[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
AMERICA'S INSURANCE INDUSTRY:
KEEPING THE PROMISE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 26, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-45
U.S. GOVERNMENT PRINTING OFFICE
75-519 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
C O N T E N T S
----------
Page
Hearing held on:
September 26, 2001........................................... 1
Appendix:
September 26, 2001........................................... 65
WITNESSES
Wednesday, September 26, 2001
Benmosche, Robert H., Chairman and CEO, MetLife, Inc............. 36
Ferguson, Ronald E., Chairman, General Re Corporation, on behalf
of the Reinsurance Association of America...................... 40
Mosher, Matthew C., FCAS, MAAA, Group Vice President-Property/
Casualty Ratings, A.M. Best Company, Oldwick, NJ............... 39
O'Hare, Dean R., Chairman and CEO, The Chubb Corporation......... 38
Pitt, Hon. Harvey L., Chairman, U.S. Securities and Exchange
Commission..................................................... 7
Sebelius, Hon. Kathleen, Commissioner of Insurance, State of
Kansas; President, National Association of Insurance
Commissioners, on behalf of the National Association of
Insurance Commissioners........................................ 32
Serio, Hon. Gregory V., Superintendent of Insurance, New York
State Insurance Department..................................... 30
Sternberg, Sy, Chairman, President and CEO, New York Life
Insurance Company.............................................. 29
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 66
Baker, Hon. Richard H........................................ 71
Bachus, Hon. Spencer......................................... 68
Carson, Hon. Julia........................................... 73
Ford, Hon. Harold E.......................................... 75
Grucci, Hon. Felix J., Jr.................................... 76
Kanjorski, Hon. Paul E....................................... 78
Kelly, Hon. Sue W............................................ 80
Benmosche, Robert H.......................................... 181
Ferguson, Ronald E........................................... 207
Mosher, Matthew C............................................ 198
O'Hare, Dean R............................................... 190
Pitt, Hon. Harvey L.......................................... 85
Sebelius, Hon. Kathleen...................................... 156
Serio, Hon. Gregory V. (with attachments).................... 106
Sternberg, Sy................................................ 103
Additional Material Submitted for the Record
Page
Bachus, Hon. Spencer:
``Oil Money is Fueling Sudan's War,'' The Washington Post,
June 11, 2001.............................................. 69
Maloney, Hon. Carolyn:
``A Nation Challenged: The Insurance,'' New York Times,
September 20, 2001......................................... 82
Benmosche, Robert H.:
Written response to questions from Hon. Michael G. Oxley..... 188
Mosher, Matthew C.:
Written response to questions from Hon. Michael G. Oxley..... 203
.............................................................
O'Hare, Dean R.:
Written response to questions from Hon. Michael G. Oxley..... 196
Pitt, Hon. Harvey L.:
Written response to questions from Hon. Paul E. Kanjorski.... 99
Written response to questions from Hon. John J. LaFalce...... 101
Sternberg, Sy:
Written response to questions from Hon. Michael G. Oxley..... 105
AMERICA'S INSURANCE INDUSTRY:
KEEPING THE PROMISE
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WEDNESDAY, SEPTEMBER 26, 2001
U.S. House of Representatives,
Committee on Financial Services,
Washington, DC.
The committee met, pursuant to call, at 9:39 a.m., in room
2128, Rayburn House Office Building, Hon. Michael G. Oxley,
[chairman of the committee], presiding.
Present: Chairman Oxley; Representatives Roukema, Baker,
Bachus, Royce, Kelly, Weldon, Ose, Biggert, Shays, Grucci,
Hart, Capito, Ferguson, Rogers, Tiberi, LaFalce, Kanjorski,
Waters, C. Maloney of New York, Watt, Bentsen, Hooley, Carson,
Sandlin, Inslee, Moore, Capuano, Ford, Hinojosa, Lucas, and
Shows.
Chairman Oxley. The hearing will come to order.
My friends and fellow committee Members, today as I speak
before you I believe that our country is undergoing a great
metamorphoses. While the tragedy of September 11 will forever
stain our Nation's history, it has also been a great awakening
for our country. We will never forget the pain and loss of life
of innocent civilians from all parts of the world that worked
in the World Trade Center. But these cowardly attacks have also
brought our country together, renewing our focus on American's
priorities. The American people stand united in their faith. We
will become stronger than we were ever before.
In trying to cripple the long-term foundations of our
Nation's economy, this attack will inevitably be viewed
historically as an abject failure. Last week, the stock markets
opened back up and handled a record volume of trading. While
the market lost enormous value during that tumultuous week of
trading, the most important thing was that it was working and
working well. The free market, that which is the underpinning
of this country's economy, was touched, but not stopped by the
terrorists. And Monday of this week showed us the power and the
beauty of those free markets with the fifth largest ever point
increase in the Dow Jones Industrial Average.
The banking industry also cast off any lingering effects of
the damage, helping the Fed pump hundreds of billions of new
liquidity into the economy, new resources that will help our
country recover from the economic lethargy; and the insurance
industry is coming through with flying colors, expediting the
processing of individual claims to provide immediate comfort to
injured victims and their families in this time of need.
Some of the worst-hit companies have been the first to step
forward with commitments to fulfill their policyholder
obligations. In fact, I would like to publicly commend all of
our company witnesses before us today for their good faith in
responding to this attack.
The September 11 attack will exceed Hurricane Andrew as the
most expensive disaster on American soil. But our country's
financial sector has absorbed the most egregious attack in
history and remains strong for now and the future, and for that
we should all be proud. Reports from A.M. Best, Standard &
Poor's and other rating firms have proclaimed that the
insurance industry was well capitalized and is financially
strong. In fact, today we will hear from A.M. Best, a company
that has been providing analysis of the insurance industry for
over 100 years.
The short-term profitability of insurance companies may
have been hit, but not the industry's fundamental soundness and
safety. This Committee is dedicated to working with the
financial industry to keep the promise alive for all Americans.
We are strong and will continue to build on that strength well
into the future.
This morning we will first hear from the distinguished new
Chairman of the SEC, Harvey Pitt, who is making his first
appearance before our committee.
I want to commend Chairman Pitt for his leadership in these
trying times. He and the Commission acted swiftly and wisely to
use for the first time their emergency authority to reduce
regulatory restrictions that might have dampened liquidity and
otherwise impeded the marketplace. The Commission was also
careful not to impose new rules in the name of reducing market
volatility that would have harmed rather than helped the
marketplace. The remarkable success of the U.S. securities
markets reopening is due in no small part to the leadership and
vision of Chairman Pitt and the commissioners.
Today Chairman Pitt will offer the Commission's
perspectives on the state of our capital markets in the
aftermath of the terrorist attacks. He will also discuss how
money laundering enforcement affects our securities markets and
how money laundering regulation might be used in the context of
those markets to track, block, and freeze funding of terrorist
activities.
I would like to welcome Chairman Pitt and our distinguished
panel of insurance industry regulators and CEOs. We are
especially grateful that Superintendent Serio from New York
could take the time to speak with us here today. Thank you all
for joining us, and I look forward to all of your testimony.
That completes the Chair's opening statement.
I now yield to the gentleman from New York, the Ranking
Member, Mr. LaFalce.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 66 in the appendix.]
Mr. LaFalce. Thank you, Mr. Chairman.
The events of September 11 have rippled through every
aspect of our lives. The wounds are deep, and the long-term
financial effects will only be known over time. What we do know
is that all Americans owe a great debt of gratitude to the
efforts of Harvey Pitt, Dick Grasso, Wick Simmons, the Treasury
Department, the Fed, amongst many, many others, for their
heroic work to get our markets on line and functioning
efficiently.
Mr. Pitt, when the President asked you to serve your
country, I suspect you never imagined that you would be facing
the issues you are facing today. Thank you for your efforts and
your steady hand during this unbelievably difficult time.
I would also like to thank Greg Serio, the Superintendent
of New York Insurance, for his efforts in moving quickly to
address the enormous human needs of this tragedy.
I spoke both with Harvey and Greg as soon as possible, and
I was relieved at how steady they were. I was relieved when
Greg told me that every insurance company he had spoken to was
going to be extremely forthcoming. That was a great solace.
In the face of enormous obstacles, the SEC worked with
other financial regulators, other Federal agencies and New York
State and New York City officials to bring our markets on line,
but, recognizing the operational challenges, I shared the New
York Stock exchange and other stock exchanges' view that the
market should not open until the necessary infrastructure was
in place to allow the markets to operate efficiently and meet
investor demand. I think it was very, very wise and prudent to
have sequential opening of the diverse markets, very wise to
have a test run the Saturday after the 11th.
In spite of enormous volume and considerable investor
anxiety when the markets did open, they functioned very well.
In particular, I applaud the SEC's actions under Section 12-K
to, amongst other steps, to permit public companies to
repurchase their own shares, injecting needed liquidity into
the market.
That was one side of the coin. On the other side of the
coin, I am a bit concerned about the coordinated short selling
that may have been taking place, perhaps putting those who are
responding to your exercise of authority of 12-K particularly
in jeopardy; and I am sure you will comment on that in your
opening statements.
I am also eager to hear from you, Mr. Pitt, whether you
believe that the SEC has all of the clearcut authority it needs
to be active and vigilant to protect our future markets from
future volatility.
When you were in the train going to New York and we
chatted, we had a conversation; and it was my thought at the
time that it might have been advisable to have more explicit
authority. But, again, I will be interested in your comments on
that.
Of course, as I have expressed to you in conversation and
in writing, I am very concerned about the reports that
affiliates of Mr. bin Ladin may have used the capital markets
to fund terrorist operations. So I want to be assured that the
SEC has the resources it needs to open this new front on the
war on terrorism and to cope with volatility such as this.
With regard to the insurance industry, given current
estimates I believe the industry has the resources to weather
this crisis and make the injured whole and remain a vibrant,
vital industry. I have been encouraged by the strong statements
that the industry has made that they will, in fact, honor their
commitments and put New York, the families of the victims,
businesses and our economy on the road to healing.
Having said that, I also recognize that loss estimates have
been very uncertain and that they may move higher because of
unknowns like measuring business interruption. Our committee
should be vigilant in exercising our oversight responsibility
as the contours of this crisis become better known over time.
In my meeting with industry officials and experts, I am
also aware of the need to study ways to ensure that affordable
insurance coverage remains available for citizens and
businesses to protect them financially at least against any
future incidents of terrorism; and we might need to give
serious consideration to proposals in which Government and
industry can partner to provide critical insurance coverage for
future terrorism catastrophic acts.
Some have suggested looking at Great Britain as a model for
terrorism insurance. That is one possibility we should look at.
Maybe there are a number of others. Maybe it is not necessary,
but it is something we should look at and look at seriously.
I look forward to working with all of you in all those
endeavors. Thank you.
Chairman Oxley. I thank the gentleman.
The Chair would, before recognizing the subcommittee Chair
and Ranking Member, the appropriate subcommittee Chair and
Ranking Member, would announce without objection that all
Members' opening statements will be made a part of the record.
The Chair strongly encourages Members to submit opening
statements, given the time constraints and also our witnesses.
I now recognize the gentleman from Louisiana, Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman. I want to thank you and
the witnesses for appearing here today.
I know this is a difficult time indeed, when they have many
pressing matters before them. The World Trade Center was a
demonic assault, but I dare say that the actions of those who
will testify today were incredibly responsive to unbelievable
circumstances. In my view, they may be described as
inspirational to us, more so than any well-intentioned
assistance we might attempt to devise.
It really is the resiliency and spirit of the private
enterprise marketplace that has made the country prosperous and
able to recover in these difficult hours. It will inevitably
lead us to full recovery from the current difficult
circumstance.
Just brief examples, Mr. Chairman, for the record of what
has transpired since that morning.
PaineWebber provided the employees of Lehman Brothers,
their competitors, office space from which to work.
The New York Exchange allowed the American Exchange, its
competitor, trading platforms and all necessary equipment in
order to conduct necessary activities and then to allow the
revenue generated from that activity to be maintained by that
Exchange.
Verizon and Con Edison went to really inexhaustible efforts
to provide material and electrical resources to ensure not only
the systems were functional, but redundancy was there to ensure
there will be no failure.
New York Life's Foundation contributed $4 million to the
relief fund at a time they were making extraordinary progress
in paying off countless claims, and other insurance companies
followed this practice.
I point out these actions to my fellow Members because of
my cautionary note against imposing additional rules or
restrictions at the precise time when our capital markets are
in dire need of expanded freedom to use their capacity to
recuperate. Instead, perhaps we can make it our goal to show
the same level of restraint within the public/private
partnership that helped bring the markets back open.
Sometimes the most meaningful contribution a Congress can
make is simply to stand aside and let those in the market
perform. I believe this is truly one of those times to support
our President and the executive branch, allow them to use their
authority and resources to stimulate the market and get America
working.
I certainly don't need to remind Chairman Pitt of the SEC
along with protecting investors a secondary mission is
promoting and facilitating capital formation. We know there has
been much conversation in recent days about how to regain
consumer investor confidence. To that end, at the appropriate
time I would ask you, Mr. Pitt, and the staff to evaluate the
concept of extraordinary incentives for investors to return to
the market. Perhaps the elimination of any gains made on
investments before year end, if the investment is held for some
terminal period of time, 18 months perhaps, the idea being that
that 20 percent net benefit would enure to the benefit of the
broader market, bringing additional liquidity and capital to
the marketplace. But whatever your staff determines is an
advisable course of action, I certainly will stand supportive
of any recommendation the agency chooses to make.
With regard to the insurance industry's commendable
response to these events, every report I have read indicates
there is sufficient capital adequacy to meet the projected $70
billion potential list of claims. While we are not here today
to discuss potential legislative agenda, there has been much
press about how the industry will react to the new underwriting
environment, from opening the Fed discount window to making the
Federal Government the insurer of last resort.
I would like to offer a general observation in the context
of future Federal responsibilities in such catastrophic events.
As a general rule, I do not think the Federal Government should
intercede to prop up a marketplace unless the President of the
United States and in consultation with the Federal Reserve has
determined that a failure in that marketplace would lead to a
precedent event for a systemic risk result.
In this case, in my capacity of the Chairman of the
Oversight Committee, I would be extremely reluctant to look at
a plan that puts the taxpayer on the hook for insured losses
when there is no Federal office that exercises any real
jurisdictional oversight with regard to the solvency of those
enterprises.
In other words, I would like to summarize by saying if you
are going to throw your saddle on someone else's horse you
can't really gripe where that horse may take you. We should
exercise extraordinary caution in moving forward in this arena.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Richard H. Baker can be
found on page 71 in the appendix.]
Chairman Oxley. The Chair now recognizes the Ranking
Member, the gentleman from Pennsylvania, Mr. Kanjorski.
Mr. Kanjorski. Mr. Chairman, because I serve as the ranking
Democratic Member on the Subcommittee on Capital Markets, which
has jurisdiction over securities and insurance matters, I have
great interest in today's hearing to examine the consequences
to our Nation's financial services system as a result of the
September 11 attacks on the World Trade Center and the
Pentagon. In my view, our country cannot and shall not allow
terrorists to alter the effective functioning of the U.S.
securities and insurance markets, the strongest in the world.
Our hearing today will consist of two panels. With our
first panel, we will discuss the current state of our Nation's
capital markets and the efforts of the Securities and Exchange
Commission to facilitate the reopening of our exchanges. While
our fixed-income markets successfully resumed trading just 2
days after the terrorist attack, our equities and options
exchanges experienced the longest shutdown since World War I.
Nevertheless, the successful reopening of the stock markets
last week and their subsequent rebound this week has
demonstrated to everyone the resiliency and strength of our
Nation's financial system.
Our second panel will discuss the state of the insurance
industry. Some experts have noted that the September 11
disaster resulted in a clash event. That is, the insurance
industry incurred multiple losses in different lines of
coverage arising from the same underlying cause. Clash events
are riskier for insurers as they give rise to claims from a
variety of different customers under different types of
policies in a scenario outside of normal assessments for
aggregate exposure. Our second panel will help us to understand
the magnitude of this clash event and its effects on the
marketplace.
Without question, the assaults of September 11 represent
the costliest disaster in American history. Estimates of
insured losses from these attacks presently range from $20
billion to more than $70 billion. The U.S. insurance industry,
however, is a large and dynamic marketplace, accounting for 2.4
percent of our country's gross domestic product.
Additionally, according to some analysts, the property
casualty insurance sector already has approximately $300
billion available to respond to this increased demand for
claims. Moreover, at this time there are no indications that
any major insurer is at risk of default. In the 15 days since
the attack on the World Trade Center, we have received numerous
assurances that the insurance industry will rise to meet the
occasion and pay their claims. Many have also assured us that
they will not attempt to invoke the acts of war exclusions
contained in their policies.
These public pledges by the industry's leaders are
promising. I therefore hope and expect that the entire
insurance marketplace will work in good faith and with due
diligence to honor its obligations. In the long run, the
American insurance industry will prosper if it follows this
course.
Mr. Chairman, I am also pleased that we worked together to
invite a balanced set of witnesses to today's hearing. As a
result, regulators, insurers, reinsurers and industry analysts
will all have an opportunity to inform us about their concerns.
Each witness will provide us with a valuable perspective in
understanding the health of the financial services industry and
the need for any changes in the public policy in the wake of
September 11.
In recent days I have heard and read about a variety of
proposals to assist the insurance and securities industries in
their efforts to respond to the collapse of the World Trade
Center. From my perspective, we must move cautiously and
methodically when considering any legislative proposal to
assist these important sectors of our economy. These industries
are complex and could experience unintended consequences if we
move too hastily. To the extent possible, we must also consider
allowing market discipline to respond to these events without
Government intervention.
Nevertheless, Mr. Chairman, we may ultimately determine
that we need to provide the insurance industry with some
flexibility in terms of meeting its capital requirements,
increasing its liquidity, and providing terrorism reinsurance
coverage. We may also need to take steps to modify our Nation's
securities laws with respect to money laundering. If we decide
to continue to pursue legislative reforms of the securities and
insurance industries during the 107th Congress, I hope we will
follow a prudent course and continue to act on a bipartisan
basis.
Mr. Chairman, thank you again for the opportunity to
comment on these matters and for calling this hearing today.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 78 in the appendix.]
Chairman Oxley. The gentleman's time has expired.
The Chair will now turn to our first witness, the
distinguished Chairman of the Securities and Exchange
Commission, Harvey Pitt. Again, Mr. Pitt, welcome to the
committee for your first appearance; and we look forward to
your testimony.
STATEMENT OF HON. HARVEY L. PITT, CHAIRMAN, SECURITIES AND
EXCHANGE COMMISSION
Mr. Pitt. Thank you, Chairman Oxley.
I appreciate the opportunity to be here, and I want to
thank Chairman Oxley for these timely and important hearings
and the enormous amount of support that you have provided to
the Commission and to me personally.
I would also like to thank Ranking Member LaFalce, who has
been in frequent contact with us and has been of enormous
support and encouragement.
With respect to the oversight subcommittee, I would like to
also express my thanks to Chairman Baker, who has been an
effective partner for the SEC, and also to thank Mr. Kanjorski
for his support as well.
So this is, for me, the first appearance, and I regret that
the subject matter of this appearance is something as tragic as
the terrorist attacks. But I think it is important for this
committee in its oversight functions to understand what the
philosophy of the SEC is, how we intend to try to solve
problems when they come up, and how we intend to work with you
very closely to make sure you are always aware of what we are
planning, what our reasons are, and what information we can
share with you. We view our relationship as a partnership.
The attacks of September 11, as we all know, caused
irreparable loss of innocent life and untold physical damage. I
cannot in any way, shape, or form minimize the impact of that.
In fact, as I am sure is true of many, people whom I was close
to were killed or are missing in the aftermath of that
destructive effort, both on highjacked planes and in lost
buildings. But, although we grieve for the lost friends and
relatives, I think we can be proud that the Nation's
extraordinary responses to these events demonstrate, among
other things, that our capital markets are the world's
strongest and most resilient.
