event. Thirdly, the whole objective of our bill was to try to encourage the development of reinsurance and to encourage syndication so that no one insurance company would write an insurance policy on the Empire State Building. There might be a lead insurance company that would write the policy. But then they would syndicate and sell off part of the insurance to other companies, or they would simply go into a reinsurance market and sell all or part of the policy--the idea being to distribute the risk not just throughout the United States but throughout the world. When we reached an agreement in October, the companies had to pay $10 billion before the taxpayer got involved. Many Members of the Senate thought that was too low. We reached an agreement. We announced it, and the White House signed off on it. We also protected victims of terrorism from punitive damages and predatory losses. In December, we still had not passed a bill. We were 3 weeks away from 80 percent of the insurance policies in America expiring. There was a belief that if we did pass a bill right at the end of the session there would not be enough time for syndication and reinsurance to develop. So the bill that was written at that time had an individual company retention but not a $10 billion retention. This is still very much confused by the media in writing on this subject. The net result is that the biggest insurance company in America-- AIG--has a retention of about $1.6 billion. The smallest insurance companies in the country might have a retention that would be in the tens of millions. That means that is what they have to pay before the taxpayer pays. That has several problems. No. 1, companies have already collected premiums. Premiums have gone up. They had to go up because risks have gone up. But premiums have gone up, and insurance companies have collected these premiums. When they wrote the insurance policy, they had no taxpayer backup whatsoever. Now we are coming along, and instead of having $10 billion that the industry has to pay before the taxpayer pays, in some cases some insurance companies will have to pay only millions of dollars before the taxpayer steps in and pays. It doesn't take a great knowledge of economics or arithmetic to figure out that when people wrote policies and collected premiums based on having to pay the full cost if a claim was made and the Government is going to come in and pay 90 percent of the claim above only a few million dollars in the case of some insurance companies, that you are going to create a very substantial shifting of wealth from the taxpayers to the people who have written the policies, if there is a major claim. And, at a minimum, you are shifting a substantial amount of risk from the insurance company to the Federal Government. I am one of a handful of Members of the Senate who thought we ought to do a bill. In fact, at one point, I was one of the few people willing to stand up and say so. I have always believed if we were going to do a bill we had to have a substantial industry retention so the people collecting the premiums paid first, and also so that we had an incentive for industry to syndicate to spread the risk, and an incentive to develop reinsurance. I am very concerned that the bill, as it is now written, represents an unwarranted shift of risk from the insurance companies to the taxpayer. If there is, God forbid, another attack, it will mean the shifting of billions of dollars from the taxpayer to the insurance companies. But the biggest concern I have is not about taxpayer risk or about the unintended shift of billions of dollars to private interests from the taxpayer. The biggest concern I have is that by reducing the amount that the companies have to pay before the Government pays, that we are going to reduce the incentive that companies will have to spread the risk to syndicate, to develop reinsurance, and that 2 years from now, when the bill expires, none of these secondary markets will have developed, the Government will have become the primary risk taker, and we will end up extending this indefinitely. In World War II we had a Government program, but we knew World War II was going to end with the signing of a peace treaty. This war is going to end with the death of some terrorist, and we are not going to know he was the last terrorist in the world. So I am very concerned that unless we raise this retention level, unless we make companies that have collected the premiums pay a substantial amount of money before the taxpayer pays, that we are never going to get the Government out of this area of insurance. Our whole focus from the beginning--in fact, I have never heard a Democrat or Republican suggest otherwise--has been that this was a bridge to help us get through this period of great uncertainty so that ultimately these risks could be built into insurance rates. That is where we are. I think we are making a mistake by not requiring the people who collected these premiums to pay a substantial amount of money first. I think we are planting the seeds to get Government permanently in the insurance business. Something happened, and it is perfectly reasonable that it would happen. When we were talking about the industry having to pay $10 billion before the taxpayer paid, the industry was delighted that they were going to have the backup of the taxpayer. But in December it was suggested that the industry could pay tens of millions of dollars before the taxpayer paid. And even though all those insurance policies expired on January 1, many of them were rewritten at substantially higher premiums. I am not complaining. Premiums have to go up because risks have gone up. But now to suggest that we should not make the industry pay up to $10 billion before the taxpayer pays, I think, is basically going back on the deal in which we engaged. I do not doubt that if I were in the insurance business I would probably want the Government to pay the whole claim, and I would want to collect the policy, I would want to collect the premiums. But I think we have a gross overreach here that puts the taxpayer at risk at an unjustifiable level. Finally, and most importantly, I am concerned that the incentives we are creating here will induce companies not to syndicate, not to spread risk as much as they would; and, as a result, the Government will pay sooner. I am worried that secondary markets will not develop and the Government will not be able to get out of the insurance business. And I am very much concerned that 2 years from now we will be right back here, and the argument will be made that there is no syndication, that there is no secondary market, and, therefore, the Government has to stay in the terrorism insurance business. We can fix that by changing this bill. We have not done that. That is why I am opposed to it.