I think that the efforts that we went through reflect
exceedingly well on our national character, and I hope it is
not unseemly for me to say I am very proud to be an American. I
am very proud to be in the Government at this particular
moment, and I am proud of my heritage as a New Yorker, because
I think New York responded with unquestionable alacrity and
efficiency and competence.
The attacks that arose on the 11th did not arise in a
vacuum. So we at the SEC coordinated our efforts with the
larger Federal Government of which we are a part, and we also
worked cooperatively with the industry we oversee.
We embraced two critical roles: first, to assist in
implementing national policy and, second, to evaluate and
facilitate the industry's planned responses, ensuring fidelity
to the protection of investors and national interests. We
sought to provide certainty to facilitate the reopening of fair
and orderly markets and to restore public confidence. We
reached out to major market participants to determine whether
we could provide appropriate temporary regulatory relief. And
for the first time, as has been noted, we invoked our emergency
powers that this committee was instrumental in providing to the
Commission; and we issued several orders and interpretive
releases.
We also provided relief from certain filing deadlines and
issued guidance on how the market closures affect the
application of certain Commission rules. We considered many
things. One of the things, as Congressman LaFalce indicated,
that we did not do was ban short selling, although it had been
proposed to us and it was carefully considered. We did not do
so because, in the final analysis, we thought that short
selling has a legitimate place in market activities. It is used
as a hedging device, and it can help make more efficient
markets.
We think that our rule regarding short selling--Rule 10A-1
under the Securities and Exchange Act--prevents improper short
selling to push a market downward. We considered that, in the
history of this country going back even to the attack on Pearl
Harbor and the Kennedy assassination, there has never been a
ban on short selling; and, finally, we thought that when the
markets reopened we wanted investors to be met with the same
markets that they had seen before the catastrophe.
Mr. Chairman, I am still in the middle of my remarks, and I
don't want to use up my welcome here. If I can, I would go on
with my statement, but if that is not acceptable I would be
happy to answer questions.
Chairman Oxley. No. Go ahead and finish your statement, and
we will have plenty of time for questions.
Mr. Pitt. One of the things we believe very strongly is
that Government is and must be a service industry, so we made
certain we would be accessible to investors and market
participants. We set up telephone and Internet hotlines and
placed additional information for investors and market
participants on our website.
Many of the things we did for investors we have done
before, but for the first time in our history we established
dedicated telephone lines for inquiries for market participants
and for firms seeking additional relief. We received over 100
calls every day last week, and we have found that reaching out
to those who have to practice their trade in this industry has
been a successful way of assisting investors. It is a device
that we intend to use frequently in the future.
The decision to reopen the markets was made by the private
sector, the markets, and major market participants in
consultation with the SEC. On Thursday, the 13th of September,
the fixed-income markets and the futures markets successfully
resumed trading; and on Monday, September 17, all U.S.
securities markets resumed trading without incident.
The markets did not give way to panic selling. They simply
did what they do best. They assessed and responded to the
crisis rationally, and the time that we took to allow the
markets to regroup worked to the advantage of investors in this
country.
The measures that we adopted pursuant to our emergency
authority will expire at the end of this week. Under Section
12(K)(2) of the Exchange Act, we can impose emergency measures
for 10 business days or 2 weeks. We are monitoring the markets
closely, and we have solicited the input of market
participants. We are considering whether we should take
additional steps to ensure that our markets remain orderly, to
remove regulatory restraints that, in light of current
conditions, inappropriately slowed down the capital-raising
process, and to further the program recently enacted by the
Congress to assist distressed industries.
One of the things that we are doing is trying to expedite
the ability of airlines and insurance companies to reach our
capital markets without any significant delay that would come
from the normal operation of the regulatory process, and we
have reached out to representatives of those industries to find
out whether there are other things that the Commission can do
to facilitate the ability of those industries to reach the
markets with alacrity.
I must say that one of the items on my personal agenda is
to speed up and make more efficient the capital-raising process
for all industries, but I think that, at this particular time,
paying special attention to the airline and insurance
industries makes sense and follows the examples set both by the
Administration and the Congress.
As you know, our Northeast Regional Office, which was at 7
World Trade Center, was destroyed in the aftermath of the
attacks. To our tremendous relief, every one of our employees
has been accounted for and is safe.
Like many affected businesses, however, we are in the
process of rebuilding. The most important part of the
rebuilding is to deal with the human issues that affect people
who saw this destruction up close, who had to flee their
business home, in a sense, and who were left homeless as a
result of this destruction with no office to return to. I think
we are doing a good job with our people. We have taken pains to
assure everyone that the most important thing is their well-
being and secure feeling, as opposed to any particular item
that they may have been working on.
We have just signed a lease for new office space that will
also be in the financial district, and we expect to be in our
new offices by mid-October. In the interim, we are very
grateful to the U.S. attorney's Office for the Eastern District
of New York, which has made space available to our people.
We have also brought our enforcement resources to bear in
the wake of the September 11 attacks. Although any securities
violation is minor in relation to the atrocities that were
perpetrated, we, along with Federal and State authorities, must
canvass all possible evidence to identify the perpetrators.
Because of the extraordinary circumstances of the current
situation, we made an exception to our longstanding policy on
not commenting on investigations. We, along with other U.S. and
international authorities, are providing all assistance
requested of us and possible to the FBI as they track down
those responsible for these heinous attacks; and we are working
with foreign market regulators as well.
The September 11 terrorist attacks also bring a new impetus
to the Commission's and the securities industry's participation
in the Government's anti-money laundering efforts. I am
confident that the securities industry and the SROs stand as
one with the Commission and our partners in Government,
including Congress, in our firm resolve to deny criminals the
use of the Nation's financial institutions, including broker
dealers, to launder the proceeds of crime for profit, or for
the furtherance of their criminal activities and especially
terrorism.
As the events of last week demonstrate, it is not possible
to destroy our free markets. They are not located in any one
building or city or place. They are an amalgamation of people
and ideas and, above all else, freedom. They are emblematic of
our great Nation. I think we can all be justifiably proud of
our Government and market participants in the way they have
performed in this crisis. These are extraordinary times, and
all Americans have responded and performed extraordinarily.
On behalf of the Commission, I appreciate this opportunity
to submit our views on the state of the securities markets in
the wake of the recent terrorist attacks; and I will be happy
to try to respond to any questions that the committee may have.
[The prepared statement of Hon. Harvey L. Pitt can be found
on page 85 in the appendix.]
Chairman Oxley. Thank you, Mr. Chairman; and, once again,
our congratulations for a job well done.
You and I both witnessed the markets performing very, very
well last Monday in New York; and it was a gratifying feeling,
I think for all of us, to understand the resiliency of that
marketplace, which brings me to my first question. That is that
some commentators suggested that the bombings brought to the
surface what has been apparent for quite some time, namely the
capital markets' overreliance on physical location in lower
Manhattan. What can be done or should be done to ensure that no
future attack on a physical location can disrupt the U.S.
capital markets for several days?
Mr. Pitt. One of the most important things that enabled the
markets to get up to speed was the ability to replicate
existing records and to do so quickly and to have alternate
trading sites.
There is no question that when the dust settles, both
literally and figuratively, on this terrible incident that we
intend to sit down with the securities industry to review the
preparedness of the industry, which I think was remarkable in
the face of these events, to satisfy all of us that there are
alternative mechanisms and that vital institutions like the New
York Stock Exchange and the Nasdaq market are protected.
Because, far from just being private sector entities, they are
of public utility and value and we have an obligation to make
sure that they are protected. So we intend to review the state
of preparedness of the industry.
From what we saw, we thought all of the major firms had
very good duplicative facilities. And the American Stock
Exchange was able to move from a physical location that was
made unusable for a time to a different physical location in a
matter of days, both with respect to equities and with respect
to options: their equities were moved to the New York Stock
Exchange and their options were moved to the Philadelphia Stock
Exchange. It gives me a great sense of comfort that the
industry had the foresight to have appropriate duplicative
facilities.
But in the wake of this, I think we will owe you a much
more detailed report, and we intend to sit down with the
industry to make certain that the American investing public is
satisfied that we have looked at the problem and have left it
in a good position.
Chairman Oxley. There have been some reports that there are
still some telecommunications problems regarding some firms and
the inability of some investors to access their brokers. Can
you bring us up to speed as to where that is right now,
particularly in regard to the firms?
Mr. Pitt. There were some incidents, although our
experience was that there was not an incredible amount of
difficulties. The consumer assistance lines that we created
enabled us to put investors in direct contact with their
brokerage firms. If they could not reach their brokerage firms,
we were quite successful in making certain that we put the
investor in touch with the firm and the firm was then
responsive.
Chairman Oxley. Indeed, the initial reports were that I
think there were 19 of 32 firms located at the World Trade
Center that were not heard from. Was that an initial report or
was that the----
Mr. Pitt. That was an initial report that Nasdaq put out.
Of 32 firms in the World Trade Center, 19 initially had not
made contact with Nasdaq, and there were concerns. By the time
the markets opened on Monday, there were only a handful of
firms that had decided not to open, but almost all had been
heard from. And, as you had pointed out in your opening
remarks, the ability to test the system on the Saturday before
the opening of the markets on the 17th gave us great
confidence, because Nasdaq and the New York Stock Exchange were
able to make contact with their principal members and everyone
who wanted to begin trading on the following Monday.
Chairman Oxley. Thank you. The Chair's time has expired.
The gentleman from New York, Mr. LaFalce.
Mr. LaFalce. Thank you very much.
Mr. Pitt, was there any authority that you didn't have that
you wish you had? Is there any implicit authority that you feel
you clearly have, but would prefer be explicit?
Mr. Pitt. I think that we have been given some important
tools that we had never used before. The Section 12(K)(2)
emergency powers are a good example of that.
I would suggest that it would be very useful to the
Commission if we had the ability to extend our emergency relief
beyond 10 business days. I recognize that an unlimited
authority to change rules and to suspend any of our rules is
inappropriate, just as a citizen I don't think Government
agencies should be given that broad range of power. But I think
that a more logical timeframe would be 30 business days, with
the ability to extend beyond that if certain conditions were
satisfied that Congress would specify. And we would be willing
to work with this committee to develop appropriate legislation
to that effect.
I apologize for going on, but there is one other area where
I think the SEC can use help. I am not in favor of wanton
expansion of Government agencies, even in times of emergencies.
However, I do believe we have to be prudent and be able to deal
with all of the problems.
The SEC, in my view, has two critical needs that money
would be useful in solving.
The first is that the SEC needs infinitely more economists
than it presently has and economists of the highest caliber. It
strikes me that the SEC is an agency that should have the best
economists who can detect market trends and economic trends and
be of assistance to this committee and the Congress as a whole
as well as to investors.
The second area is technology. I believe that the SEC has
to be at the forefront of understanding the capabilities of
modern technology. As it stands now, I believe that the SEC is
behind the times and that it always trails the industry; and I
think that is another place where authority would be helpful.
Mr. LaFalce. I thank you very much for that response,
because I have been advocating that since we assumed
jurisdiction over the securities industry. The Customs
Department has been advocating for years for what they call
ACE, Automated Commercial Environment, but we are talking about
a billion dollars or so to do that. And I couldn't agree with
you more that you need the human resources such as the
economists and the technological resources to see, for example,
if certain activity was taking place on September 10 that you
might have been able to detect. Do you have a dollar figure
for--are you in the process of preparing some estimates of what
your additional human resource and technological needs might
be?
Mr. Pitt. I don't have a number at the moment, and I want
to stress that first I would like to see whether there are ways
in which we can reduce our existing expenses. I think we have
an obligation to use all of the resources we have been given
and to use them efficiently.
The second thing I would want to do would be to consult
with people in the Office of Management and Budget. I believe
that the Commission is an independent agency and ultimately it
will be asked for its own view, but I also believe that the
Commission is a part of Government and I would not want our
agency to be advocating positions that were inconsistent with
the national policy.
Mr. LaFalce. Let me ask my last question. Explain to me
Rule 10A that gives you the authority to prevent improper short
selling. What would that be?
Mr. Pitt. Well, the rule basically is what is known as a
``tick test'' rule. It was adopted in 1938, and it is largely
still in the form in which it was initially conceived. It
provides that exchange listed securities can only be sold short
at a price above the price at which the immediately preceding
sales were affected. That is sort of a plus tick. Or the last
sale price, if it is higher than the last different price, that
is a zero plus tick, and it prevent sales on minus ticks and
zero minus ticks.
Mr. LaFalce. Is that all it does? That is almost nothing
then. I mean, I shouldn't say almost nothing, but----
Mr. Pitt. I think it is not almost nothing. One of the
things that we did was monitor the extent of short selling on
the markets in the week that the markets reopened, and what we
found was that the extent of short selling was slightly lower
than it had been in the weeks preceding the terrorist attacks.
Mr. LaFalce. Did you look at it in an industry-by-
industry--for example, the airline insurance?
Mr. Pitt. We did have that data. I don't have it with me,
but we looked at it from an overall market perspective and
otherwise.
Mr. LaFalce. I would like you to give me that data broken
down with at least with respect to the airline and insurance
industry.
Mr. Pitt. I would be happy to supply that to the committee.
[The information can be found on page 101 in the appendix.]
Chairman Oxley. The gentleman's time has expired.
The gentleman from Louisiana, Mr. Baker.
Mr. Baker. I want to welcome you, Mr. Pitt. I know this is
your first formal committee hearing. I don't know if anyone
could have possibly had the ability to forecast what was to
follow after your appointment to this position, but I can
certainly say that given your experience and knowledge of the
SEC, your market experience, that the number of folks who could
have stepped into this responsibility in light of the difficult
circumstances to follow at least were very limited, and I am
very pleased that we had your guidance and knowledge in this
capacity during these difficult days and I thank you.
Mr. Pitt. Thank you very much.
Mr. Baker. And that is expressed by the fact that there was
very careful and thorough analysis given with consultation in
the industry with the reopening of the market. I think there
was great anxiety, at least in my part, not what the market
performance would result, but whether there would be a
momentary glitch, thereby undermining what shaky consumer
confidence exists. And the reasoned careful approach ensuring
that the system would--I know employees were there over the
weekend, even to the extent of putting people on the metro,
making sure they could get in on the subway to get into work
was an extraordinary level of effort, and for that I want to
commend you.
In our last conversation we were engaged in the relocation
of some 330 new employees to new space. Has that proceeded as
expected?
Mr. Pitt. It has. We signed a new lease this week. It is,
I think, five or six blocks from where our old offices were, so
it is still in the Financial District, which is what the
employees in our New York office wanted. And I also think it is
useful to show support for the Financial District in New York.
So we hope to have the space completely configured and people
actually working in it by mid-October.
Mr. Baker. Should circumstances dictate--I know that no one
can predict all the needs at this moment. We are not even sure
what the needs are, but in your view, is there anything that is
lacking in your ability to reconstruct, organize, make fully
operational the agency's activities within the New York arena
that this committee should address?
Mr. Pitt. I appreciate that question, because there has
been some speculation in the press as to whether or not we
would lose cases or other matters, and I would like to assure
this committee that to the best of our knowledge, we will lose
no significant case, investigation or examination. All of the
items that we would have wanted to pursue, we will be able to
pursue. The ability to replicate records in each of those areas
differs. And one of the things that comes out of this event for
us, before we turn to the industry, is to make sure that our
own recordkeeping gives us all the comfort level that we are
not in jeopardy of ever losing any particular matter.
Mr. Baker. Well, I was of that opinion, but I thought it
important for the public record for those affected by pending
matters to know that business would proceed as expected. With
regard to a whole array of issues, which are certainly
appropriate for a review at some point, I would just like to
request at a future time from the standpoint of the redundancy
of operational systems, review of current form filings and what
may be set aside in the current environment, which are done
electronically without the necessity of paper filings today,
which may be of great help, being aware of whatever investment
recommendations that might be made from the agency's
perspective to instill consumer confidence, a review and
perhaps careful consideration of the employee safety--the
structure itself, once fully operational, what are we going to
do different today, tomorrow, that is different than today with
regard to that issue from an agency perspective. I don't expect
any immediate answer. I know you are engaged in frankly much
more important work at the moment. I just wanted to leave open
the record with future discussion with the agency on any and
all matters that would assure consumers and, frankly, taxpayers
that anything will be done to assure the sound and safe
operations of markets. They are the strongest, deepest and most
liquid markets in the world, and we will do everything to
assure immediate recovery for our overall economic prosperity.
Mr. Pitt. Thank you, Congressman.
Chairman Oxley. The gentleman from Pennsylvania.
Mr. Kanjorski. I have not had an opportunity to
congratulate you in your first several weeks in office in
having met the challenges of this monumental task. You
certainly make us proud that the commissions, bureaus and
agencies of the Federal Government are manned by exceptional
people.
Mr. Pitt. Thank you.
Mr. Kanjorski. I was listening to some of your potential
needs. Recently, the Congress enacted some legislation on the
House side to reduce transactional fees and other income that
could be used by the Securities and Exchange Commission for
modernizing or updating or increasing staff of the economists
that you mentioned. Would it be wise for us to reexamine that
piece of legislation, which passed the House, to perhaps
authorize the Commission to use some of these fees at its will
to move without using the appropriations that fund the
Commission on a regular basis?
Mr. Pitt. Well, the question you raise is very pertinent,
and I can say speaking for the Commission that the Commission
has supported the combined legislation, which provides for the
reduction of transaction fees, because they effectively operate
as an undeclared tax and, second, pay parity for our employees,
which in the light of this tragedy becomes even more
significant. I believe that legislation makes sense. I have
often thought that if there were some way in which the
Commission could be self-funding, but in which it was still
required to comport with the national budget policy of the
Administration, that would be ideal. But I am an advocate of
reducing the transaction costs in the current legislation, and
my strong hope would be that the Senate and the House, both of
which have now passed legislation that I think is almost
identical, could get together and enact that into law, and then
we would be happy to work with the Administration and Congress
to figure out ways in which the SEC could be put on a self-
funding basis.
Mr. Kanjorski. Thank you. I do not like to sound ghoulish,
but what would occur if we have a second terrorism attack? How
prepared are the security markets to function properly, and
what kind of impact do you see in a second similar or larger
attack?
Mr. Pitt. I actually think that if, God forbid, there were
another attack, all of us would perform even better than we did
this time. Let me start by saying, if destruction is attempted,
there is no way to predict how devastating that destruction can
be. But the one thing that amazed me was that, as unaware as
the entire industry and Government was about the onset of this
attack, we responded quickly and we responded effectively and
our markets came back up as strong as ever. In fact, the New
York Stock Exchange had record volume on the first day it
opened. We have learned a lot from that. And, in my view, we
will do a better job in providing redundancy measures and
applications so that we could get back up to speed.
The most important aspect of the recovery effort has been
human heart, and that resolve was strengthened, and I believe
it will only grow stronger as a result.
Mr. Kanjorski. Very good. I was just interested in whenever
an event like this occurs, there are always those portions of a
society that try to take advantage of the situation. There are
possibilities that exist which operators within the market
would take advantage of it. Now with more than 50 percent of
the forces of the Justice Department and the FBI allocated to
the terrorist examinations, in my opinion a proper allocation,
new challenges arise. The effect could be that some of the
prosecutorial talent will not proceed on other second
priorities, such as criminal activity within the securities
industry.
Do you think it would be wise for us, exercising some
authority for the President under national emergency
provisions, to have a moratorium on the statute of limitations
and institute a hiatus statute, so that pressure isn't there
for a period of 6 months, a year, 2 years, at the will of a
national executive in a national emergency?
Mr. Pitt. I think that is an interesting thought and one I
had not considered, and it would be one, with your permission,
I would like to reflect on before responding in a definitive
way. But I think it would be worth considering the issue.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from New Jersey, Mrs. Roukema.