Mr. GRAMM. Mr. President, I yield the Senator from Pennsylvania 3 minutes.

Mr. GRAMM

Mr. GRAMM. Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. GRAMM

Mr. GRAMM. How much more time do we have?

Mr. GRAMM. I have 2 remaining minutes, I believe; is that right?

Mr. GRAMM. I yield those 2 minutes to Senator McConnell.

Mr. GRAMM. Let me address for that 1 minute the whole issue about retention. When we started this debate, the Federal Government was going to be the backup insurer. We were going to have substantial retention by the private companies that have sold policies and collected premiums. They were going to pay up front, and in big losses the taxpayer was going to pay. When we got into December and 80 percent of the insurance policies were expiring, there was a movement toward individual company retentions to dramatically reduce the amount companies had to pay before the Government paid. Now we are at the end of June. Companies have sold insurance policies. They have collected premiums. To come in now with retention levels in the tens of millions instead of tens of billions is to create an unintended, and I believe unwise and unfair wealth transfer but, more importantly, it discourages the kind of risk sharing that we need to ultimately get the Government out of this business. I believe if the bill became law as it is now written, we would end up with the Government permanently in the terrorism insurance business. I think that would be a bad thing. I urge my colleagues to vote no.

Mr. GRAMM. I am ready to go to third reading on the bill. I do not think we are going to achieve anything by offering amendments. I cannot offer the amendment I would like to because it brings in the third year, and it would not be germane. At this point to offer an amendment would be to simply delay something rather than to seek a constructive change. The thing to do is to go to third reading and pass the bill. I would be willing to do it on a voice vote. Then we will take it from there.