Mrs. Roukema. I appreciate you speaking here today. And as
a Member who represents a district who, in many districts, is a
bedroom community for New York financial services, we have had
a lot of loss in our district. But also speaking again on
behalf of my constituents and the economy of our region, I am
so grateful for the positive presentation you have made here
today, and we are going to deal in a very realistic way with
keeping the SEC operating and operating well.
Mr. Pitt. Thank you.
Mrs. Roukema. But one of my concerns and it has been a
concern of mine over the past year-and-a-half, having held
hearings in my previous subcommittee on the subject of money
laundering, we have had hearings and you have referenced the
question of money laundering. I want to ask you to be more
explicit in that regard, telling you that I have introduced,
with Congressman LaFalce, the bulk cash smuggling bill, which I
think will be moving ahead quickly. But more importantly than
that is the more comprehensive question that integrates both
financial services with the judiciary, and that is a
comprehensive money laundering act.
We haven't really looked, as far as I know, and haven't
been looking on this for a long time, haven't looked at the SEC
potential component of this. We have almost exclusively focused
on the banks. By the way, you also mentioned with respect to
working with foreign market regulators, and so it seems to me
if we are going to really deal comprehensively with money
laundering--and the Attorney General Ashcroft is also composing
a bill--could you give us help on how we should integrate the
SEC or the securities markets with respect to that, both
domestic as well as the foreign markets?
Mr. Pitt. Yes. Any money laundering has now taken a front
and center position, and perhaps it should have had that in the
past, but it certainly has it now and appropriately so. We are
working closely with the Treasury Department, and we are of the
view, as is the Treasury, that there are sufficient differences
between securities firms and banks that we have to come up with
a program that is tailored to each one. And the principal
difference in lay terms, as I gather it, is the banks involve
initial acquisition of money to be laundered, but the
securities firms involve the subsequent placement. So some of
the procedures that work for banks would not make sense in the
securities industry.
I am pleased to say that there is an enormous degree of
voluntary activity on the part of the securities industry to
deal with these issues, and we are working with the Treasury
now to make certain that the securities industry is as covered
as the banking industry.
Mrs. Roukema. Well, I am glad to hear that, but at the same
time it is my understanding that the Administration through the
Attorney General will be presenting a piece of legislation in
the very near future, if, in fact, it isn't going to be
presented this week. But Treasury, Attorney General, the
Justice Department, I would hope would be working together with
you in that regard, and certainly I would like to be in close
communication with you as to how our own piece of legislation
can be adjusted and modified appropriately.
Mr. Pitt. I would welcome that communication, and we are
working closely with all of those agencies at the moment. One
of the things that we have stressed is cooperation with other
branches of the Government.
Mr. Roukema. Thank you very much. I appreciate that, and we
can't leave this loophole out of the bill. Thank you.
Chairman Oxley. Gentlelady's time has expired.
The gentlelady from New York, Mrs. Maloney.
Mrs. Maloney. I also want to express my praise to the SEC.
I had recently visited your employees at 7 World Trade Center
after the passage of the SEC--the individual investors or
reduction fee that also included a portion that raised parity
payment for the employees with other financial institutions,
and they were very appreciative of the work of the committee.
But Mr. Pitt, you, working along with Dick Grasso at the
New York Stock Exchange, Wick Simmons at Nasdaq, the ECNs and
the entire investment community, the SEC provided the industry
with the regulatory flexibility needed to reopen the markets as
quickly as possible.
I was personally at the reopening of the New York
Mercantile Exchange and I believe it was symbolic of the
efforts taking place on Wall Street. The staff and senior
executives had worked around the clock to reopen. There were
interruptions in power supplies and terrible logistics. They
could not even get to the Exchange. They had to bring their own
employees by boat, because of the debris and not to mention the
great grieving that many in the industry feel, having lost so
many of their colleagues.
I can tell you that during this crisis--every day was a
crisis, and the day before the markets opened a lot of us
couldn't sleep. We were really concerned about what would
happen. I truly believe that buying stocks is a patriotic act.
We had Liberty Bonds in World War I, War Bonds in World War II.
And I think in the terrorist war we have stocks. And many, many
Americans went out and did just the opposite of what the
terrorists wanted, they invested in the American economy and I
believe they are great patriots. I just want to mention that
one of my industries that I represent, Metropolitan Life, their
Chairman, Mr. Benmosche, who is here with us, they went out and
invested $1 billion last Friday during the market's worst week,
and I feel that is a great patriotic statement. And many of my
colleagues here in Congress and the people that I have the
honor of representing are doing the same. Many Members of
Congress are going to the site this coming Monday and they
expressed what they wanted to do was to buy stocks to also show
their support.
In your testimony, you stated--although I didn't see it in
the written testimony--that you made a conscious decision not
to invoke Section 10(a) that would ban the selling of short
stocks, that you wanted investors to see the same market that
they saw before it closed. And in New York, there were many
reports on this. It was on the radio, television--really a
call, a patriotic call not to sell short, not to sell airlines,
not to sell tourism. And it was reported that there was a
gentlemen's agreement among hedge funds and others not to sell
short. And there were other rumors that many companies and
individuals had come forward and pledged to do the opposite. I
know our State Controller, Carl McCall, said he would do the
opposite, and there was a huge effort not to sell short. And I
believe in free markets, but I would like you to comment
further.
Was there this huge effort that was reported to appeal to
Americans not to sell short? Was this gentlemen's agreement
honored? Could you expand in that area, because there was
concern that there would be tremendous short selling in this
particular crisis that would have been problematic?
Mr. Pitt. I don't believe there was a gentlemen's or
ladies' agreement not to engage in short selling. I think that
many institutions gave careful consideration to the impact of
their own trading. All of those institutions have a variety of
obligations and they received, I thought, very good advice in
terms of their ability to restrain themselves in engaging in
short selling. So I think people were aware of the issue. I
don't know that there was any agreement. We certainly, in the
many hours before the markets opened, spoke to many
institutional investors and others to make certain that we were
in touch with them, that we could answer any questions they
have. And they understood the importance of the markets opening
as normally as possible.
In my view, notwithstanding the calls for banning short
selling, I think that our restraint and allowing our existing
rules to take care of that preserved two things. One, it did
exactly the right thing for investor confidence and, second, it
preserved a free and competitive market and an open market. So
my own view was that that was the right decision. I will say
that the Commission spent a good deal of time exploring that
particular question before we reached a conclusion on it.
Chairman Oxley. Gentlelady's time has expired.
The gentleman from Alabama, Mr. Bachus.
Mr. Bachus. I want to first congratulate the way SEC has
handled the financial crisis that has faced the Nation. Having
said that, you are aware that the Administration has just begun
a well publicized assault on the financial resources, and I
would suppose that the SEC is a part of that effort.
Mr. Pitt. We are.
Mr. Bachus. Knowing that, are you aware that terrorism and
slaughter in Sudan, which has actually led to the loss of over
2 million innocent men, women and children, that is funded by
United States venture capital for oil exploration and
development?
Mr. Pitt. Congressman, I am aware that there are
atrocities being committed in Sudan that I think are
reprehensible. As to the role of venture capital in American
enterprise, I have to say that I have seen some reports
regarding that, but I don't have any firsthand direct knowledge
of it.
Mr. Bachus. You don't dispute the fact that the oil is
funding the war and the war is resulting in people getting
killed. And when I say war, it is a one-sided war. You are
aware of that?
Mr. Pitt. Again, I am aware of the concerns that have been
expressed, and I think that they are legitimate concerns. I do
not have, I think, as much information at my disposal as I
believe you do. So I have no reason to disagree with you. It is
just that I am not personally familiar with it.
Mr. Bachus. I accept that. I wanted to leave with you and
submit for the record an article, June 11 article, in The
Washington Post entitled ``Oil Money Is Fueling Sudan's War:
New Arms Used to Drive Southerners From the Land.'' I would
like to supply you also with a copy of that so you will be more
aware of that.
Chairman Oxley. Without objection.
[The information can be found on page 69 in the appendix.]
Mr. Bachus. Let me turn to a totally different subject. To
me, it seems to be clear that the U.S. domestic reinsurance
industry will bear the brunt of some pretty extraordinary
losses. You would agree, I suppose?
Mr. Pitt. I do.
Mr. Bachus. It appears to me that they are very strong and
well capitalized. The top 50 U.S. reinsurers have over $53
billion in surpluses. In addition, they have affiliations with
major companies such as Berkshire Hathaway and General
Electric, which can provide additional capital if necessary. Do
you believe that they are up to the crisis?
Mr. Pitt. Congressman, I believe from everything I know
that they are up to the crisis and committed to dealing with
it. I also believe that this is an extraordinary event. No one
could have anticipated this, and it is up to all of us to make
certain that the burdens of resolving these problems do not
fall disproportionately on the shoulders of any one industry.
And that is one of the reasons why in our own way we want to
facilitate more instantaneous access to the capital markets by
insurance companies and do what we can to make this an easier
process.
Mr. Bachus. Do you think that the U.S. domestic reinsurance
market has the strength and financial human capital to meet its
obligations to its customers, enabling them in turn to meet
their direct obligations to the individuals and businesses that
were victims of the September 11 attack?
Mr. Pitt. Congressman, I don't have any reason to doubt
their ability. But I think on the next panel you will have some
very knowledgeable representatives of the industry, and I think
it would be more appropriate for me to defer to their
statements about their abilities than to surmise for myself
what I think they are capable of doing.
Mr. Bachus. Thank you. I will close simply by saying, Mr.
Chairman, I look forward to hearing from Ron Ferguson on the
state of our reinsurance market. In times of great crisis, I
think we can all be grateful for the critical role played by
reinsurance in protecting the solvency of the insurance
marketplace and in ensuring that the primary insurance is
available to customers, small businesses and commercial
property owners. Thank you.
Chairman Oxley. Gentleman's time has expired.
The gentleman from Texas, Mr. Bentsen.
Mr. Bentsen. I want to join with my colleagues, you and
your staff and your fellow commissioners have done an
extraordinary job in this extraordinary event. This is I guess
as big as 1929 or 1987, and it must be interesting for you
having just become Chairman about 30 days ago.
Mr. Pitt. Well, thank you. I do have to say that the
notion of on the job training is overrated.
Mr. Bentsen. Last week, the market lost 13 or 14 percent of
its value and some of that is to be expected. One of the
reasons for the sells--at least it was reported--was because
there were a number of investors, including some rather large
investors, that had margin calls and were having to call to
raise cash. Is that a problem you think we are going to see
going forward in this market and is it something that should
raise concerns about the margin lending system? And I know you
have some responsibility and the Fed has some responsibility
over that.
Mr. Pitt. It really is something that needs to be
monitored, and you are right. We share authority with the Fed.
The Fed sets the policy, and we help implement it. And my view
is that the Fed is in incredibly capable hands, and they are,
along with our staff, doing a good job of monitoring the
situation and making sure that investors are not unduly
burdened, but that our economy and the market safety issues are
preserved.
Mr. Bentsen. In your testimony, you said you eased some of
the regulations--I think this is right--for firms with their
net capital requirement rule of reporting. Have you detected as
a result of this any firms that are having trouble meeting
their net capital requirements and is this something we need to
be concerned about?
Mr. Pitt. No, we have not. But that doesn't mean it isn't
something we shouldn't be concerned about. We are spending a
very large amount of time making certain that we are in contact
with firms and that we have a good understanding of what their
situations are, and the self-regulatory bodies are even more on
the scene than that. So the one thing I can tell you is I don't
think it is a problem. I don't believe it will become a
problem, but I am confident if there were any movement in that
direction we would be able to deal with it instantly.
Mr. Bentsen. Regulation Fair Disclosure has been
controversial and been debated in this committee and I think it
is a good reg. But given the huge chaos in the markets after
September 11, it is not something you stated in your testimony,
but is that something you all are perhaps granting some leeway,
or is the position the same post-September 11 as it was pre-
September 11?
Mr. Pitt. We are reaching out to affected companies as
well as representative groups like the National Investor
Relations Group and attempting to ascertain how the rule is
working in actuality. I testified at my confirmation hearings
the underlying concept that no one should have an unfair
advantage is unassailable. That part is correct. The issue,
however, as you allude to, is whether in operation the rule is
having untoward effects. And in connection with the events of
September 11, the concern would be to make certain that the
rule doesn't contribute to market volatility. We are looking at
those issues and trying to monitor it so that we can come up
with empirically based data.
Mr. Bentsen. If I might quickly ask, the Chairman alluded
to the fact of the other regional exchanges around here, and
how the market operates when you have a crisis like this when
New York and Nasdaq were affected and some of its member
companies. And we have the Cincinnati Exchange, and others are
out there. Is the Commission going forward at how best to
structure our exchanges so that markets can operate through
this? And to that end, you know, I realize that Nasdaq has had
proposals that it wants to expand and change its format. There
are some controversies around that, or some questions around
that from other participants in the market. But do the events
of September 11 and its effect on the markets affect your
viewpoint toward the future of the markets and how you are
going to address these?
Mr. Pitt. I would have to say it absolutely affects my
view. September 11 affects my view of almost every issue,
including personal issues. The structure, or the potential
structure of the markets is a very serious issue and one that I
had intended to put at the very top of the Commission's list of
priorities upon assuming the chairmanship. I think we have to
recognize that we have conflicting goals. One is to promote
competition and free and open marketplaces; another is to
provide opportunities to investors to get the best execution
and the best prices that may be available to them in the
market, which means that the SEC should be playing a role with
the entire industry to come up with a structure that meets
those goals. And we will do that and hopefully do it soon. But
I think at the moment we are focused on some more immediate
questions. But there is no question that I agree with your
concern in that area and that we intend to move on it.
Chairman Oxley. The Chair would announce that, because of
some severe scheduling problems for the panelists on the second
panel, the insurance panel, the Chair would like to limit the
questions to 2 minutes for each Member. I apologize for that,
but we do have some issues with the Jewish holiday that we have
to deal with and we would ask the cooperation of the Members
that we ask questions for 2 minutes to the SEC Chairman and
then we can proceed to the second panel.
Under that constriction, I recognize the gentleman from
California, Mr. Royce.
Mr. Royce. I want to commend you, Chairman Pitt, and the
Securities and Exchange Commission and the industry. You have
done an admirable job in the face of this horrendous tragedy.
And my question--I am for unencumbered markets, but my question
goes only to those who had prior knowledge of this attack. We
have been reading and listening to press accounts that describe
a plot by some terrorists and their associates to manipulate
our capital markets to fund and profit from their terrorist
activities. And in particular, it is my understanding that some
of the associates of the terrorists have been short selling or
purchasing put options on stocks of companies that they felt
would be most affected by these terrorists attacks. And two of
the examples that have been given are American and United
Airlines, where they allegedly made millions. And I understand
you may not be able to speak to this issue because of the
ongoing investigation; however, I think all Americans would
like to better understand how these types of transactions work
and what authority the Security and Exchange Commission has to
monitor them, and to that end would you explain how short sales
and put options work and information that the Commission
normally obtains in connection with these activities might help
to track down those people associated with acts where they may
have had prior knowledge.
And, second, with regard to transactions initiated outside
of the United States in foreign countries, I would like to know
if the Commission is obtaining all of the information it needs
from foreign regulators to track down this activity and what
are the legal obligations of foreign authorities to cooperate
with the SEC in such cases, and does the Commission need
enhanced authority to pursue any of this information to catch
the cowards that planned and profited off of this attack?
Thank you, Mr. Chairman.
Mr. Pitt. The way in which trading operates on short sales
is somebody either sells a security that they don't own, or, if
they own it, that they are not going to use, and they borrow
securities to complete the transaction. Their hope is at a
later point in time they will be able to buy the necessary
securities to cover the borrowing at a price lower than the
price at which they sold it. So it is an assumption in these
situations that the market will go down. Put options involve,
in effect, the future ability to put certain securities to the
other side of the transaction--the purchaser--at a specified
price. The options markets are fairly standardized, certainly
on the exchanges. And there are dollar amounts and expiration
periods. So mostly every quarter, you have the expiration of
puts that have been sold. And one of the most tell-tale
examples of potential illegal trading is when somebody buys a
security--such as an option that is out of the money--that
looks like it never could possibly reach where it is and then
suddenly it hits.
The rumors and reports that you have referred to are things
that we have been aware of and we have been aware of them from
several sources, including a number of the regional exchanges
who called us and spotted excessive volume that seemed abnormal
to them and referred it to us. We have very good market
surveillance techniques. The people who purchase any of these
securities in our markets can run, but they cannot hide. We
will find whoever the purchasers are. The issues really relate
to who the ultimate purchaser is or seller of a security,
because people can use nominees and foreign entities and so on.
But we get the information. And, once we do, we try to track it
down, not only using our own abilities, but we have agreements
with most of the major foreign countries. Many of those are
referred to as memoranda of understanding in which we agree to
mutually assist one another. And indeed, Congress passed
legislation a number of years ago that enables the SEC to
conduct an investigation at the behest of a foreign securities
regulator even though there is no SEC interest.
So there is an enormous amount of authority there, and I do
want to assure you that we are not the least bit shy of
exercising every bit of it to find anyone who is responsible
for this conduct.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from Oregon, Ms. Hooley.
Ms. Hooley. Most of the questions I had were asked or
answered in your testimony. I want to thank you and the
Commission for the incredible job that you have done.
Mr. Pitt. Thank you very much.
Chairman Oxley. I thank the gentlelady for her courtesy and
understanding.
The Chair recognizes the gentlelady from New York. And I
understand it is her birthday. Happy birthday.
Mrs. Kelly. Thank you, Mr. Chairman. Thank you very much,
Mr. Pitt, for appearing. I just want to be brief and focus on
one thing that I am concerned about.
Insurance companies invest the monies that they have in
various ways. There are insurance companies who are invested
with billions of dollars in municipal bonds, and I am concerned
about whether or not it will have an effect on the economy if
these insurance companies start selling off the municipal bonds
that they owned in order to pay the necessary claims. And I
wonder if you would address that and answer whether or not you
think anything needs to be done in order to forestall this
potential problem.
Mr. Pitt. Your analysis of the situation is correct.
Because of the large amounts of holdings of both equities and
bonds of insurance companies, if they are forced to sell off
securities, that could have a distinctly negative impact. Most
of the insurance companies have well diversified portfolios and
they have prepared for the eventuality of having large claims,
although nobody could have forseen this.
Again, I think that the representatives on the next panel
will be able to tell you whether they need additional
resources, although I have read and seen certain suggestions
that anything that would prevent the large sale--selling of
securities might be desirable. But I think I would leave that
question to the next panel.
Mrs. Kelly. Thank you. And Mr. Pitt, as a New Yorker, I
thank you very much for everything you have done to help us get
our markets back in order. It was wonderful to stand with
Chairman Oxley on September 17 with Richard Grasso and Wick
Simmons and people from all over the markets standing there
ending the markets that day. Anyone who wanted to trade could
trade on September 17, and that is a remarkable resiliency and
we thank you very much for your part in that.
Mr. Pitt. Thank you.
Chairman Oxley. The gentlelady's time has expired.
The gentleman from Texas, Mr. Sandlin.
Mr. Sandlin. My questions revolve around selling short in
the securities firms, and I think you have answered those and
we appreciate those answers. I want to be clear on the issue of
puts and make sure I understood what you said.
Do you have the ability to and do you intend to track every
single person and/or entity that had a put, particularly as it
involves the airline industry?
Mr. Pitt. With any trades that take place in our markets,
we have the ability to track down who the immediate purchasers
or sellers were through our blue sheet processing. That is not
the end of the inquiry, however, as I was trying to indicate,
because I might be listed as a seller of a security, but, in
fact, I might have been acting for somebody else. So we have to
go beyond that. And, once you get past the immediate purchaser
or seller, that requires far more detailed investigative
techniques.
Mr. Sandlin. I guess my question is this. I know it is a
big job and I know you clearly have the ability, but will you
and do you intend to take every single transaction that
involved a put and put in that effort and dedicate the
resources and time to trace that transaction regardless of the
time or effort that it takes to do that?