Mr. GRAMM. Mr. President, I have a markup with the members of the Banking Committee coming up. Given that last vote, it is not my intention to try to offer an amendment. The amendment I wanted to offer, which was a 3-year program, would not be germane postcloture because of the third year. I want to sum up what I believe to be the chronology of this debate and express my concerns. Senator McConnell and I will offer amendments if the House bill is brought up in an effort to substitute this bill for it, and potentially on the naming of conferees. But I think, in terms of today and this bill, it is clear where the votes are. Let me remind my colleagues that in the wake of 9-11, there was great skepticism in Congress about the need for terrorism insurance. I think any checking of the Record will show that I was one of the early supporters of an effort to have terrorism insurance. I believed then and I believe now that we need a bridge from our current situation where terrorism insurance is hard to get for high-profile projects, where it is expensive as we go through this process of rational investors determining what the real risks are. I thought it was important we have a bridge program to give a Federal backup for a fairly short period of time until the market could adjust to this new reality and the threat of terrorism could be built into the structure of insurance premiums. I have to say, in the entire debate over the bill, the role of the Federal Government has been a role of a backup, where the Federal Government paid only in cataclysmic kinds of circumstances. In the fall of last year, we reached a bipartisan compromise that was worked out among the leaders of the Banking Committee, the committee with jurisdiction. That bill had a $10 billion retention the first year for the insurance companies, $10 billion the second year, and then, if the Secretary of the Treasury decided a third year was needed, we had a $20 billion retention. What ``retention'' means is that the insurance companies would pay the first $10 billion, and then the Federal Government would pay 90 percent of the $90 billion that might follow. The argument that was made, from the very beginning really, boiled down to two points: One, that the people who were collecting the insurance premiums should have first liability and the Federal Government should be in a backup role. The second argument was--and I think it was the more dominant argument; the more important argument, in my opinion--that our objective here is not simply to insert the Federal Government permanently into the insurance industry. I note to my colleagues that, unlike World War II, where, when the Japanese bombed Pearl Harbor, we knew that war would end someday, and we knew we would prevail, and we knew there would be a formal ceremony ending that war--and, in fact, there was on the deck of the Missouri-- this war, when it ends, will end with the dying gasp of some terrorist somewhere, and we will not be sure that he is the last one, and there will not be any formal agreement ending the hostilities. So our objective here is to build a bridge to private coverage. That bill was agreed to in the fall by the Secretary of the Treasury on behalf of the President and by the leadership of the Banking Committee. We agreed in that to ban punitive damages against the victims of terrorism. We had a press conference. It looked as if we had come up with a bipartisan consensus. Then there was objection to the ban on punitive damages against the victims of terrorism, and the bill did not go forward. Then in December, in a last ditch effort, in which I am proud to say I participated, we tried to write a bill that would deal with a situation where, we were already halfway through December; 80 percent of the insurance policies in America--at least we were told at the time--were expiring on January 1, and so there would not be time for reinsurance to develop. There would not be time for extensive syndication, a basic procedure whereby an insurance company would insure the Empire State Building but then perhaps would lay off the risk to 20 other companies. In December, a bill was worked on that had individual company retentions. For the largest companies in the industry, that retention is pretty substantial, over $1 billion. For small companies, that retention is quite small, in the tens of millions of dollars. There are two problems with the bill before us which is based on the December draft. The first problem is, the situation is very different today than it was in December. Those policies did expire, and many were renegotiated at substantially higher premiums. It is now 7 months later. Insurance has been sold. Premiums have been collected. Those premiums are based on substantially higher risk with no government backup. Now we are being asked to pass a bill that maintains those retention levels that might have made sense in December, when 80 percent of the policies in the country were expiring and there was no time for reinsurance or syndication. But in my opinion, to adopt this bill 7 months later when substantial numbers of policies have been sold at substantially higher prices, and those higher prices are part of the solution--I am not complaining about them because risks are higher--the point is, we are dramatically changing risk by having the Government pay 90 percent of the claim above these retention levels. I have offered a compromise which would split the difference, which would have individual company retention the first year, for the first 12 months after the bill is signed into law. Then it would go to a $10 billion industry retention; and then if the President extended the program 1 more year, it would have a $20 billion retention. Why is that important? It is important for two reasons. One is equity. These retention levels put the taxpayer at an unjustified risk. These low retention levels we have in this bill create a situation where policies were sold; premiums were collected; expectations were that there would not be a Federal backup. And now the Federal backup is coming in at individual company retention levels which are substantially lower than the level we looked at in October of last year. This creates an unintended transfer of risk from the insurance companies to the taxpayer, where the insurance companies have collected premiums based on bearing that risk themselves. That is an equity problem. We are putting