Mr. Pitt. In a technical sense, I suppose the answer to
you is yes. In a practical sense, it is not necessarily the
case that we would track down every single transaction. We
would look at them and try to use the resources available
efficiently. But the answer certainly is that with enough time
and enough resources, we could track down the purchasers of the
securities.
Chairman Oxley. The gentleman's time has expired.
The gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman, and thank you,
Chairman Pitt, for being here. This morning in the Wall Street
Journal there was an article called ``Under the Rubble'' that
said the New York Mercantile Exchange is inaccessible but safe,
and also mentions certificates on securities. And I would like
to know if any of the securities transactions depended on, or
are dependent upon, such certificates and, if so, are there
plans to eliminate this kind of antiquated practice now?
Mr. Pitt. I read the article with interest, Congresswoman.
And I guess I would say the following: About 95 percent of all
securities transactions are done without certificates. They are
done electronically. But there are some people who like the
feel of a stock certificate; and, although there has been an
enormous amount of pressure to eliminate all stock certificates
so that the entire system is basically recoverable through
computers and so on, it has been a somewhat slow process. If
you compare it to the checking system, which is 100 percent
done through book entries, that is a goal we aspire to. Part of
it is educating people that they don't have to have the actual
certificate in their possession. It is a cultural issue and we
are trying to be sensitive to it as we move toward a completely
book entry system.
Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
Chairman Oxley. Thank the gentlelady.
The gentleman from Kansas, Mr. Moore.
Mr. Moore. Thank you, Mr. Chairman. I want to join my
colleagues in congratulating you on the good job you have done
in handling this crisis, Chairman Pitt, and other Members of
this committee have already asked my questions, so I yield back
my time, Mr. Chairman.
Chairman Oxley. I thank the gentleman.
The gentleman from New York, Mr. Grucci.
Mr. Grucci. Thank you, Mr. Chairman, and thank you for
bringing us together at this hearing. It has been very
enlightening so far. Chairman Pitt, in our desire to try to be
helpful in wanting to figure out all the ways we can do so,
there has been some discussion among some Members about
reverting back to what was done during World War II, which is
to float bonds. At that time it was War Bonds, but perhaps
something similar to that, not just to fund the war on
terrorism, but to also help fund the reconstruction and the
rebirth of not only the Pentagon, but of Lower Manhattan. It
has always been my understanding when you buy bonds, you take
money from the market to do so. And if so, would that be the
wise thing to do at this point in time? And could you enlighten
me on what your position would be on bonds versus allowing
moneys to flow into the marketplace?
Mr. Pitt. Well, I would say the following, sir. I think
that in a time like this there are two important aspects. One
is what you do substantively, and the other is how you appear
as a practical matter to people. I support rebuilding New York
and its infrastructure. I think that it is very important that
these projects be undertaken, because they will stimulate our
economy and they will also provide the best defense spiritually
against terrorism. As to whether the Government should be
issuing bonds to pay for it or not or whether it can happen
from the private sector, I think that is a more difficult
question. In the first instance, I am always reluctant to see
the Government intercede. But, if those responsible for this
national policy in the Treasury and to some extent the Fed
believe that the Government should step in as well, then I
think obviously that would be a very good thing. I guess it is
not my province to figure out national policy as to whether or
not we should use bonds. I would say though--from my personal
opinion, not as an SEC opinion--that, to me, the most important
thing is to get these projects underway and preferably as much
of it in the private sector as is possible.
Chairman Oxley. The gentleman's time has expired.
The gentleman from Kentucky, Mr. Lucas.
Mr. Lucas. Mr. Chairman, we have got a lot of financial
industry leaders here today and with busy schedules, so I am
going to pass to another day.
Chairman Oxley. You get a gold star.
The gentleman from Florida, Mr. Weldon.
Mr. Weldon. Mr. Chairman, I would like a gold star as well.
I am also really quite interested in the reinsurance issues. I
am interested to get to that part of the program.
Chairman Oxley. Thank you.
The gentleman from Texas, Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. I want to ask one
question. But prior to that I want to commend you also, as my
colleagues, you and your SEC staff, for your excellent work
during these difficult times.
Mr. Pitt. Thank you.
Mr. Hinojosa. My question is, following the attack you
issued a rule temporarily relaxing SEC regulations governing
companies' ability to buy back their own shares. Do you have an
idea of the extent to which companies took advantage of this
rule and repurchased shares of their own stock and what role
you believe this practice may have played in stabilizing the
financial markets?
Mr. Pitt. Yes. We have been tracking that. And there was a
decided upsurge in the amount of repurchasing, first in the
number of plans that were announced and then second in the
actual repurchasing activities. Companies felt comfortable. One
of the things we had to do is give accounting relief, which had
never been done before as well, so that companies that did
repurchase were not subject to adverse accounting consequences
in connection with their acquisitions.
So I believe there was a discernible and significant
increase. I think the ability of companies to repurchase, and
the willingness of the Government to allow that, had a very
positive effect on peoples' attitudes toward the market. They
realized that there would not be as emotional a reaction in the
marketplace as one might expect. So I believe it was a very
successful effort, and that is why we have continued it and may
indeed continue it further.
Mr. Hinojosa. Good work.
Chairman Oxley. Gentleman's time has expired.
The gentleman from California, Mr. Ose.
Mr. Ose. Thank you, Mr. Chairman.
Mr. Pitt, if I may, you indicated some difficulty in
tracking down who the ultimate beneficiary is of selling these
put contracts and the like, beyond which you are also
confronted with the problem of identifying who the ultimate
beneficiary might have been in whole or in part. I just want to
reinforce what I am sure the rest of the Members of this
committee and this Congress otherwise feel, and that is that if
there are people who have perpetrated these acts and profited
from them, there is not anything you could ask from us that we
would deny you to identify who those people are. And we would
even go into the SEC fees that you all collect that we had a
long debate about earlier this session to fund that
examination. But I just want to make sure you understand that,
which I think you do, given the tenor of your comments earlier,
and I wanted to reinforce that.
Mr. Pitt. Thank you. I want to reassure you that we will
use every effort and tool at our disposal in order to bring the
responsible parties to justice. This is our number one
priority, and to the extent that there was any connection
between the terrorists and market trading, we will do
everything within our power to track those people down and
bring them to justice.
Chairman Oxley. Gentleman's time has expired.
The gentlelady from California, Ms. Waters.
Ms. Waters. Thank you very much. I would like to thank you
for appearing here today and we do appreciate your work. I
would like to just draw your attention to some of what Mr.
Bachus said today. I think it is very important. And I also
think that what the President did recently in his executive
order freezing the assets of individuals who are associated
with terrorism groups, nongovernment organizations and even
leveraging with some countries that may be harboring terrorists
by freezing their assets if they don't cooperate with us, and I
like that. I like this war that is being waged in the financial
community on these terrorists and these activities. I have long
believed that we need to take these kinds of actions as it
relates to brutal dictators who send their money to our banks
and whose bloodied money finds its way into the capital
markets.
So whether it is terrorists, brutal dictators or drug
traffickers, we have to do a better job. Everybody is saying we
must see the world differently now, and I certainly hope we
will get some leadership in doing that. Do you have any role in
the implementation of the President's executive order dealing
with the freezing of assets and the identification of assets?
Mr. Pitt. We are completely committed to the policies that
the President has articulated, and one of the things that we
have done is to touch base with the Administration upon the
issuance of that to make certain that in every way possible we
are supportive of national policy in that regard. So I would
like you to feel comfortable that we consider ourselves part of
one Government, and we intend to do everything we can to
buttress the President's policies.
Chairman Oxley. Gentlelady's time has expired.
The gentleman from New Jersey, Mr. Ferguson.
Mr. Ferguson. I appreciate the fact you are here and your
leadership. We in New Jersey, our families and companies, have
been devastated by this situation and are trying to get back on
our feet emotionally, physically and financially, and your
leadership in making sure our markets remain strong and sure is
vital to that. And I know I speak for people across my district
and New Jersey when we thank you for your leadership and your
strong stewardship.
In the interest of time, Mr. Chairman, I yield back.
Chairman Oxley. Thank you, gentleman.
Gentlelady from Indiana.
Ms. Carson. My constituents have reported to me about Osama
bin Laden's brother in Boston who has humongous resources,
property and structures. Without intruding on any area of
secrecy, is there some way to discern whether or not any of
those resources actually were filtered in by the terrorists or
his brother or may possibly be used for further attacks on this
country?
Mr. Pitt. From the SEC's point of view, the answer is yes,
if those assets were used in any illegal conduct. There are
agencies of Government that start with the money and trace
where it went. We look at the securities markets and trace it
back to the money. Between us and the other agencies we cover
100 percent of the waterfront.
Chairman Oxley. I thank the gentlelady.
Mr. Chairman, we appreciate your testimony today in your
first appearance before our committee, obviously not the last,
and look forward to a long and fruitful relationship with you
and the rest of the SEC and your very capable staff. I know
this is a very difficult time to have your maiden appearance
before the committee, but obviously your reassuring words I
think are very, very helpful for the committee as well as the
Nation, and I thank you for your service.
Mr. Pitt. Thank you for having me, and I assure you of our
complete cooperation on all of these issues.
Chairman Oxley. The Chair knows that some Members may have
some additional questions for this witness. If anyone wishes to
submit in writing, without objection the hearing record will
remain open for 30 days, to place their responses in the
record. So ordered.
We now would like to call up our second panel, the
insurance panel. While we are impaneling the next panel, I know
that we have two Members wishing to recognize a particular
witness and introduce them, and let me turn now to the
gentlelady from New York, Mrs. Maloney, for presentation of a
couple of witnesses.
Mrs. Maloney. Thank you, Mr. Chairman, for granting me a
point of personal privilege to welcome the leaders of two major
insurance companies based in the district that I represent, Mr.
Sy Sternberg of New York Life and Robert Benmosche of MetLife.
They have both been working incredibly hard in displaying great
leadership in this crisis.
Mr. Sternberg is Chair of the ACLI, who sent out a notice
to all of the member organizations right after the crisis,
after the tragedy, calling upon all of the companies to pay
their claims quickly and thoroughly. I can't tell you how
important this is. After the crisis, there were grief centers
with the organizations and businesses opened up to gather with
their employees. And the day after the crisis, there were many
questions about the industry invoking the act of war for
exclusions. In fact, one company had been told by their
insurance company that they would invoke the act of war and not
pay their claims. They have since rescinded. So this statement
in support of paying the claims is very, very important, and
the industry has followed.
One of my companies lost 700 people, many of whom lived in
the district that I represent. One of their CEOs called me
before this hearing to say that both of you are absolute
angels. And he spoke of his insurer, MetLife. He called Mr.
Robert Benmosche a great man, because some of his employees had
not opted to renew their group insurance, yet MetLife is
honoring their insurance. Thank you very much.
Another friend and colleague, very briefly, is the New York
State Insurance Department, Greg Serio. We will hear from him
how his office is helping process claims.
And I have to close by saying that our former
Superintendent, Neal Levin, is among the missing. He is
currently the Chair of the Port Authority and he did a
brilliant job prior to Greg Serio as the State Insurance
Department Superintendent, and we remember him and everyone
else who is lost or missing.
Thank you, Mr. Chairman.
Chairman Oxley. The gentleman from Kansas.
Mr. Moore. Thank you, Mr. Chairman.
I have the honor of introducing this morning our Kansas
Insurance Commissioner, Kathleen Sebelius. Ms. Sebelius was
elected in 1994 and, I believe, is in her second term as
Insurance Commissioner of Kansas and is presently President of
the National Association of Insurance commissioners. I am very,
very proud of her and glad to have her with us this morning.
Thank you, Mr. Chairman.
Chairman Oxley. I thank the gentleman.
Let me recognize, then, our panel today: The Honorable
Gregory V. Serio, Superintendent of the New York Insurance
Department; the Honorable Kathleen Sebelius, Commissioner of
the Kansas Department of Insurance and President of the
National Association of Insurance Commissioners, speaking on
behalf of the National Association of Insurance Commissioners;
Mr. Sy Sternberg, the Chairman, President and CEO of New York
Life Insurance Company; Mr. Robert H. Benmosche, Chairman and
CEO of MetLife, Inc.; Mr. Dean O'Hare, Chairman and CEO of the
Chubb Corporation; Mr. Matthew C. Mosher, Group Vice President,
Property-Casualty Rating from A.M. Best Company; and Mr. Ronald
Ferguson, Chairman and CEO of General Reinsurance Corporation.
We thank you profusely for your patience and for waiting.
I am going to recognize Mr. Sternberg first. I understand
he has some potential travel and timing problems. So let us
begin with Mr. Sternberg as our first witness.
STATEMENT OF SY STERNBERG, CHAIRMAN, PRESIDENT AND CEO, NEW
YORK LIFE INSURANCE COMPANY
Mr. Sternberg. Thank you, Mr. Chairman.
I am Sy Sternberg, Chairman, President and CEO of New York
Life Insurance Company. I also serve as Chair of the American
Council of Life insurers. However, today I will be speaking
solely in my capacity as head of New York Life.
I want to thank Chairman Oxley and Congressman LaFalce for
the opportunity to testify on this issue of national
importance. I also want to express my appreciation to all
Members of Congress for the incredible hard work and
bipartisanship demonstrated during this very difficult period.
In the hours and days that followed the September 11
terrorist attacks, people throughout the Nation were looking
for ways to offer assistance, to do something constructive in
response to this terrible tragedy. At New York Life we summed
up our response in one sentence: We will pay our claims quickly
and compassionately.
Mr. LaFalce. Mr. Sternberg, would you please lower the
microphone a bit? Thanks.
Mr. Sternberg. We have been working closely with the New
York Insurance Department, and we thank Superintendent Greg
Serio for his strong leadership in this crisis. While a death
certificate is normally required by life insurers before a
claim can be paid, it can be time-consuming or even impossible
to obtain one in a disaster of this magnitude. Instead, we are
contacting employers, consulting the passenger manifests from
airlines, and gathering obituaries and other lists of those
presumed dead. We are supplying families with the next-of-kin
affidavit developed by the New York Insurance Department, and
we are relying on certification from our own agents who in many
cases know the families well and can attest to the loss.
As of last Friday, we received 21 claims, but that number
will grow as the hope to find thousands of people missing
gradually dims. The first of those claims was paid on the life
of a young Cantor Fitzgerald employee. The $190,000 death
benefit was delivered to the victim's surviving relatives by
their New York Life agent this past Saturday.
Analysts have estimated that the total life insurance
claims resulting from September 11 could be in the range of $2
to $6 billion. While the amount of these claims is staggering,
the monetary exposure is, in fact, a fraction of the $52
billion in death claims paid last year by the life insurance
industry as a whole and therefore will not have a material
adverse impact. In the case of my company, which pays out
almost $1.5 billion in death benefits per year, we expect the
total amount of New York Life policyholder claims related to
the tragedy to be in the range of $100 million. This is less
than a 7 percent increase in total annual claims. Our ability
to pay is backed by $40 billion in life reserves and another $8
billion in surplus.
Claims for the September 11 event will not be a problem for
our company, nor will I expect it to be a problem for the life
insurance industry. I should note, however, that the life
insurance companies are major investors in corporate America.
We are holders of corporate bonds, real estate mortgages, and a
small percentage of our portfolio is in the equity market. If
the economy worsens, some life insurers could have problems on
the asset side of the balance sheet. I know this committee and
the NAIC, led by Commissioner Sebelius, will monitor this
closely.
With more than 150 years in the New York City business
community, we feel a special obligation to stand at the
forefront of the relief effort. The New York Life Foundation is
making a contribution of $3 million to the September 11 Fund
administered by the New York Community Trust and United Way,
and we are matching our employee contributions to the American
Red Cross with a minimum contribution of $1 million.
Additionally, we are donating some $1.5 million of
television advertising time that was originally intended for
New York Life commercials to the American Red Cross.
I am gratified by the way our industry has responded to
this ordeal. This is a time for the insurance industry to be
visible. This is a time for us to be charitable, and this is a
time for us to stand as a pillar of stability in a none too
stable world.
Thank you for the opportunity to testify, Mr. Chairman.
[The prepared statement of Sy Sternberg can be found on
page 103 in the appendix.]
Chairman Oxley. Thank you, Mr. Sternberg, for appearing;
and, as we say, we understand your time constraints. Please
feel free to stay as long as you can. We are hoping we can wrap
this up no later than 1 o'clock, if that gives you some idea.
Mr. Serio.
STATEMENT OF HON. GREGORY V. SERIO, SUPERINTENDENT, NEW YORK
INSURANCE DEPARTMENT
Mr. Serio. Good morning, Mr. Chairman, Mr. LaFalce, Members
of the committee.
When the Insurance Department was formed in 1860, our seal
was inscribed with the motto ``Bear ye one another's Burdens.''
the unprecedented events of September 11 bring new dimensions
to that charge for the burdens brought about by the vicious
attacks on the World Trade Center go beyond and I will say far
beyond the payment of claims and the covering of future risks.
Indeed, at this time, the property, casualty and life
industry in New York State and their reinsurers appear to have
the resolve and the resources to meet the obligations arising
out of the World Trade Center incident. From industry
reputations and commitments, many that you will hear today, to
the Insurance Department's own initial analysis, all
indications are that the insurance industry will bear the
financial burden.
The Insurance Department, along with insurance entities,
were materially impacted on September 11, as were all
businesses in lower Manhattan; and, like many others who
witnessed and lived the events of that day, the Insurance
Department found itself with the burden of, A, insuring that
its work force was safe, B, finding alternative space for
relocating operations, and, C, planning for the return to our
own main offices.
The Insurance Department, perhaps unique among our
neighbors in the financial district, also needed to meet the
additional challenge of responding to the disaster immediately
to help ease the burden of others. We were also concerned for
our friend, as Congresswoman Maloney said, Neil Levin, who was
in Trade Center One that day.
I am proud and pleased to say that the New York Insurance
Department and its 1,000 dedicated employees met the challenges
posed by September 11 through preplanning for disaster
responses, through ongoing financial risk assessments,
practices and knowledge of the financial condition of our
regulative parties and through sheer determination and will to
keep our agency on the front lines of the State's and city's
unified response to the disaster and to return as quickly as
possible to our home in lower Manhattan, which we did on
September 17.
The Department has been working since the hours after the
disaster to bear the burdens of the others, the victims and
their families, as insurance consumers, the dislocated insurers
and brokers and the constituencies who call upon us in the
course of our normal duties. They will continue to successfully
do so in the weeks and months ahead.
The incident of September 11 put into action a disaster
plan devised and implemented by the Department in May of this
year. The Department's Emergency Operation Center, which houses
the major carriers writing in affected areas, is connected to
the State emergency managers and the governor's staff by
various communications and data links for the purpose of
exchanging critical information relating to the incident.
Through this real-time exchange of information, emergency
managers and Department financial analysts were able to
determine the amount of insured versus uninsured loss and take
estimate from there, where public assets will be necessary, and
where the industry can be best staged to start facilitating
claims activity. The insurance industry as it has since the
onset of the disaster was very responsive to the call to our
emergency operations center.
The industry has also been highly effective at moving
assets into New York City, including catastrophe response teams
and mobile claim centers. A sizable insurer presence at the
Families Services Center at Pier 94 on Manhattan's west side in
conjunction and coordination with the Department's staff at
State and City Emergency Operation Centers will allow expedited
movement of insurers into areas deemed best for administering
to those insureds.
Equally important to the mission of facilitating connection
between insurers and insureds is the Department's mission to
make certain that claims are, in fact, paid in a timely manner
and that there are adequate resources to meet those
obligations. Again, on both counts the industry has indicated
and exercised a willingness to pay claims without regard to
exclusions or other contractual restrictions.
Future challenges await us in the recovery process. Long-
term financial analysis, particularly as better data concerning
losses is developed, is a critical function. Likewise, planning
for gaps or limitations in coverages, gaps brought on not by a
reluctance or a recalcitrance of insurers to pay, but rather
the sheer unlikelihood of events of these dimensions will need
to be anticipated and addressed. Business interruption coverage
will be closely monitored to determine if losses brought on by
long-term closures in certain areas of lower Manhattan will be
covered.