the taxpayer at a level of exposure which is unjustified. The second problem is of greater importance. If we simply are passing a bill that transfers wealth from the taxpayer to insurance companies, it is inequitable, in my opinion, at the level we are doing it. But it is not the end of the world, nor is it the first or last time we would have ever done any such thing. The problem is, the way the bill is now written, for the next 2 years, the incentive that insurance companies have to develop reinsurance--and reinsurance is a system whereby I sell a policy on a building, but then I share that risk through a reinsurance system which is developed. I share the profits, but I share the risk. That way the risks end up being dispersed not just among all the insurance companies in America but literally all the insurance companies in the world. As that market develops, there is another alternative called syndication whereby companies insure an asset but then they syndicate by having other companies take a piece of it. They in essence become the reinsurer. Why is all this important? Why would anybody care about all these things? Why I care about it is because if we don't have substantial industry retention, we are dramatically reducing the incentive for the reinsurance market to develop. If we don't have substantial industry retention, we are creating an incentive for companies to take a larger share of risk because they are not having to bear the risk. They have their industry retention, which for smaller companies can be in the tens of millions of dollars, and then the Federal Government comes in and pays 90 percent of the cost. If we don't develop reinsurance, if we don't develop syndication as the norm, then we simply continue a system where the bulk of the risk is borne by the taxpayer. Two years from now, if we don't change this bill, we are going to be back here, and the same people who are saying today we have to have this bill are going to say: You have to extend this bill for another 2 years, another 10 years, forever. The problem with the structure of the bill is that it acts as a disincentive to do the things the industry has to do in order to get the Federal Government out of the insurance business. I am not yelling; I am not complaining about the insurance companies. I am not trying to put them in a position where I am vilifying them. I would say when we came out with our bill last October, there was great joy and celebration in that the insurance industry was going to have to bare a $10 billion retention, but the Federal Government was going to pay 90 percent of anything above that. It was my perception, in talking to people, listening to people, that people thought that could be made to work. Granted, there were people who wanted the Government to bear more of the risk. The point is, there was a perception that this was something that could be made to work. Now we have a situation where the retention level has been reduced dramatically. If I were running an insurance company, I would want the retention level to be zero. If I were running an insurance company, I would want to sell the insurance, collect the premium, and I would want the Government to pay the claims. So I never expect people to do what is not in their interest. If you do that, you are going to be disappointed. But what has literally happened here is that we wrote a bill in December for an emergency situation where it was going to go into effect in less than 3 weeks. There was no time for reinsurance pools to develop; 80 percent of the policies in the country were going to expire on January 1. So in order to try to accommodate that short timeframe, we agreed, or at least many were willing to agree--the body never agreed--to retention levels that were dramatically lower. I know nobody knows what ``retention'' means. It means the Government pays sooner and more. That may have made sense in January, but it does not make any sense at the end of June when insurance policies have been sold and premiums have been collected based on no Government backup. So the whole reason for the lower retention levels in December has now passed. What happened was, quite frankly, the industry saw these lower retention levels in December and said: That is what we want; we do not want those higher retention levels we agreed to in October; we want the lower retention levels. The problem is they only made sense in January. They do not make sense in June. My lament--and that is all it is at this point because it is clear from the last vote that we are going to pass this bill--is that we are going to put the taxpayer at a much greater risk than is justified. It is amazing to me that in October, the very people who thought the retention level at $10 billion was too low now are supporting retention levels that are a small fraction of the $10 billion retention we had agreed to in October. This creates tremendous inequity for the taxpayer. It creates an unintended wealth transfer. I think it is a problem, and I believe it should be fixed. The second problem is much greater, however, and that is we are reducing, not eliminating, the incentive of the industry to syndicate and to develop reinsurance, and in the process, I believe we are taking a step toward having Government permanently in the insurance industry. I am not going to convince anyone else--I think I have convinced about 35 Members of that, and I think that is probably the high water mark. I am not going to try to offer an amendment. I am ready to let this bill pass. But I will say that I still believe we are making a mistake. I still believe we need to find something--we should go back to the October retentions, but at the least we need something between the two. We will have an opportunity, if the House bill is brought up to amend it with this bill, to vote on punitive damages. The President has said he will not sign a bill unless we deal with punitive damages. We will have an opportunity at some point to address these issues again. But to continue to debate it today uses up Senate time. We should get on with the Defense authorization bill. I have a markup in 5 minutes on another issue of equal importance. As a result, I do not intend to try to use up the Senate's time. The Senate spoke on the cloture motion, and I am ready to pass the bill and address these issues some other day as we proceed in the process that ultimately leads toward a bill.

Mr. GRAMM. We are not ready, Mr. President, to name conferees. I have to sit down with our people who have been involved in this debate and talk about how we want to go about it. I would be willing to step aside today and let the bill be passed, but in terms of bringing up a House bill or substituting this bill for it or naming conferees, we are going to have to have some meetings. Part of our problem this morning--and I understand in trying to run the railroad that you have to set a time schedule--we did not get an opportunity to meet this morning--we being Republicans--before we had this vote. It is just going to be essential that I have an opportunity to sit down with our people. My suggestion is we go ahead and pass the bill, and then we will have an opportunity to go to the Defense authorization bill, and then we will have an opportunity to sit down and my colleagues on the other side of the aisle will have an opportunity to sit down and maybe something can be worked out.

Mr. GRAMM. Mr. President, I ask unanimous consent the order for the quorum call be rescinded.

Mr. GRAMM. Mr. President, I intend to vote against cloture. I urge my colleagues to also vote against cloture. This boils down now to two issues, and they are very real issues. No. 1, the President has said he will not sign a bill that will make victims of terrorism subject to attacks by plaintiff's attorneys and subject to punitive damages. We think it is vitally important that we have an opportunity to deal with this issue and to have at least one more vote on it. Secondly, we are in a situation now where this bill has evolved to the point that the taxpayer is virtually the payor of first resort, not last resort. When this bill was initially put together in a bipartisan compromise, supported by the administration, we had in a terrorist attack $10 billion of costs that the insurance industry had to bear before the Federal Government came in to pick up the tab. This was critical for two reasons. No. 1, it provided incentives for insurance companies to syndicate, so no one insurance company insures the Empire State Building. There may be a lead company and then they syndicate to other companies to spread the risk. No. 2, it was vitally important in terms of protecting the taxpayer. What has happened now, by going to a retention level by individual companies, is that we have reached a point where the taxpayer is put at exposure very early in the process. I think it circumvents what we are trying to do. My biggest concern is, if we adopt this bill in its current form, that we are setting up sort of a hot-house plant that cannot exist and grow and work without permanent Government involvement. I remind my colleagues, our objective was to have a 2- or 3-year program to bridge this gap to create a situation where the reinsurance market would emerge, where syndication would become the norm in high profile projects so that the Federal Government could get out of this industry and so that the cost of terrorism in terms of risk would be built into the term structure of interest rates. The problem with this bill--and this bill made sense in December when we had 3 weeks before 80 percent of the insurance premiums in America were going to be due and the existing policies were going to expire, but today much of that insurance has been written, premiums have been collected, and to adopt a bill with retention rates as low as we have in this bill is to create economic windfalls and to destroy the incentive of the industry to do the things that need to be done to get the Government out of this business. I remind my colleagues that I have been among the earliest and strongest supporters of having a bill, but what has happened now is the nature of this bill does not fit the reality of the world in which we live, in the world at the end of June when policies have been sold, premiums have been collected based on no Government backup, and now we are coming in with retention levels that are so low that in some cases the Federal Government is going to begin to pay when losses are in the tens of millions. When we initially contemplated this bill, when the administration signed off on a compromise, there was a $10 billion retention. Mr. President, $10 billion was made by the people who collected the premiums before the taxpayer paid. That has now been dramatically changed with retention levels set on a company-by-company basis. I think this encourages companies to take on full projects, I think it moves us in exactly the wrong direction, and I think we have an opportunity to fix this. I believe it will be fixed if we deny cloture, and I urge my colleagues to vote against cloture and give us an opportunity to deal with punitive damages being imposed on victims of terrorism and give us an opportunity to have retention levels that protect the taxpayer, that do not create windfall gains and retention levels that encourage the development of reinsurance and syndication, something that is absolutely essential to get the Federal Government out of this business within 2 or 3 years. I yield the floor.

Mr. GRAMM

Mr. GRAMM. What are we seconding? Mr. President, I suggest the absence of a quorum.

Mr. GRAMM. I am hopeful that at some point we are going to work out a compromise and move this bill forward. It seems to me the position we are in is we want to set this vote up for tomorrow. The Senator has the right to object to doing that, pending getting the opportunity guaranteed that he can offer his amendment. If he is here--and he has this problem with this funeral apparently--no one can prevent him from doing it. I am hopeful if we work out a compromise that we might talk him out of offering the amendment. So I think we should accept the amended unanimous consent request of the majority leader. I do not see that we are giving him anything that he would not have if we were not here. It seems to me, pending trying to work out a compromise, that we would be better off not having it offered tonight. He could offer it as a second-degree amendment tonight--it is perfectly within the rules-- by objecting to setting up the vote for tomorrow. So I think the logical thing to do is to take the majority leader's proposal.

Mr. GRAMM

Mr. GRAMM. Why don't you just ask it be set aside and offer yours as a first degree?

Mr. GRAMM

Mr. GRAMM. I thank the Senator from Nebraska for raising this important question. I believe that this bill does not speak individually to the issues now confronting the group life insurance industry. I would note that the bill does contain a provision that requires the Secretary of the Treasury, after consultation with the Nation of Association of Insurance Commissioners and representatives of the insurance industry and other experts, to study the potential effects of acts of terrorism on the availability of life insurance and other lines of insurance coverage.