In the meantime, the Department will maintain its 7-day-a-
week schedule, its hotline telephone numbers, its outreach
centers in Manhattan, Westchester, Nassau, and Suffolk
Counties, its 24-7 presence at our standing emergency
management office, and our active presence at and near ground
zero to make certain that consumers' needs are being met.
The Department will also continue to actively monitor
carrier financial conditions, its financial analysis and
modeling activities to assure ongoing financial liability,
including liquidity and solvency in response to this disaster
and future challenges.
Thank you very much for having us here today, and we will
answer questions when the time comes.
[The prepared statement of Hon. Gergory V. Serio can be
found on page 106 in the appendix.]
Chairman Oxley. Thank you, Mr. Serio. Spoken very quickly,
like a true New Yorker.
Ms. Sebelius.
Mr. LaFalce. New York or New York City, Mr. Chairman?
Chairman Oxley. I should have been more specific. New York
City.
STATEMENT OF HON. KATHLEEN SEBELIUS, COMMISSIONER, KANSAS
DEPARTMENT OF INSURANCE; PRESIDENT, NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS, ON BEHALF OF THE NATIONAL ASSOCIATION
OF INSURANCE COMMISSIONERS
Ms. Sebelius. Thank you, Mr. Chairman. Good morning to
Chairman Oxley and Members of the committee.
Speaking for myself and my fellow insurance commissioners
from across America, we appreciate the opportunity to update
Congress and the public today regarding the impact on our
Nation's insurance system from the September 11 terrorist
attacks.
I think you have just seen an example of Director Serio's
leadership, and I want to assure you that he has done a
magnificent job in the face of this incredible disaster of
helping to formulate what I think is very sound policy to move
forward.
You heard Chairman Pitt talk about some personal SEC
experiences with this disaster, and I wanted to start with the
NAIC, the National Association of Insurance Commissioners,
personal losses.
Our Securities Valuation Office was in building 7 which, as
you know, collapsed at the end of the day on Tuesday. The 44
employees in that agency were all safe from any physical harm,
although the trauma of the day's events I think will be with
them for probably months and years to come.
In terms of the ongoing operations of the office, we have
backup data for that very sophisticated system which was
captured immediately in Kansas City. The office was back
running the following day. We signed a lease yesterday in
Manhattan for new office space that the SVO should be in by the
first week in October.
But the operations of evaluating securities, which is
critical to companies' portfolios, has really not been
interfered with in spite of the terrific loss. My testimony
today is going to contain the best estimates of the losses
calculated and updated constantly for the last 2 weeks. The
estimates have been revised several times and may increase
further as the full impact of events are known.
Let me start by saying we do have reassuring news to
report. The NAIC believes that the American insurance industry
is well capitalized and financially able to withstand the
pressures created by these terrible attacks. The United States'
insurance industry is a $1 trillion business with assets on the
books of more than $3 trillion. Preliminary loss estimates of
$30 billion represent just 3 percent of the premiums written in
the year 2000.
In addition to the industry's overall strength, the State
insurance guarantee funds have another $10 billion of capacity
to compensate American consumers in the event of
insolvencies.The insurance companies have shown their ability
previously to respond to huge disasters such as Hurricane
Andrew in 1992 and the Northridge earthquake in 1994.
For some committee perspective in using inflation-adjusted
figures, these events, which occurred within a 2-year period of
time, resulted in almost $26 billion in insured losses. That
gives you some perspective of what we are looking at now; and,
as you know, the industry remained alive and well.
We are heartened by the initial response of the Nation's
insurers in the current situation, and we anticipate that they
will fully meet their responsibilities to victims in terrorist
attacks and applaud their stepping forward to do that. As
regulators, my colleagues and I will continue monitoring the
process.
Mr. Chairman, I think that this hearing is very important,
and the terrorist attacks on September 11 are a stark reminder
that insurance is different from other financial services,
because it is involved in every aspect of our lives when we
leave home every day. Insurance products provide the necessary
assurance of financial safety that allows Americans to accept
daily risks in business, travel, personal activities of every
sort that we have come to believe are normal to the American
way of life.
Insurance coverage is unique in that it is a product that
most people only encounter when they are under the stress of
unhappy and often extreme circumstances. Although insurance
payments will never fully compensate for personal and emotional
losses, they offer one of the first glimpses of hope for those
who face the daunting prospects of starting life all over
again.
Insurance regulators are keenly aware that people need to
know that we will have promised financial resources available
quickly to help them begin the process of recovery, and we
understand the true role of insurance in America lies as much
in rebuilding faith and hope as in rebuilding or replacing
offices, homes, and property. The key to delivering on the true
promise of insurance is prompt, caring, and effectively
handling of policyholders' claims and payments. You have heard
from Sy Sternberg and you will hear from the other insurers
that that is what they see their commitment is and are in the
process of doing.
As regulators, our first responsibility was to find out
what happened, determine how it was going to affect
policyholders and insurers, and identify gaps or weaknesses;
and I want to bring you up to date on what we have done. We
have been coordinating reports throughout the community of
regulators since September the 13th, which have included
financial data calls and special conference calls of the
various working groups on financial analysis, reinsurance, and
international insurance issues.
We also adopted an action plan unanimously in mid-September
which includes three elements: to assess the solvency impact on
the global insurance industry, information from insurers,
reinsurers and the Lloyds of London syndicates; to identify
legal, financial, policyholder and claims issues stemming from
the tragedies; and to identify specific insurers that may
require regulatory surveillance or specific attention.
The scope of the project right now is focused on roughly 50
insurance groups comprising 275 companies, which account for a
substantial part of the affected insurance markets in New York,
New Jersey, and Connecticut.
With respect to reinsurance, the project will look at
approximately 30 global reinsurance groups, 35 individual
companies and 90 syndicates at Lloyds of London. It appears in
that nucleus that there are about 12 groups with estimated
losses exceeding $500 million and, of those, four groups which
have losses in excess of $1 billion.
The action plan will include the following steps:.
To identify the insurance companies with business
operations in the Wall Street District, particularly the World
Trade Center Towers and buildings 5 and 7, and assess the
impact on those insurers with substantial ``back-office''
operations;
To identify and calculate individual insurers New York, New
Jersey and Connecticut books of business in relationship to
their total business, break down premium writings by the line
of business and evaluate the company's exposure to further
decline, as referenced earlier, in the equities market;
Associate all insurers identified with their parent,
affiliate and subsidiary insurers because, as you know,
withholding companies--a primary company might be in New York,
but the subsidiary may be somewhere else, and those assets need
to be watched closely;
Identify insurance groups and insurers with potentially
heavy loss exposures;
Conduct a survey, which is under way right now, to capture
information on each insurer's net and gross estimated losses,
as well as general information on the insurer's reinsurance
program, reinsurers and anticipated cash flow needs.
State insurance departments are also coordinating their
disaster response activities to help New York, Virginia, the
District of Columbia.
The affidavit that is being used currently in New York to
certify death certificates is actually an affidavit developed
in the Oklahoma Department, at least the prototype after the
Oklahoma City bombings, and that kind of information is
available.
We also stand ready with emergency teams if the flow of
consumer complaints becomes excessive for the New York
Department to handle and are developing a protocol so that that
assistance can be given either in a virtual fashion, through
toll-free hotlines, or specially trained examiners around the
country.
We have an insurance summit scheduled for mid-October to
continue the collaboration with industry, Federal regulators,
and Members of Congress on these very key issues.
What can Congress do to help? We think there could be a
tendency in the insurance industry to react to the dramatic
events of September 11 by taking prospective steps to limit
exposure for similar events in the future. This can occur
through introducing coverage exclusions or canceling policies
most likely to cause a future loss. If that happens, we feel it
won't be good for the American economy.
There are a couple of things we would like to put on the
radar screen for Congress to think about for the future.
We know the industry can't withstand multiple events of
this magnitude in a short period of time without harm to all
consumers, and we look forward to working with Congress down
the road to look at proposals so that the risk of loss from
terrorist activities in the future, should they occur, can be
spread as broadly as possible.
Second, we would urge you to continue the dialogue and
collaboration with insurance regulators and key members of the
industry to ensure that foreign and domestic companies who must
work through this tragedy together continue to fulfill the
promises made to consumers in America. We need to make sure
that the chain of insurance and reinsurance protecting American
citizens doesn't falter or fail in meeting its
responsibilities.
Finally, Mr. Chairman, insurance regulators believe the
insurance industry is strong and that it stands ready to meet
its obligations to provide funds where due under the contracts
it is issued. State insurance regulators are working together
to help ensure that any glitches which do appear don't disrupt
the process of getting people's lives back in order and
American business back to work.
The NAIC and its members plan to work closely with Congress
and its fellow regulators as set forth in the Gramm-Leach-
Bliley Act to meet the needs of Americans in a timely and
compassionate way.
[The prepared statement of Hon. Kathleen Sebelius can be
found on page 156 in the appendix.]
Chairman Oxley. Thank you very much.
Mr. Benmosche.
STATEMENT OF ROBERT H. BENMOSCHE, CHAIRMAN AND CEO, METLIFE,
INC.
Mr. Benmosche. Thank you, Mr. Chairman, Ranking Member
LaFalce, and Members of the committee.
Our Nation is still struggling to come to terms with the
horrific events of September 11, and the human toll remains
foremost in our minds. We all want to do our part to bring
comfort to those who lost a loved one.
Just as a comment, and emotionally for me, we lost two
people; and it is very hard, as you think about all of the lost
lives that went through this tragedy.
Mr. LaFalce. I am sorry. You lost how many?
Mr. Benmosche. Two.
Mr. LaFalce. Would you bring the microphone a little bit
closer?
Mr. Benmosche. The two that we lost, the devastation for
those who survived is emotionally draining for all of us.
We welcome this opportunity to reassure you and the
American public that we are fully prepared to meet all of our
obligations. In addition, our financial soundness and the
dedication of our employees has enabled us not only to assist
quickly those directly affected by this tragedy, but also to
continue to invest in the economic future of this country.
MetLife was founded in 1868, and today we are the largest
U.S. life insurer, with $2.2 trillion of life insurance in
force. We are also the largest provider of group insurance,
managing programs for 33,000 employers, covering 21 million
participants. Included in this total are the 2.6 million
participants of the Federal Employees Group life Insurance
Program. Approximately 9 million households, or one in every 11
U.S. households, are individual customers of MetLife.
MetLife is headquartered in New York City, and like those
of who you live or work in Washington, DC., we feel keenly the
shock and the sadness that reverberated throughout the country
on September 11.
During this time of crisis, our employees rose to the
occasion; and our critical business went on without
interruption. We quickly took steps to make it easier for
families of victims with MetLife policies to access the needed
funds for their families. We waived the traditional requirement
for a death certificate, relying on an airplane passenger
manifest or communication from the employer. Over $53 million
has already been approved for payment to beneficiaries, with
the first payment being authorized 3 days after this tragic
event.
A significant number of MetLife policyholders in the World
Trade Center were insured through group life insurance
programs. We are working closely with employers affected by the
disaster to process life insurance claims quickly. This
includes the FEGLI program, which covers some of the
individuals at the Pentagon.
Even before we were contacted by beneficiaries, we began to
determine from employers if the individual was at work on
September 11. Additionally, our institutional business area,
which handles group life claims, is sharing employer
certificates of eligibility with our individual business claim
team as well as other insurance companies so that we can move
as an industry rapidly to get these claims paid to the
beneficiaries and the families.
We established 1-800-MET-LIFE as a general number for all
affected individuals to call to provide a central gateway on
handling all claims related to this tragedy. This will be
especially helpful when an individual has both group and
individual coverage within MetLife.
As the Nation moves to assess the impact of the attack and
plans its recovery, it is understandable that one of the
concerns that has risen is the immediate and long-term
financial well-being of the insurance industry. We currently
estimate MetLife's after-tax losses related to this disaster at
$250 to $300 million.
While MetLife's exposure is substantial, we are more than
capable of sustaining the losses. We are a strong company, with
approximately $255 billion in total assets. We also count as a
source of our strength our domestic regulator, the New York
State Insurance Department, who you have just heard this
morning, which is the finest, I believe, Insurance Department
in the country; and their oversight of insurers doing business
in this State has created a very strong, financially sound
environment for all of us.
I would like to take this opportunity to commend the
Department, under the leadership of Superintendent Greg Serio,
for their actions during this crisis--getting back to business
the day after the disaster, arranging for insurers to be
present at the New York Family Assistance Center and generally
working with the industry on ways to expedite claims payment.
And I must say parenthetically that we struggle with
regulators, but when you want to have something sound it is
great to have New York making sure we are all financially sound
in times of crisis. So, thank you again.
The attacks of the World Trade Center and the Pentagon have
also raised questions about the industry's preparedness to
recover from disasters affecting our facilities. MetLife has
the people and the process and the systems in place to ensure
we will continue to serve our customers even if a natural man-
made disaster were to strike one or more of our offices.
During the disaster at the World Trade Center, we
implemented a number of elements of our disaster recovery
plans. First, we renovated an alternative business site
facility, equipped it with computers and telecommunication
services, and in the case where we needed to relocate the
people in the World Trade Center, we did it the next day.
Our primary focus at this time is on paying claims to the
beneficiaries of victims of this horrible attack. However, we
have also taken to heart the words of our Government leaders,
encouraging us to look to the future and take the necessary
steps to heal and strengthen this Nation economically. We
believe in the economic future of this great country and the
people of this great country and, therefore, we announced last
Friday that we invested $1 billion in a broad array of publicly
traded stocks as part of a program to increase significantly
our investment in the public equity markets. We have made this
move because we have enormous confidence in the resilience of
the country and its economy, and it is time to put our money
where our beliefs are.
Those of us in the insurance industry recognize that the
business of processing and paying claims promptly, assisting
customers with decisions and continuing to strengthen our
companies financially are critical elements in helping our
country face this crisis. The foundation of our industry is the
promise to our policyholders that we will be there in their
time of need. By honoring this commitment, we know that we are
doing our share to help our Nation recover.
I would be very happy to answer any questions later on.
[The prepared statement of Robert H. Benmosche can be found
on page 181 in the appendix.]
Chairman Oxley. Thank you very much.
Mr. O'Hare.
STATEMENT OF DEAN R. O'HARE, CHAIRMAN AND CEO, THE CHUBB
CORPORATION
Mr. O'Hare. Thank you, Chairman Oxley, Ranking Member
LaFalce and distinguished Members of the panel. I am Dean R.
O'Hare, Chairman and Chief Executive Office of The Chubb
Corporation. Chubb is one of the country's largest providers of
property and casualty insurance.
I am pleased to testify today, but deeply regret the
circumstances that bring us together. We are outraged by the
tragic events of September 11, and we express our deepest
sympathy and offer our prayers to all the victims and their
grieving families.
Before I continue, allow me to commend you and Ranking
Member LaFalce for taking quick action and holding these
hearings.
My message for the committee today is straightforward.
Chubb will meet its commitments, and the industry will pay its
claims and survive. There are serious potential problems going
forward, however. Allow me to expand on these points.
First, Chubb will meet its commitments while maintaining a
strong balance sheet long term. On September 11, the losses
will likely for Chubb be between $500 and $600 million pre-tax,
net of reinsurance.
We have confidence in our reinsurance. Chubb's reinsurers
are among the strongest and most reliable in the world.
However, we agree with the concerns that you raised in your
letter to the NAIC. It is essential that there be close
monitoring of individual reinsurance company payments and
potential solvency concerns going forward.
Second, I can assure you that Chubb's response after the
tragedy began almost immediately. We have already settled
claims with some customers, and we have issued significant
advanced payments to others.
Our response is being led at the company's highest levels
and by our very best people. Our first priority is meeting the
human needs of the victims of this tragedy; and we, along with
other insurance carriers, are doing everything humanly possible
to respond.
Third, as I indicated, I believe strongly that the property
and casualty industry as a whole will be able to pay its claims
and remain solvent. These losses are spread worldwide, and the
bottom line is the industry can certainly absorb them.
Concerning your question about possible changes in coverage
going forward, I believe that both insurance buyers and their
insurers will alter their behavior significantly.
Unfortunately, it is becoming apparent that as current
reinsurance treaties expire they will be renewed only with a
terrorism exclusion. Therefore, it will become impossible to
provide our customers with terrorism coverages.
Apart from this problem, we must also recognize that if the
United States were to suffer a series of future attacks or
catastrophes of the magnitude of September 11, insurance
solvency would be called into question. The industry has a
specific amount of capital and cannot insure risks that are
infinite and impossible to price. Accordingly, Chubb is very
interested in work with you to respond to the insurance needs
of all U.S. businesses and citizens.
We do have the ability to meet this crisis. At the same
time, we must be realistic about the future; and the future
holds serious problems. In fact, as indicated, we are
experiencing problems today in providing our customers with
coverage for terrorism risk.
I know your staff is focused on this problem but, Mr.
Chairman--and this is my fundamental message today--legislation
is needed quickly, perhaps patterned after pool re in the
United Kingdom for terrorist coverage.
The availability of insurance is absolutely essential to
the growth of our economy. The lives lost on September 11 can
never be replaced, and their loved ones will forever feel the
void, but we can and we will help rebuild lower Manhattan, the
financial heart of our country and of the world. Together, we
will succeed in our war on terrorism. We will ultimately create
a more secure America, one with an even more vibrant economy,
but we need to act quickly.
Thank you for this opportunity to address the committee. I
am pleased, when appropriate, to respond to your questions.
[The prepared statement of Dean R. O'Hare can be found on
page 190 in the appendix.]
Chairman Oxley. Thank you, Mr. O'Hare.
Mr. Mosher.
STATEMENT OF MATTHEW C. MOSHER, GROUP VICE PRESIDENT, PROPERTY-
CASUALTY RATINGS, A.M. BEST COMPANY
Mr. Mosher. Thank you, Mr. Chairman.
I want to start by thanking you for the opportunity to
address the committee on this very important issue.
A.M. Best's mission statement is to perform a constructive
and objective role in serving the industry marketplace as a
source of reliable information and ratings dedicated to the
encouraging of financially sound industry through the
prevention and detection of insurer solvency. Given this
mission, A.M. Best----
Mr. LaFalce. Excuse me, sir. Would you please move the
microphone closer? Thank you.
Mr. Mosher. Given this mission, and A.M. Best broad rating
coverage of the insurance industry, we are investigating the
exposure of all carriers with exposure to this horrible event
and stress testing their loss estimates along with their
exposure to the financial markets. While the estimates of the
cost of these losses continue to grow and financial markets
have staggered, A.M. Best Company believes the U.S. and
international insurance companies will be able to meet their
commitments. However, this assertion is dependent upon the
ultimate insured cost of these attacks.
It remains far too early to estimate the insured losses of
the attacks. However, as a result of a discussion with insurers
and reinsurers, public indications made by those companies
potentially most affected and our own analysis, A.M. Best
believes the losses are likely to exceed $30 billion, making
this the costliest catastrophe in U.S. history.
The nature and location of the tragedy dictate that the
majority of losses will ultimately fall with the largest
commercial carriers, their reinsurers and the London market.
The insurance segments most affected are property, aviation,
business interruption, workers' compensation, commercial
liability, and life insurance.
Over the past 2 weeks, A.M. Best has been communicating
with insurance company managements to gain a better
understanding of the exposures they face from these terrorist
attacks. We have found the industry estimates to be, for the
most part, well-researched and prudent estimates of their loss
exposure. As part of our analysis we have stress-tested
capitalization to support up to twice these amounts of the loss
estimates, the additional credit risk for reinsurance
recoverables as well as a 25 percent decline in common stock
investments since year end. This stress capital position is
then compared to require capital to support ongoing operations
in the company's current rating.
While the underwriting losses from the attack are somewhat
concentrated with the industry's strong property casualty
commercial carriers, the impact of weak financial markets and
further economic slowdown will be felt across the insurance
industry.
Additionally, a decreased asset base and reduced interest
rates will produce lower investment income. Given the lower
investment income and more visible underwriting risk, A.M. Best
expects to see increased insurance prices in order for insurers
to achieve adequate operating returns.
Those lines expected to be most affected are the same lines
affected by the attack itself. Personal lines coverages such as
personal automobile and homeowners insurance are only expected
to be affected to the extent lower investment income and
increased reinsurance cost due to decreased reinsurance market
capacity must be passed on to insurers.
Thank you, Mr. Chairman.
[The prepared statement of Matthew C. Mosher can be found
on page 198 in the appendix.]
Chairman Oxley. Thank you, Mr. Mosher.
Mr. Ferguson.
STATEMENT OF RONALD E. FERGUSON, CHAIRMAN AND CEO, GENERAL
REINSURANCE CORPORATION
Mr. Ferguson. Good morning, Chairman Oxley, Ranking Member
LaFalce, panel members.
I am Ron Ferguson. I am one of the 2,400,000 people that
work in the American Insurance industry day-in and day-out;
life, health, property, casualty. I am proud of our industry. I
am proud of the role we play in our society and in our economy.
I am proud of our team, the two-million-four who are working
hard, as is everyone else, to get this country back on its
feet.
Normally, we work out of the limelight and out of harm's
way, but, as you may know, some insurance companies did lose
personnel in the terrible attacks on September 11.
We also salute those who do work and walk in harm's way as
emergency service personnel and military personnel, and we are
awed by their heroism and their patriotism.
As we reflect on the events of September 11, we all have a
heavy heart. As I thought about coming here this morning, the
picture in my mind was that I was coming here with my heart in
my hand, but we are not coming here with our hat in our hand.
I echo the comments of the previous panel members at this
table that the insurance industry, the life and property
casualty insurance industry can pay all of its claims from this
disaster. But as some of the panelists have mentioned and some
of the Members of the committee have mentioned, we do at the
appropriate time--and I realize it is not today--we do at the
appropriate time have to ask: And then what? What do we do to
make sure that we have a vital, strong insurance industry in
the future to serve our society and our economy?
I thought my brief remarks here, the one thing I could try
to do would be to put this disaster in an economic perspective.
Clearly, there is no way to put the loss of life into any
perspective, and I won't even try. But on the economic side, as
Mr. Mosher and others have indicated, we can start to dimension
this for you.
If you will bear with me as I throw out a few numbers--I am
an actuary by training; I can't help it. I would like to get
you to focus on the size of this disaster in economic terms in
the capital base that it ultimately rests upon.
Now, credible and knowledgeable analysts, including the one
right here to my right, have estimated that the economic loss,
including life and health insurance, is likely to run between
$30 and $40 billion. That is including life insurance, and that
would be pre-tax. My own personal opinion, which should be
accorded no special weight, is that it is going to be at the
high end of that range.
Of interest to me, and I would imagine to you, is the fact
that only about half that amount has been declared. That is to
say, if you add up all of the press releases and comments, you
get about $18 billion pre-tax that has been acknowledged or
declared by companies here as well as around the world. So we
still have many precincts to be heard from.But, again, the best
estimate would be somewhere between $30 and $40 billion pre-
tax, including life insurance.
Now, as Mr. Mosher pointed out, the great bulk of that loss
is going to fall on what we call the commercial lines insurers,
not the private passenger insurance companies, not the
companies that specialize in homeowners and so on. So it is
instructive, I think, to kind of look at the business from the
top down.
You will hear analysts and commentators compare this loss
of $30 to $40 billion to the premium volume for the industry,
and that is a useful and interesting way to get a perspective.
You will also hear analysts and commentators compare the size
of the loss to the asset base of the entire industry or the
property casualty industry. And, again, that is an interesting
and useful measure as we try to grapple with this and get some
perspective on it. But I have to quickly say we have to keep in
mind not a single premium dollar was actually collected for
terrorist coverage. Not a single asset was ever earmarked to
pay claims for terrorist-type losses.
It follows, then, that the industry, and I agree totally
with the other panelists, the industry will respond. The
industry has broad financial shoulders. The insured losses from
this event will be paid. But the point I want to take you to is
that this rests on a capital base. It wasn't provided for in
the current premiums. It isn't earmarked in the asset account.
It comes out of the capital account. The total capital of the
U.S. insurance industry, life, health, property, casualty, at
June 30 was about $500 billion, by my estimates.
Let's quickly focus on the property casualty business,
where 90 percent of this loss is going to come to rest; and as
one Member of your committee correctly noted a few minutes ago,
the policyholders' surplus or capital account of the property
casualty industry was about $300 billion at June 30.
Now, I would like to take you a step further, and that is
if we look at that $300 billion capital account from which
these losses will effectively be paid, we then have to realize
that there are many insurance companies that aren't involved,
that write personal automobile, homeowners. State Farm is a
great example. Once you start taking those companies out of the
capital base--and I talked about this in my written testimony,
so I will highlight it here in the interest of time--you can
arguably get down to a capital base in the United States of
about $120 billion where this loss will rest. That will be the
fulcrum for this loss.
I am using rough estimates, and people could and no doubt
will argue with my numbers. I myself could argue it is higher.
I could argue it is lower. But let us take this as a
hypothesis. The point I am coming to here is that with $120
billion of capital in the U.S. supporting this business, it is
clear that--two things: number one, the losses will be paid.
The $30 billion to $40 billion can be funded out of that
capital base. But it brings into sharp relief the question that
Commissioner Sebelius put on the table and Dean O'Hare put on
the table, what do we do next? How do we safeguard our industry
and its important role in our future?
Again, I realize it is a topic for another day, but I
simply could not resist the opportunity to make sure we
understand that part of the story. So the losses will be paid,
the industry can handle it, but the big question is: And then
what? Thank you.
[The prepared statement of Ronald E. Ferguson can be found
on page 207 in the appendix.]
Chairman Oxley. Thank you, Mr. Ferguson, and to all of our
panel.
Let me just compliment the insurance industry in general
for an extraordinary and perhaps unprecedented response in this
situation. I know that many of you were at the White House last
week, and the message that you brought to the President and to
the American people in your news conference afterward was one
of positive reinforcement that the insurance industry is
prepared to pay these claims, that you are financially sound.
The regulators have confirmed that today, and you have
performed magnificently.
I had a conversation the Wednesday after the tragedy with
Mr. Sternberg. He was very vociferous in saying these claims
would be paid and that they would be paid in a timely manner.
There was no backtracking. There was no wringing of hands. That
is the way the entire industry, both on the life side and the
PC side, have responded.
I wanted you to know on behalf of this committee how proud
we are of your industry and what a job that you have really
done, and this was again further emphasized by the testimony we
have had from the regulators.
And I suspect that, Mr. Ferguson, the question you asked is
very timely today. Because if we truly are in a position where
these claims are going to be paid then we need to look to the
future and we need to look, starting right now.
So, basically, my question will be to the panel members the
question you asked, Mr. Ferguson, where do we go from here? I
am satisfied that the industry is in position as rock solid, as
I said about the banking system when we held our news
conference with Mr. LaFalce last week; and I am confident that
the securities industry and the insurance industry fall into
that same category. So now the question is, where do we go from
here? That is the ultimate question, and I need to know and I
think this committee needs to know what advice you would give
us.
How does the re pool work in Great Britain? How much
Government involvement will our taxpayers and the public be
comfortable with? How effective is the system in Great Britain?
Are there similar ones in other countries? Those kinds of
things--I am going to kind of make it a free-for-all, which I
don't like to do normally in a committee of this size, but I
think it is a great way to focus in on the job that we have in
front of us, all of you as regulators and members of your
industry as well as on our side of the dias.
So, Mr. Serio, let me begin with you and kind of take us
through perhaps what we should look for in the not-too-distant
future.
Mr. Serio. There are a couple of issues that we have been
focusing on in terms of what is the next stage, particularly
for the New York market. Capacity questions, questions about
rates, where will they be going?
I will disagree with one thing said here. Maybe, relatively
speaking, there is less of an impact upon the personal lines
rather than the commercial lines, but as Congresswoman Maloney
knows, there are a lot of people who live on Manhattan, Long
Island, Westchester, New Jersey, and Connecticut who will have
homeowners' and automobile claims. A lot of automobiles that
are going to be claimed and totaled, a lot of homeowners'
claims. So we don't want to lose sight of that. Because there
has been a general hardening of the market over the last year
to begin with, maybe even longer, and that certainly
exacerbates what we could not have anticipated prior to that.
So we have, from the regulatory side, have to think about
how to put that into the mix from the overall market, a market
that was hardening, capacity shortages and certainly increasing
prices; and we have to monitor the situation so we can estimate
and predict where some of those rates are going to go to
determine what is going to be the difference and the balance
between affordability and availability.
I will put one more thing out on the table. There is a lot
of discussion about a terrorism pool or whether terrorism is an
insurable or an uninsurable risk and whether some public entity
has to come in and cover that, as we have done with other
things that we have considered to be uninsurable. But I think
from the insurance side I think the analysis really has to go
back to a purely insurance analysis, and that is the question
of risk management practices on the part of the aviation
industry, airport facilities, and the conjunction and the
interplay between the insurance industry and some of the others
in assuring that there are good risk management practices in
place.
That hasn't been in the discussion. The aviation
discussions have taken place in a different committee.
Insurance discussions have taken place before this committee.
But I think there is a need to bring some traditional risk
management discussions back into the dialogue here in
Washington, and we perhaps could help in that dialogue, because
risk management, in making sure that the insurers are working
with their insureds who run aviation facilities and airlines,
to make certain that we are not simply going to create a fund
that is going to allow for lapses in risk management practices,
but that risk management will be built into whatever is built
here in Washington and agreed to here and whatever the
practices are going forward.
There have been a lot of concerns about the sudden spike in
insurance for airport facilities and for airlines. There is a
direct correlation between that and the presence of risk and
that risk that can be controlled by those groups and those that
can't be, and I think that is where we will divide--whatever
fund we put together will be based on the risk management that
we can expect from the airlines and the aviation community and
those that we can't.
Chairman Oxley. Thank you.
Ms. Sebelius.
Ms. Sebelius. Thank you, Mr. Chairman.
The national regulators are at the point of really looking
in great depth at the pool re proposal, kind of analyzing that;
and initially while that may serve as somewhat of a model to
use, it is of such a different scope and kind of a different
focus that it is difficult to use that as a platform. Capital
in the English plan is relatively limited, compared to what we
would need to look at; and I think there is an ongoing fear of
what creating a Government mechanism does to the existing
private market. I think the worst of all worlds would be to
erode the private market or have an uncompetitive system where
the Government has advantages or a monopolistic opportunity in
this new mechanism that would discourage private market
capacity.
So we really stand ready to help analyze any kind of
mechanism that--I think it has been under discussion for a
number of years. Following Hurricane Andrew, there was a series
of discussions about what about the next hurricane? What if you
had a hurricane that came all the way down the East Coast and
wiped out a whole series of cities? How can the private
industry sustain that and do we need some sort of a reinsurance
pool or voluntary reinsurance pool? So there is a lot of
background evidence that has been gathered in this country and
abroad.
As regulators, we stand ready to help with technical
expertise and provide any oversight we can. There certainly are
issues with risk management which I think are critical. There
are issues with rating bands. Already I think it can be
identified that the financial risk potential of terrorist
attacks occurs in somewhat limited markets. I mean, Kansas may
not rise high on the scale of an area that may be attacked, so
how you spread that risk outside of those limited capital areas
I think is one concern. What kind of coverage caps are
appropriate, how to encourage the private market to move back
into this area and what sort of incentives can be there for
people who both engage in risk management practice and private
market players who are going to provide those insurance are key
questions.
So while on one hand I think there is a need to put the
issues on the table quickly and begin to study them, I don't
think this is an uncomplicated issue. I guess our plea would be
to very carefully consider what the unintended consequences of
setting up a mechanism are; and we stand ready, willing and
able to help in any way we can to walk through this next step
of the process.
Chairman Oxley. We will be looking for your help on that
area.
The two Life representatives, is it redundant or irrelevant
in terms of the pooling arrangement, Mr. Sternberg?
Mr. Sternberg. Well, from a property and casualty
standpoint, we need to consider that seriously. We have drawn
no conclusions at this time.
Chairman Oxley. Very good.
Mr. Benmosche. I think the only concern we have is the
issue of pricing for insurance. We look historically at World
War I, World War II and so on. That is basic coverage we have
provided as an industry. And keep in mind, we have a 20 percent
market share of group life. So we are fairly large here. The
issue becomes where people purchase supplemental insurance or
accidental death and those kinds of costs and premiums that are
charged have certain life expectation, and that is where the
exclusions come into play. So what we have to think about is,
going forward, whether we can price for some of these things.
This go-around we were able to meet the needs, but going
forward, if you have a really large disaster, then the company
could not afford to pay additional benefits because there were
no premiums charged for it. And we have to be careful we don't
sink the company in providing coverage for things that we
weren't prepared to deal with. So I think it is only a small
aspect of the business that we are concerned about.
Chairman Oxley. Mr. O'Hare.
Mr. O'Hare. I would agree with much of what Commissioner
Serio said, especially in terms of risk management. It does
seem to me, however, that this Nation right now is at a point
where it is addressing issues in terms of airport security and
things of that nature, that frankly are far from being
resolved. Addressing these issues is at the very beginning of
the process, and until that process is completed and until we
have the kind of security mechanism in place so we don't have
to be concerned about terrorism--and I am picking airport
security, but there are hundreds, maybe thousands of other
areas that we as a Nation need to address in the war on
terrorism--that is certainly a national priority today. Until
that occurs, unfortunately, simply as a reality, a commercial
insurer like Chubb, who puts together enormous coverages for
organizations, much of which is in the financial community,
needs to go beyond itself in providing these coverages. We need
to be able to obtain reinsurance. And if that reinsurance
excludes terrorism, which as of today you cannot buy--if I
wanted to go and insure a major investment banking organization
with an office in downtown Manhattan, there would be absolutely
no place where I could go and buy reinsurance that would cover
terrorism. So if the issue of some kind of reinsurer of last
resort is not addressed, the effect is very simple, and that
effect is you will not have coverages that include terrorism.
And if we have another instance like this, companies will not
be saying they are going to pay claims. They are not going to
pay claims because it wasn't covered.
So we do need an insurer of last resort. I think that has
to be something that both the private sector and Government
work together to create. I have no desire to have the
Government in my business, you can rest assured of that. But I
think as a Nation, we need to continue to provide terrorist
coverage in order to make this economy work. And if we are not
prepared to work together to find a way to do this, then what
we are really saying is we are not prepared to have this
economy function as it has in the past.
Chairman Oxley. Thank you.
Mr. Mosher.
Mr. Mosher. I think one thing is to point back to Hurricane
Andrew and the risk management issue and look at the response
that came from the industry in terms of the better management
they had in terms of dealing with catastrophe risk and
exposures they have from that point until now. Obviously this
is something that was unforeseen, but I would expect to see a
strong response in that regard. The other thing I would echo is
Mr. O'Hare's comments in terms of the flexibility that a
reinsurer may have in terms of their policy and being able to
exclude immediately as opposed to the primary carriers and
their lack of ability to change perhaps the forms and policies
that they have. And I think that is an important issue in terms
of trying to determine how do you deal with this going forward.
Chairman Oxley. Mr. Ferguson.
Mr. Ferguson. Big topic.
Chairman Oxley. You started it.
Mr. Ferguson. Guilty. I think in your question you
articulated some of the principles that we really have to focus
on, and the Commissioner did, too, and that is what is the
right role of the private sector versus--using Dean O'Hare's
words--the reinsurer of last resort. And getting that right,
which I think was part of your question, is the difficult task
before us. We have ideas on this. I think pool re--and I
understand Commissioner Sebelius' reservations about it and
those should be taken into account. I think we can engineer
around those.
Chairman Oxley. Could you explain to us how pool re works;
what the mechanics of pool re are.
Mr. Ferguson. As I understand it--and I am right now in the
process of getting more details on it myself--it was fashioned
in 1993 to cover terrorism losses arising out of the IRA
bombings that were occurring in London, and it is basically not
unlike what Mr. O'Hare said. You go to the pool, you buy
coverage for terrorism--as an insurance company, you would go
to the pool if you couldn't find it elsewhere. You buy coverage
for terrorism. It is at, as I understand it--it is offered at
what is thought to be an actuarially correct price, but let us
be honest. No one knows what that is. But it is not intended to
be subsidized. It is intended to be a right price over a long
sweep of time. But here is the punch line. If at the end of the
day pool re runs out of money--which hasn't happened, by the
way--the U.K. Government would step up to be the reinsurer of
last resort. It is about that simple.
Chairman Oxley. It would be the reinsurance pool we are
talking about now that would have to be depleted.
Mr. Ferguson. Yeah. Again, it gets back to the right
balance between the private sector and Government. As Mr.
O'Hare said, we have got a strong, vibrant private sector
insurance industry here and we want to allow that to try to
adapt to the new environment. If there are companies that want
to write terrorist coverage, they should be allowed to do that
and not have to go to the pool. I think the idea is to make it
voluntary, but to be there as the reinsurer of last resort.
Another thing I started to think about is whether such an
arrangement, whatever form it takes, pool re or I am thinking
about another little concept I am calling the Homeland Security
Mutual Insurance Company--I am trying to think this through--is
what do we do about the fact that as of September 11, the line
between war and terrorism, at least in my mind, got hopelessly
blurred. And to me that suggests that if we are going to come
up with an alternative backstop, it may have to cover war and
terrorism, because I don't know where you draw that line
anymore. Ten years ago, I think we all would have thought we
knew how to draw that line. This morning, I am not so sure that
we do.
Anyway, the point is I have got some ideas on this. Mr.
O'Hare has some ideas. There are trade associations working on
it, as Commissioner Sebelius said. The question in my mind,
Chairman, is where do we take our ideas? Who should we best
work with? I have conversations with Treasury and conversations
with Commerce, and it is a little hard to know exactly where we
ought to take the ideas and where we can really try to work
through some of the things that have been discussed here in the
last 15 minutes.
Chairman Oxley. Thank you, Mr. Ferguson. And I have far
exceeded my time, but I do appreciate the first cut at this
very difficult issue. I think it has been helpful for the
committee. Gentleman from New York.
Mr. LaFalce. Thank you, Mr. Chairman, and I am going to
follow your lead and ask for a free for all with some of the
questions and comments that I have. But before I get into that
I, too, want to commend everyone not only for their testimony,
but for the tremendous response. I can't think of anybody in
the United States who hasn't responded magnificently, from the
President and Secretary of State, Secretary of Defense to the
U.S. Congress, Republicans, Democrats alike, the regulators,
insurance industry and this is America at its best. I also was
proud when New York State Insurance Department was referred to
as the best in America.
Of course, Mrs. Sebelius, I can't imagine anybody being a
better spokesperson for the insurance regulators of America
than you. And now having given all that praise, it is one thing
to be forthcoming and say we are going to cover all acts of
terrorism. These are not war exclusions whatsoever. And I would
imagine the easiest form of insurance to cover immediately is
life insurance. That is something that is quite measurable,
definable. I would think that business interruption insurance
presents some more difficulties. And whether or not there is a
forthcoming response with respect to that, in large part I
believe remains to be seen. So everybody from the President to
the entire executive branch and the Congress, we have to
sustain this forthcomingness, and that could be more difficult.
I am thinking--maybe it is my days as an attorney for the
insurance industry--well, what exactly does interruption mean;
how do we define interruption? And once we define interruption,
can you say that businesses in Kansas were interrupted because
of the terrorism in New York City and then how do you measure
the damages? I mean, the businesses are going to come in and
they are going to say they were damaged to the tune of $1
million. And we know it was only about $100,000. And what about
this coinsurance? Are coinsurance provisions going to leap up
in all future policies that are written and how are they going
to be applied with respect to those that already exist? Some
securities analysts have said that business interruption might
be somewhere between $5 and roughly $9 billion. I wouldn't be
surprised if it is more than that, and I wouldn't be surprised
if the upper limits that have been articulated, $40 billion,
turn out to be considerably higher than that.
The response of the industry is going to be very
interesting, and we have seen a great response so far, but this
is the first inning of a 9-inning game and we need great
responses over the whole ballgame. And also your response will
help shape the future of the economy, too, because your
insurance is one of the automatic stabilizers that we need.
Your insurance will provide the economic stimulus we need, in
part, to rejuvenate our economy.
Also, I am concerned as to what--especially you publicly
traded companies--what perspectives you have about the short
selling that might have taken place September 10 and then also
the short selling that took place once the markets were
reopened and any comments you might have on those, too. Jump
ball.
Mr. Benmosche. For the life company, I can only share with
you that for us--you are right. The commercial insurance
aspects of this are going to be huge, and that is one part that
MetLife doesn't have a business--we do not have in MetLife a
commercial and P and C business. One of the biggest questions
here is to what commercial insurance will be available around
this entire subject, so it is the other panelists that are
going to have to deal with this.
Mr. Serio. Let me start with the question of business
interruption coverage. And I think in their zeal not to
disappoint, the industry is actually putting us into the middle
of a bit of a conundrum and they are actually expanding
coverages beyond those that are provided for in their
contracts. That creates an interesting dilemma for the
regulators, because everybody wants to see companies do those
sorts of things, expand coverages, which simply did not
anticipate an event such as this, whether it is business
interruption, is it just lack of access to their properties, is
it physical damage and you can't get to repair your physical
damage, where your markets or customers cannot get to your
location, living expenses for homeowner's coverages, likewise,
similar coverage. There has been an outpouring of interest on
the part of the industry to expand some of those coverages that
have had somewhat limited timeframes built into them up to this
point.
Mr. LaFalce. Let me just ask you what you mean by expand.
You mean expand the interpretation of the existing contracts or
expand the coverage for future contracts?
Mr. Serio. Actually, in the existing contracts in
responding to this incident, numerous companies have told us
they are going to expand coverages either in the terms of
timeframes for living expenses or for the so-called civil
authority coverage, which allow for coverages when a business
cannot get into their business, even though they have no
physical damage. Let me explain that. In Lower Manhattan, after
the incident of September 11, large segments of Lower Manhattan
were basically closed off for security and also for emergency
response purposes. South of 14th Street was basically
inaccessible to businesses and homeowners. Since the 11th, that
perimeter has come down to where they now have a smaller
affected area. But for all of those people who have been
affected, there are timeframes either in business interruption
coverages or homeowner's living expense coverages that are
triggered by a civil authority action, the action of a police
or fire department or local government to make it inaccessible
to their businesses or their homes.
Mr. Bachus. [Presiding.] Ms. Sebelius.
Ms. Sebelius. Well, Ranking Member LaFalce, I think it is a
very good question on the business insurance and business
interruption front. Let me say at the outset, that that is one
of the issues that State insurance department regulators deal
with every day, not necessarily this kind of coverage, but the
dispute between companies and policy holders and what is the
appropriate value, how you mediate the claim, how you get it
processed in a timely fashion.
Mr. LaFalce. The only doubt that a business in Kansas whose
business was interrupted on account of the terrorist attack on
New York City would be eligible for coverage.
Ms. Sebelius. Business interruption coverage is typically a
separate coverage. It is not automatically loaded onto general
property coverage. It has some time limits and has some pretty
specific definitions. There are measurement precedents of what
you look at before and after, almost like a job discrimination
case where loss of wage has a way to be determined in terms of
what you are doing afterwards. So there are some precedents of
how you look at it.
I have doubt that there will be some disputes and maybe
some claims that are denied that departments need to be
involved in and monitored, and there may be attempts of fraud
on the consumer end who will say my business was interrupted
when they are really having a slump season.
So those are the kinds of issues that regulators have to
stay on top of and monitor closely. That is what State
regulators do on a day-in, day-out basis, and I think we are
ready to go to work on these kinds of coverages.
Mr. LaFalce. Would the business interruption insurance
cover the fact that the interruption was caused not by the
terrorist attack, but by the FAA decision to shut down the
airlines?
Ms. Sebelius. I assume--typically indemnifies a business
for loss of income for a period that is necessary to restore
property damaged by an insured peril. That is typically the
contract language. So whether or not an FAA decision would be
an insured peril or not----
Mr. LaFalce. You see, that is my whole point. We have only
gone through the first inning and all these issues are
extremely important in deciding how forthcoming the industry
really is to this unique circumstance.
Ms. Sebelius. What Director Serio was referring to is, the
regulatory conundrum is to essentially be in a situation where
we would be forcing, urging, requiring companies to pay
benefits while they may be important to restoring somebody's
business or property, but benefits that clearly are not defined
in the policy and were not contemplated in the pricing of the
policy and were not reserved for in the pricing of the policy.
Those are going to have to be looked at very closely, because
the regulatory push to do that may render the company insolvent
and be public policy damage to all consumers in the future. So
the balance of what is required, what it means, what the
precedents are, and I think we are going to work on these
issues so we have some uniform definitions across the country
so everybody is looking at them in the same way.
Mr. Bachus. Let me say this to the Ranking Member. We have
actually gone over now 12 minutes, and if we could ask your
indulgence to let other Members ask questions, and then if we
have time--I think we have assured the panel we would try to be
through by 1:00 o'clock.
Mr. LaFalce. Could you allow the others to make a brief
response?
Mr. Bachus. Any of you all feel especially compelled to
respond? All right, with that, let me go on and ask a few
questions. I am going to try to get through mine quickly. I
want to say this, and I think it can't be overemphasized, that
the insurance industry has had a historic loss as a result of
this attack, but it is gratifying and inspiring to see that you
have come through it on a sound footing, that you are fully
prepared for a catastrophe of this nature, which I think is
demonstrated by your response, and in the words of Mr.
Sternberg, I think New York Life has summed it up by saying we
will pay our claims quickly and compassionately.
So I want to commend all of you for this. I think it
inspires new confidence that the American people have in the
insurance industry. And there were serious questions raised
right after this whether the industry would impose an act of
war exclusion, and it was characterized by the news media and
many people in Government as an act of war. But you have not
seen fit to do that, and I commend you for that.
I also want to commend--I think it was MetLife, the MetLife
family--for going to--Mr. Benmosche, you read part of your
statement and you didn't have time to read it all. In it you
said last Friday--and I don't think you read this part--you
said ``Last Friday, we invested $1 billion in a broad array of
publicly-traded common stock as part of a program to increase
significantly our investment in the public equity market.'' I
want to commend you on that. You do things for investment
purposes, but you were in there doing that, and I commend the
entire MetLife family for taking that action.
Mr. Serio, one thing, we have said that claims are going to
be paid promptly and compassionately. One thing you did say in
your testimony--and I think I understand this, but I just want
to allow you to comment on that--you testified that lawsuits
over the September 11 tragedy will take years to reach any
resolution. Is there anything Congress can do to expedite or
consolidate this in legislation? And I know it is a very
complex thing and there are very many complex legal issues to
be confronted.
Mr. Serio. I think we were basing our observation on past
experiences, past disasters. Some action has already been taken
with the aviation bill that was passed and signed last week to
consolidate some of the litigation in the Southern District of
New York and to consolidate itself in Federal Court. It is
actions like that that need to be evaluated with respect to
other suits that are likely to come out of this. Virtually all
the parties that are involved with this, property owners,
obviously the airlines and others, have to evaluate the
litigation risk and allow us as regulators and you as
policymakers to decide, based upon that risk, that it could
take years for litigation to be completed. I think what we want
to do is make sure that it doesn't take 10 years, as it has
been in some other cases, for people to be compensated for
their loss. Other than the first party benefits, I think Mr.
Sternberg and Mr. Benmosche and others were talking about, were
those third party liability benefits, and that compensation
should not take that long to be received by victims and their
families.
Mr. Bachus. Ms. Sebelius, in your written testimony, you
said approximately 40 percent of reinsurance covering American
insurers is placed with foreign reinsurers. Is that high number
a consequence of our tax policies? And if so, would reinsurance
be easier to regulate if policies were to change?
Ms. Sebelius. Representative Bachus, I am not sure I can
specifically comment on the capacity and what the impact of the
tax policies have been on companies. Some of my colleagues to
the left may be able to do that more adequately in terms of
where the reinsurance market is. I don't feel that American
regulators feel we have difficulty regulating the reinsurance
market. We do have subsidiaries of most of those major
companies here in the United States. We have regulatory
oversight. We have just put in some additional data calls for
some of the areas that we need additional information about,
but the reinsurance community is very much, I think, in the
regulatory scheme and has been very cooperative and forthcoming
in terms of where their losses are, what their capacity is, and
I think regulators at this point are confident that they can
move forward on that. But why exactly many of them are located
in Europe might be a question for down the table.
Mr. Bachus. I noted that on page 25 of your testimony you
outlined some things that Congress may do in regard to
reinsurance or creating pools. And also, I think this
committee, many of the Members are aware that in Britain they
have created at least a layer of reinsurance where the
Government steps in above that layer. One other legislation
that has actually been introduced in this Congress--and I would
ask you about this--I hadn't heard a comment on that--is it
allows insurers to get to set aside premiums for catastrophic
events in a special tax free fund. I don't know if you all are
aware of that or if you have any comments on that--in other
words, some tax-free account.
Mr. O'Hare.
Mr. O'Hare. This is something that actually, the industry
in the early 1970s put forward, and I think it existed for
maybe 2 or 3 years. And the accounting profession viewed the
catastrophe reserve, as we refer to it, as a mechanism whereby
companies would manage earnings even though the specifics, you
know, were outlined precisely as to how these contingency funds
would be built up. So certainly from my point of view, I view
this as a way that the industry could buildup reserves for
situations like this and therefore putting the industry in a
better position to live up to its promises, if and when the
time came. I am very much in favor, but it would take SEC and
the accounting profession to go along with it.
Mr. Bachus. Mr. Ferguson, you were starting to comment. And
I am going to follow my own admonition about cutting back.
Mr. Ferguson. The idea of using tax policy, whether it was
the first question or the second question, are certainly things
that could be considered. And whether or not that is the right
use of tax policy I guess is a philosophical debate for another
day.
The only point I want to make here, however, is that both
of those things at the margin would have some impact on
capacity and the financial strength of the industry. But
frankly, they pale in significance compared to the issue we are
really facing with the kind of event with the World Trade
Center. So I wouldn't say they are bad, but at the margin they
really don't solve the problem.
Mr. Bachus. And if any of you care to give us some specific
solutions you think would----
Mr. Ferguson. Love to.
Mr. Bachus. You know, I have serious philosophical problems
with Government bailouts of private enterprise. At the same
time, as we demonstrated last week, when we have a catastrophic
event that affected the airline industry like it did, you know,
we were compelled to respond. And perhaps there is something in
the arena of reinsurance of these things that is appropriate.
Mr. O'Hare. I don't think the industry--certainly I am not
asking for a bailout.
Mr. Bachus. And I should not have used that word in
relation to a sound industry. The airline industry was not in
sound financial shape. So that is really comparing apples and
oranges.
Mr. O'Hare. The airline bill was a bailout. What we are
talking about here is looking forward and providing a reinsurer
of last resort. And I would point out to you that in the United
Kingdom, the reinsurance pool, to the best of my knowledge, was
never, ever used.
Mr. Ferguson. But it is in a profit position.
Mr. Bachus. I guess what I should have said is to prevent a
bailout.
Mr. O'Hare. That would be a good categorization.
Mr. Bachus. And I apologize for that. You have proved both
in insurance and reinsurance that you are very sound.
Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
First question, has anyone on the panel asked to consult
with the leadership of Congress prior to our bailout bill or
airline subsidy program last week?
Mr. O'Hare. Yes.
Mr. Kanjorski. That is very good. First of all, let me
congratulate you, Mr. O'Hare and your company. You were the
first one to come forward and clarify that you would not
exercise act of war provisions. I thought that was one of the
most patriotic commercial activities taken during the entire
tragedy. Speaking from the Democratic side, what disturbed me
was an overwhelming cavalier attempt by the Congress to
compensate the airline industry. I understand the problem with
the airline industry. If you follow the logic that the industry
was negligent, that they were required to provide security, and
they failed to provide it, then as a result, their plane was
seized, and people and passengers on that plane were killed,
and as a result, 7,000 people on the ground were killed, it is
perfectly consistent in tort law to potentially hold the
airlines liable for all those deaths and then compensate those
parties at the rate of lost compensation and pain and
suffering. This liability would have clearly wiped out all of
the insurance companies. They would not have been able to meet
that burden. We wanted to do something to subsidize them to
make the airlines operate. I was particularly worried to
support the particular plan passed by Congress because, as I
understand it, the insurance industry is one of the major
holders of paper on airplanes. Thus, if we have 2,000 airplanes
sitting on the ground, and the industry's value is in the range
of $200 billion in securities and leases, the airline industry
is not very valuable and, therefore, would have a difficult
time. That situation would have not only risked the insurance
companies, but also would have had a ripple effect to putting
the airlines out of business, an underpinning of the insurance
industry, which would have further weakened the financial
structure. The thing I am most worried about, however, is that
we hurried to develop this compensation program, consequently,
I am not sure how many people paid attention to what we did. We
created a clear strict liability for 7,000 people to recover
all their compensatory loss and pain and suffering. I have run
through the mathematics and, at a minimum, I would say that we
have subjected the Federal Treasury to at least $33 to $35
billion in outright payments. Now that will make some of the
families whole if you could ever make anyone whole as a result
of a death. I am not suggesting that. That would probably, on
average, give about $4 million, of which I consider about $1
million dollars compensatory payment and $3 million for pain
and suffering that the master is entitled to a portion.
My problem is what happens with the next occurrence.
Obviously, the United States Government cannot constantly award
a tort recovery to all people subject to terrorist acts. I do
understand it was a peculiarity because of tort law in
airlines, but if an energy company, however, is attacked and
blown up and there is a radiation leak, there could be hundreds
of thousands of people affected. I do not think we are well
prepared to think out the need of compensation for all people,
or a capping of what amounts will be paid to what individuals.
For instance, one question I have in mind is that there
must have been in the World Trade Center towers extraordinary
income earners. These people in the bond business may have been
making $100 million to $300 million a year in income. Why
should the Federal Government take that into the calculation
and compensate these families $1 billion or $3 billion when, in
fact, at the next terrorist occasion, we will not have the
wherewithal, or the ability to afford compensation for the next
sufferers? Is the insurance industry capable of coming forth in
a relatively short period of time to look at the reasonableness
of assisting at least the Government in establishing some
compensation program for victims of terrorist attacks and their
families to make sure we do not bankrupt the Government by
taking this action?
For instance, one of the provisions we had in the bill is
that the master is to discharge life insurance payments from
the total amount. That provision is sort of counterproductive
because it encourages people not to buy life insurance. They
can wait until they suffer a disaster in a terrorist event and
then get the compensation from the Government. There seems to
be countervailing good practices here, getting out of the free
market system that holds individuals responsible or pushing the
burden of total payment for injury on the Government.
Mr. O'Hare. I think I would comment as follows: Number one,
I think the bailout--the airline bailout was really a measure
designed to keep the planes in the world continuing to operate.
I think if air travel came to a halt, this would not have a
very good impact on the economy. So what needed to be done was
needed to be done, and it was, in fact, done. I applaud the
Administration for that, and Congress for doing that.
As far as putting maximums on liabilities for the airline
industry, that had no impact on the insurance industry,
because, in essence, what the bill says is that if it was--it
is up to the limits of your insurance coverage. So the
insurance industry does not benefit one way or the other from
that.
Mr. Kanjorski. I am not suggesting that insurance companies
benefit. I am suggesting that what we did has subjected the
Treasury to an entitlement program that is unlimited in a way.
We do not know what the master's assessment of these damages
will be and we have contracted now--or at least passed a law
that the Treasury will be open to that amount. Treasury
however, may not be so open to a similar program in a future
terrorist event. And that is why I am suggesting that we have
to find something that is relatively fair here.
One thought I had, is that we are sending these young men
into harm's way, and therefore, we have a very limited policy
on their death. It is sort of unfair that, because you were a
bond trader in the Towers, your State may receive $1 billion
dollars in compensation. Yet a young man or young woman may go
off and lose his or her life in the protection of the country
and they have a limited coverage of whatever that is now. When
I was in the service, it was $20,000. I imagine the coverage is
$100,000 today, but it is very limited for that sole purpose.
What I am saying is we as a Government have not looked at
the impact of terrorism on the Treasury in the realm of
fairness and equity in anticipation of possible future
terrorist events.
Finally, I will leave you with the following statement,
because I am disturbed with what kind of an effect terrorists
will have on terrorist insurance in the commercial field. I do
not know how we are going to finance large real estate
developments in major cities if one cannot get terrorist
insurance, particularly after this event, without having the
ripple effect further go down to the mortgage market right into
the financial institutions. And, as someone said on the panel,
the industry is not writing terrorist insurance. I imagine
bankers are not going to be far behind you and not write
mortgages to finance future targets.
Mr. Bachus. I thank the gentleman. Two or three Members
have advised me they have to catch airplanes very soon. If I
could ask the indulgence of the panel, we have five more
Members that want to ask questions and they are all very active
Members of the committee. They have sat through the testimony
and are very interested in asking questions. And any of you
that can stay, we very much appreciate that. It is five
Members, and we will try to limit it to 5 minutes.
With that, Mr. Weldon.
Mr. Weldon. I thank the Chairman and I certainly want to
join the others in thanking you for stepping forward in the
ways that you have to help our Nation wrestle with this
challenge, and I also want to thank all of you for coming and
testifying. We are very concerned as a committee and as a body
about the issues that you are discussing with us today.
I am particularly interested in the issue of reinsurance,
and I really appreciate all the comments that I have heard. And
my question for you is we had a bill in the Congress last year
that was introduced by two Members who are no longer on the
committee, Mr. Lazio and Mr. McCollum. Are any of you familiar
with that legislation, the way it dealt with reinsurance? And
if so, can you give me your feedback on maybe what you think
may have been some of the problems with that bill and what we
could do as a Congress to perhaps draw up a better piece of
legislation?
And maybe I will start with you, Mr. Ferguson. You are in
this arena, correct?
Mr. Ferguson. I presume you are talking about H.R. 21 or
some version of that?
Mr. Weldon. Yes.
Mr. Ferguson. I think the issue here is what is the right
role for the private sector versus the Government, which I
guess in H.R. 21, if I understand it properly--and I realize it
may have changed since I looked at it many months ago----
Mr. Weldon. There is no H.R. 21 now.
Mr. Ferguson. Well, back then, my understanding was that
the Government would come in at $2 billion. And my
straightforward answer to your question would be that simply is
too low a threshold. It is--my opinion--wrong mix of private
response and Government response. I think the private sector
ought to be able to handle a much larger number than that.
Mr. Weldon. Is there enough capacity right now though in
the private reinsurance market? Do you believe that exists?
Mr. Ferguson. Yes, I do. Yes, I do.
Mr. Weldon. Would all of you in the insurance business
agree with that statement that there is enough capacity in the
private reinsurance?
Mr. O'Hare. I think there is enough capacity, but I am not
going to say there is enough capacity to provide terrorism. I
don't think anybody on this panel would agree there is
unlimited----
Mr. Ferguson. I thought we were talking about--your point
is taken, Mr. O'Hare. I thought your focus was on natural
disasters, hurricanes, and that is what I was responding to.
Mr. Weldon. But I wanted to cover both issues. Number one,
your thoughts on the bill as it existed previously, what were
the weaknesses, but as well, is there enough capacity for
reinsurance today, private reinsurance in the market for
natural disasters?
Mr. Ferguson. I think so.
Mr. O'Hare. And I would agree with Mr. Ferguson that there
is sufficient capacity for natural disasters, but I limit my
statement to natural disasters. I certainly think we are in a
crisis situation in terms of being able to buy reinsurance for
terrorism.
Mr. Weldon. Anybody want to add?
Mr. Mosher. I think the terrorism issue, it is not a
capacity issue. It is an issue of not knowing how to price it.
There is no way to know what the true cost is. So that is why a
reinsurer isn't willing to write it. They don't know what their
true exposure is as opposed to a natural disaster where $2
billion probably is too low, because they do have good models
and they have a good idea how to price that. There is a
willingness there. So it is really an issue of ability to
price, not a capacity in terms of what they will and won't
write.
Mr. Weldon. Thank you. I yield back.
Mr. Bachus. I appreciate that.
Mrs. Maloney.
Mrs. Maloney. Thank you, Mr. Chairman.
In the interest of time, I am going to yield my time to Mr.
Bentsen so that some of my colleagues who have not been able to
ask questions may ask questions, but not before one brief New
York question.
First of all, I thank all of the panelists. You have given
us a great deal of information and a great deal to think about,
and at a time when the entire country is watching this
industry, I have been heartened thus far by the very positive
and very fast humane response that all of you have given.
Without objection, I would like to place into the record a
New York Times article from September 20 that offers a very
favorable description of the activities that the industry is
taking.
[The information can be found on page 82 in the appendix.]
Mrs. Maloney. Very briefly, I would like to ask Mr.
Sternberg and Mr. Benmosche, I understand that MetLife will pay
the largest amount of life insurance claims resulting from this
tragic incident. New York Life will also pay a major amount of
claims. They have already started paying claims. And I would
like to ask, is this because you are New York domiciled
companies?
Mr. Sternberg. Our exposure is generally dependent on the
size of our overall national insurance practice. It happens
that we have somewhat more insurance in the New York
Metropolitan Area. But I would say that, for the most part, our
percentage of claims exposure is a function of the size of our
book or business, which is quite large and also aimed to the
high end of the market. And we have many people in the
financial sectors that we insure. We also happen to be the
insurer of the American Bar Association. And as you know, there
were many lawyers in the World Trade Center. These factors
contribute to our claims exposure.
Mr. Benmosche. From MetLife's perspective as well, we do
business with 87 of the Fortune 100. Fifty-three companies in
the World Trade Center were, in fact, clients. We deal with
33,000 employers. They employ, as I said, 21 million people.
This is, basically, if you have 20 percent market share, this
is what you would expect to happen. And same thing for MetLife
as New York Life, we are New York-based companies. Being able
to compete in New York is hard. You have to deal with New York
regulation, which is very restrictive, to make sure we stay
financially sound. So part of it is you will see us have a
little bit more business in New York State than other companies
might have.
Mrs. Maloney. Thank you. I yield to Mr. Bentsen.
Mr. Bachus. There is 2 minutes and 23 seconds. And by
unanimous consent, I would like you to add your 5 minutes to
that and just take the full time.
Mr. Bentsen. Thank you, Mr. Chairman. I thank Mrs. Maloney
also for yielding to me.
Looking at everyone's testimony--and I am not going to
quote the sentences, but I marked them in just about all the
testimony, it would indicate to me that you are saying there
needs--and in the previous discussion with Mr. Weldon, there
was the question of understanding the risk premium for
terrorist insurance and the reinsurance market and whether or
not Congress is going to help in making sure that there is
sufficient capacity there. And I think Mr. Ferguson with
General Re talked about that, while there is sufficient capital
in the industry and the reinsurance industry, that capital was
originally spread evenly over the market, and obviously now is
being disproportionately allocated to this area, and going
forward, that could be problematic.
As you may know, in the past this committee has considered
legislation that has been brought forth primarily by the
property and casualty companies to create some sort of
Government backstop in the reinsurance market for natural
disasters. Am I incorrect in interpreting the statements in
your testimony that while there has been division among the
industry over the previous attempts, that there is a consensus
building now for the need for some form of Government backstop,
Government reinsurance market, if not related solely to
terrorism, at least in large part, or maybe perhaps combined
with natural disasters?
Mr. Benmosche. Just before they answer that question, I
have to apologize to all of you, but I have to get back. It was
a pleasure to be here and I hate to leave in the middle of your
question.
Mr. O'Hare. Can I comment? My view is that what we are
talking about, and there is, I believe, a total consensus
within the industry, is a reinsurance pool of last resort
dealing solely with terrorist exposures. Irrespective of that,
I think a national disaster, H.R. 21 type of arrangement with a
much larger than $2 billion base is something that, I think,
would be an extremely positive event. So as far as the specific
details of H.R. 21 are concerned, it is a little foggy in my
memory. I think we were in favor of it. I know we would be a
lot more in favor of it if the threshold was higher, but that
is not the real issue.
The real issue here--and I want, you know, to keep going
over this--the real issue is we have a crisis brewing as we
speak, because as we speak we are in the process of negotiating
our renewals for next year. Our present reinsurance coverage,
which fortunately in our case takes us through for the most
part the middle of next year, but most companies are addressing
these issues as of January 1. If they do not have terrorist
coverage, then the policies they issue will have to exclude
terrorism.
Mr. Bentsen. And I do want to hear Mr. Ferguson because my
time is going to run out. But it raises the other question I
wanted to get to. And I understand what you are saying. And it
makes me think that perhaps we may be seeing you sooner rather
than later with respect to this issue, not unlike the airlines.
And I am not being critical of this. The market may disappear
on you and the reinsurance market may disappear on you.
If I can go to the other question. The P and C companies
are going to have to liquidate assets in order to start paying
claims at some point in time. That is a normal function. And
they are well capitalized, although this is somewhat larger
liquidation than usual. This is coming on the heels in my home
city of Houston that had a somewhat substantial event back in
June. We thought it was substantial at the time, about a $5
billion event, maybe pales in comparison now, with the
flooding. And Mrs. Kelly brought this up about the muni bond
market where the P and C companies tend to be the bigger
players. But as you begin to liquidate assets, and as I read in
the testimony, at some point premiums will have to come up
because there was already a reduced profitability situation.
Aren't we entering into somewhat of a vicious cycle? I
mean, you are going to have to do what you are going to have to
do. But the gentleman brought up the issue that you have lines
of credit with your banks--both lines--and the ability to roll
your commercial paper. Do you believe that there is still
sufficient liquidity on that side of the capital markets or
have you seen that tighten up at all? Because that would seem
to me to both benefit your industry from the ability of having
to sell cheap in order to raise capital quick, but also the
broader markets of dumping product on the market and further
affecting it.
Mr. O'Hare. Number one, I think the capital markets are
tremendously liquid. Chubb, right after the event, tested the
capital markets just to see if we could sell commercial paper
and the liquidity amazed us. So I don't think there is a
problem. As far as being concerned about the industry dumping
securities in order to pay claims, I think that really is an
individual company-by-company situation. In the case of Chubb,
I fully expect that we will pay these claims out of our cash
flow. Our cash flow for the year 2001 will be about $800
million. We have said we expect our losses to be in the
neighborhood of $600 million. So I am not assuming that we are
going to have to dump securities on the market in order to pay
claims.
I will say, though, that the $800 million that we would
have had to put into the market, a good portion of that would
have gone into municipal bonds, because they are just more
income-effective to an organization like ours. Obviously, there
is going to be less money going into that marketplace. And
since we, the property and casualty industry, are such a big
piece of the municipal bond market, I have to assume that we
will affect demand.
Mr. Ferguson. I don't have too much to add to that. I think
it is company by company. Most of the large sophisticated
companies have liquidity plans. In our case, we are very much
like Mr. O'Hare's situation. We have about a billion-and-a-half
in cash. By that, I mean short-term highly marketable
Treasuries. So we wouldn't be liquidating other investments.
But that is going to vary by company.
Mr. Bentsen. Is the reinsurance market going to rethink its
position with respect to a Federal backstop in the wake of
this?
Mr. Ferguson. Well, back to your first question, I would
urge that we not mix together natural disasters and situations
like this, the terrorism and the war. I think they have
different philosophical and intellectual underpinnings to them.
And I hope you won't take this the wrong way, but I have to say
it in response to your question. The reason I can get
comfortable with the idea that there ought to be a Federal
backstop for war and terrorism is that, after all, is that not
the basic duty of a country to defend its citizens? And without
criticizing anybody--and I hate to even say it, because I know
it could be misconstrued, but that is really the underpinning
of the idea that it might be legitimate and necessary to have--
to use Mr. O'Hare's phrase--a ``reinsurer of last resort'' for
terrorism and war. When you get into natural catastrophes, I
think it is a whole different issue and there the private
sector should be up front.
Mr. Bentsen. My time is up, but I would say that debate
would go that many would believe that it is a basic function of
Government also to come to the aid of its citizens in terms of
a natural disaster.
Mr. Ferguson. But the onus should be on the private sector
to come up with that response, I think.
Mr. O'Hare. Natural disasters, the actuaries would tell
you, are something that are will fit into an actuarial formula.
Terrorism is another question.
Mr. Bachus. Thank you.
Gentleman from Connecticut.
Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, I would
like to state that I was at an Intelligence Subcommittee
hearing on terrorism and I was faced with this awkward choice,
which sometimes happens, two extraordinary hearings. This has
extraordinary implications for the country. Obviously living
right next door to New York City, we are seeing this up close
and personal.
A great advertisement for life insurance is that sadly some
of my constituents who were killed, murdered, have no life
insurance of any consequence, and yet they had very high
incomes. And it is real tragic what we are seeing happen to a
number of people. They simply didn't listen to you, and you all
said ``you need life insurance.''
And it is also important to me obviously, because
Connecticut is an insurance State. And in our area, I think it
is the reinsurance capital--at least one of them--of the world.
So I apologize for not being here. I want to state a few
things, and I don't need long answers, just to see if my sense
is right.
Technically, legally, life would have to have been paid,
but casualty would not have to have been paid for a terrorist
act. People with life insurance policies covered for a
terrorist act? I am talking legally. You all are going to cover
it. That is not the issue.
Mr. Ferguson. Could I start on that? It is my
understanding, Congressman Shays, that very few property-
casualty insurance policies have a terrorism exclusion, number
one.
Number two, many property-casualty insurance policies do
have a war exclusion, and that goes back decades and decades
and decades.
Number three, on the life insurance side, it is my
understanding--although I am getting out of my area of
expertise here a little bit--that very few life insurance
policies any more have either a war exclusion or a terrorist
exclusion. So the real issue kind of turned on did the war
exclusion apply on the property policies, and many of them do
have that exclusion. And by and large the industry has said no.
Mr. Shays. I make the assumption that one of the challenges
is that, one, the right thing to do is to cover it. But even
from a business standpoint, I would suspect that some companies
would be boycotted if they sought to not participate. I don't
say that as a negative to any of you, but I mean, that would
have been a reality even from a business standpoint. But what
all of you are saying--Chubb a little more aggressively than
the rest of you--either you would not have the resources to
cover another attack like this or you would simply put people
on notice right now that it wouldn't be covered. And I would
like to know which is it. Do the rest of you jump in with Chubb
in their candidness and say ``we can't cover it'' or ``we won't
cover it.'' First I want to know if it is can't or won't, and
then I want to know what the others think.
Mr. O'Hare. When you put together coverage for a commercial
client--you may be talking hundreds of billions of dollars for
that particular client--you don't take on this coverage by
yourself. You go to the reinsurance market and you lay off a
portion of the risk. If, in fact, the reinsurance market, which
is the case as we speak, is unwilling to give you coverage for
terrorism, then the product that you sell cannot cover it,
because there is no way on earth that a single company could
offer hundreds of millions of dollars on its own. So the fact
of the matter is, as much as we would love to, we can't,
because in order to put together complex coverages----
Mr. Shays. I understand that when you renegotiate it. But a
lot of these----
Mr. O'Hare. Where we are today with the coverages that
exist, which do provide for terrorism coverage, I will tell you
right now, as long as we have a penny's worth of net worth, if
they were to be 10 or 20 more such events, we would keep paying
until we were bankrupt.
Mr. Shays. That is fair. In other words, you are basically
saying you would go bankrupt in the bottom line?
Mr. O'Hare. I am saying if, in fact, you have 20 or 30 such
World Trade Centers. Chubb has, for example, $7 billion worth
of net worth. We are going to spend, after taxes, $350 million
on this event. So we could have 20 of them.
Mr. Shays. I realize this is a sensitive issue, because
everybody listens to how you respond and it impacts your
stocks. And I am not trying to sensationalize this. What I am
hearing you say is that it wouldn't be one more attack, but a
few more could do you in, in essence?
Mr. O'Hare. I am saying that it would have to be a few more
this year.
Mr. Ferguson. But that would, obviously, vary company by
company, and there are other companies that could not make
literally----
Mr. Shays. I mean, I have the general sense that we are
going to try to resolve this. I mean, we are all anxious and
all dealing with pretty horrific circumstances. But my sense is
that this Congress is going to have to find a way to deal with
a problem that you are notifying that seems intuitively very
easy to understand. So I am not questioning that. And your
challenge is how strongly do you state the case without making
it a sensational issue and causing other problems. But the
bottom line is, you are very clear. You are doing something
that technically, legally, you don't have to do right now. You
are covering a terrorist attack.
Mr. O'Hare. One second. The policies that Chubb has issued
do, in fact, cover terrorist attacks. What they don't cover is
if the country had a declared war, and there was a fear in the
public, I think principally created by the press, that
indicated that some insurance companies were going to rely on
the war exclusion, which does, in fact, exist in most policies.
I was the first one to come out and say as respects to the
property and casualty industry that the World Trade event was
not a war in the traditional sense and we are going to pay our
claims.
Mr. Shays. Mr. Chairman, do you want me to come back
afterwards? Would you like to go and I will come back? I am
almost finished, but I think I will yield.
Mr. Bachus. We have gone over, so I will recognize the
gentleman from Kentucky. And let me say this, I do want to
commend Mr. O'Hare. Your company was a leader in stepping
forward and saying that you were going to fulfill your
commitment to the American people, and we are very grateful.
Mr. Lucas.
Mr. Lucas. Yes. Since I am the last barrier between getting
out of here, I would like to say that I have stayed here as a
public policymaker to understand and have empathy for your
problem so I can more intelligently help you deal with this,
because I think we have got some work to do here and I
understand that. I appreciate all the informative information.
It was very succinct and we had a lot of horsepower here at the
table, and I appreciate that and we are here to help you.
Thanks.
Mr. Bachus. I thank the gentleman. I am going to permit Mr.
Shays to have 3 more minutes with your indulgence, and then we
will adjourn the meeting. I do want to make some remarks very
briefly, thanking some folks.
Mr. Shays. I thank the gentleman. I don't want to leave it
right there. I want to be clear you are saying that an act of
terrorism is covered and an act of war is not and we get into
the definition of what is a war and all of the ambiguity with
that. But are you saying in rewriting your policies, you will
have to say we now view an act of terrorism as an act of war
and make it clear to your subscribers that that is the case?
Mr. O'Hare. No, I am not saying we would view an act of
terrorism as an act of war. What I am telling you is we would
be forced to specifically exclude terrorism. The reason has
nothing to do with Chubb.
Mr. Shays. I understand the reason.
Mr. O'Hare. Is we need to have reinsurance.
Mr. Shays. The consequence is almost like an act of war is
the bottom line here. Does anyone else want to make a point?
Ms. Sebelius. Congressman, just from a regulatory
standpoint I think one of the key issues, and it has been
identified pretty clearly, though is to have as part of this
exercise a very clear, very narrow, very limited definition of
what it is. If the Government were to play any role in the
reinsurer of last resort, defining what exactly is an act of
terrorism and how broadly that is, it could have enormous
implications. So while that may be self-evident, I think that
may be a lot trickier.
Mr. Shays. But it can have enormous implications if we
don't jump in and help.
Ms. Sebelius. Absolutely. But the definition and how
narrowly it is drawn and what it defines is a critical piece of
the puzzle.
Mr. Shays. I have confidence that this is going to be
legislation that would be debated pretty extensively and won't
just go through like some of the legislation in the last week
or two.
I thank you, Mr. Chairman, and I apologize to some of the
witnesses, because I am assuming some of this is redundant.
Mr. O'Hare. If I may respond just to that comment, I am not
trying to create a situation that this is a panic, but I am----
Mr. Shays. I don't feel it is a panic.
Mr. O'Hare. I am saying very specifically that the
reinsurance coverage on what we would call facultative covers
is not there today. So as we speak, it is having significant
impact on the market. It is having significant impact on what
any property and casualty insurer can offer to its customer. So
as we speak today, customers are not getting what they could
have gotten before September 11.
Mr. Shays. Members of Congress need honesty and you can't
be reluctant to tell us what you need to tell us. I feel like
you feel like you are walking on thin ice here, but this is
helpful testimony. I thank you.
Mr. O'Hare. Thank you.
Mr. Bachus. We did receive testimony earlier and I think
Mr. Pitt reassured us that the reinsurance industry is very
strong and well capitalized, and I think maybe what we are
saying here is on September the 11th, the world changed forever
as we know it, and this terrorist attack was unlike anything we
had seen in this country. It was impossible, and would have not
been proper to have priced in for such an event, to ignore such
an event after it has occurred is something that the insurance
industry, as any industry, and the American people will not
ignore in the future, and that is going to result in some
changes in the marketplace.
Let me close by saying this. Ms. Sebelius, I want to thank
you and the NAIC for working very closely with this committee
as these events unfolded and also, Mr. Ferguson, the
Reinsurance Association has worked with the committee. We very
much appreciate their professional work. Mr. O'Hare is
representing the property-casualty field and also the life
insurance field. The leaders that met with the President, the
insurance industry, last week at the White House, that was very
reassuring for the American people, and I think as the events
have unfolded, the commitment and the actions of the insurance
industry are exemplary, an extraordinary showing of compassion
and concern for their policyholders, and I think the insurance
industry has earned a great deal of goodwill from the American
people. I hope that is the case.
Mr. O'Hare. Thank you for those comments.
Mr. Bachus. Thank you.
Mr. Mosher, the only question I was going to ask, and I am
going to submit it in writing out of respect for our committee,
is you said that the strength in the insurance industry is
built on financial market gains as opposed to underwriting
profitability. That is something we hadn't really discussed
here, but if the insurance industry is to stay strong and it is
to remain strong with these even new considerations, we have to
look at allowing more favorable pricing by insurers. That is
something we didn't get into today and I am going to submit
some questions to you about that, and I appreciate your
pointing that out. I am very happy that the insurance industry
has invested their resources very wisely. If they hadn't, we
would be in trouble today, because their pricing certainly has
not been sufficient.
The last thing I wanted to say, and this I mean as
sincerely as anything and I say this to you, Mr. Serio, as New
York Insurance Superintendent, the people of America have been
watching New York and we are very proud of the State of New
York, very proud to be in union with the State of New York. I
would like to personally express my gratitude and the gratitude
of the committee for the exceptional efforts by your office and
of Governor Pataki to respond to this tragedy. We have all
talked about Mayor Giuliani. We know what he has done, but
George Pataki has been a pillar of strength.
We also want to express great sorrow at the loss of former
New York Superintendent Neal Levin. Having you here today
reminds us again how well we worked with him, how much we
admired him and how he will be sorely missed. And I would like
to express our prayers and sympathy with his family.
Mr. Serio. Thank you.
Mr. Bachus. I think that brings the loss home to us all.
With that--and this is something I have to do for procedure,
but the Chairman not only thanks the witnesses for their
testimony, but notes that some Members have additional
questions for the panel that they will submit in writing and,
without objection, the hearing record will remain open for 30
days to submit written questions to those witnesses and to
place their responses in the record. Without objection, that is
so ordered.
Again, I thank you all for your attendance. The hearing is
now adjourned.
[Whereupon, at 1:39 p.m., the hearing was adjourned.]
A P P E N D I X
September 26, 2001
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