[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
CATASTROPHE BONDS: SPREADING RISK
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
OCTOBER 8, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-86
U.S. GOVERNMENT PRINTING OFFICE
84-418 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
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
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, Texas 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
------
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAY INSLEE, Washington
CHRISTOPHER COX, California JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
October 8, 2002.............................................. 1
Appendix:
October 8, 2002.............................................. 29
WITNESSES
Tuesday, October 8, 2002
Brynjolfsson, John, Executive Vice President, PIMCO.............. 16
D'Agostino, Davi M., Director, Financial Markets and Community
Investment, General Accounting Office (GAO) accompanied by Bill
Shear.......................................................... 4
McGhee, Christopher M., Managing Director, Marsh & McLennan
Securities Corporation on behalf of the Bond Market Association 14
Moriarty, Michael, Director, Capital Markets Bureau, New York
Department of Insurance on behalf of the National Association
of Insurance Commissioners..................................... 6
Ozizmir, Dan, Senior Managing Director and Head of Trading, Swiss
Re Financial Products.......................................... 18
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 30
Oxley, Hon. Michael G........................................ 32
Brynjolfsson, John........................................... 33
D'Agostino, Davi M........................................... 56
McGhee, Christopher M........................................ 64
Moriarty, Michael (with attachments)......................... 72
Ozizmir, Dan................................................. 215
Additional Material Submitted for the Record
``Catastrophe Insurance Risks'' The Role of Risk-Linked
Securities and Factors Affecting Their Use, General Accounting
Office Report.................................................. 219
CATASTROPHE BONDS: SPREADING RISK
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Tuesday, October 8, 2002
U.S. House of Representatives,
Subcommittee on Oversight and Investigation,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:08 p.m., in
Room 2128, Rayburn House Office Building, Hon. Sue Kelly
[chairman of the subcommittee] presiding.
Present: Representatives Weldon, Tiberi, and Inslee.
Chairwoman Kelly. [Presiding.] Good afternoon. In the
interest of time, I am going to go ahead and start this
hearing. I understand there are other members that are on their
way down, but I am going to go ahead and start because you have
all come--a few from some distance, and I want to be able to
get you fully heard before we end this hearing. So this hearing
of the Financial Services Committee, Subcommittee on Oversight
and Investigations will come to order. I want to thank all
members of Congress who will be coming today. Without
objection, all members present will participate fully in the
hearing and all opening statements and questions will be made
part of the official hearing record. The chair recognizes her
self for a brief opening statement.
Let me first say welcome to what will likely be the last
hearing of the Financial Services Committee for the 107th
Congress. It would be an understatement to say that this
committee has been busy. I know our staff agrees, and I want to
take this opportunity to publicly thank the remarkable and very
professional staff of the Financial Services Committee for
their work this year.
They have done yeoman's work and we all appreciate it. The
topic of discussion today is a new slant on an old problem. We
only have to go back one Congress in the old banking committee
to recall the numerous hours spent debating the creation of
insurance capacity for disaster-prone areas. Individuals can
disagree about the nature of the solution.
The fact still remains that increasing capacity in our
insurance markets is incredibly important. Whether you are a
disaster-prone state like Florida or California, or from a
state like mine, New York, with terrorist-targeted properties,
it remains to be seen how much in the way of accumulated losses
the private insurance and reinsurance market can absorb before
the entire market is put at risk. As we see today, large
insurers and reinsurers are being downgraded by rating agencies
and markets continue to harden. When we last looked at the
issue of natural disaster exposures, there was mention made of
using the capital markets perhaps as a way to spread risk
beyond the traditional insurance markets.
Let me quote from 1999 testimony in front of this
committee. "The potential capacity from the capital markets
should not be ignored or underestimated during consideration of
what was then Rick Lazio's federal disaster reinsurance bill.
While still in its infancy, a lot of resources are being
directed by capital markets intermediaries to encourage the
development of the market." And further testimony stated, "The
development of this risk-linked securities market would
revolutionize catastrophe insurance funding and greatly expand
the capacity of the U.S. insurance market."
In other words, the private capital markets made sense then
and probably make even more sense now. Last year, Chairman
Oxley requested the General Accounting Office to look at the
use of catastrophe bonds and their track record to date. Some
in the private sector suggested that what was once counted as
the next big financing instrument never really took off in the
market as anticipated. The committee asked the GAO to find out
why exactly that was. Specifically, the committee inquired, if
it was a structural problem, meaning these instruments are too
complicated or produce prohibitive transaction costs, or if it
was because the market did not understand how to evaluate their
underlying risk, or if it was because the traditional insurance
market was soft and there was not a demonstrated need for new
sources of capital.
GAO appears before us today to discuss its findings, with
an emphasis on the barriers and hurdles these instruments face.
The team that put this report together is to be commended for
their work in taking such a complicated topic and really
boiling it down into its essential nuts and bolts. The
committee greatly appreciates the GAO's work in this area and
its cooperation with our committee staff in drawing its
conclusions. Before I close, let me quickly make two points.
The first is that this committee is looking to facilitate
capacity creation in the insurance marketplace. In this case,
we are examining catastrophe bonds. This is not to suggest that
a booming market for these bonds should replace or be an
alternative to traditional insurance financing such as risk-
spreading by way of reinsurance.
Second, in no way should anyone leave this room thinking
the Financial Services Committee is creating a new class of
government bond or government-backed security. This committee
is simply looking at ways to possibly remove barriers that will
bring about greater acceptance of an instrument that already
exists in the marketplace today.
With that, the chair will recognize the gentleman from
Florida, my very good friend, Congressman Weldon. Congressman
Weldon, have you an opening statement?
[The prepared statement of Hon. Sue W. Kelly can be found
on page 30 in the appendix.]
Dr. Weldon. Yes, Madam Chairman. I apologize for being
slightly late, Madam Chairman. I want to commend you for
calling this hearing on a very important issue, not just for my
congressional district in the State of Florida, but as well for
the nation, and focusing the attention of the committee on the
risks of catastrophic events. My state of Florida is wrestling
with this very issue as it braces itself for the kinds of
storms that just hit Louisiana.
As is mentioned in the GAO study released today, the
adequacy of the insurance industry's capacity to cover large
catastrophes is a difficult question to answer. As you know, I
have introduced legislation that addresses this capacity
question by establishing the federal government as the insurer
of last resort for mega-catastrophic events. The state of
Florida experiences significant exposure to catastrophic
events, yet people continue to relocate there, making it one of
the fastest growing states in the country. Florida is also
beset by litigation exposure, the complications of legislative
and regulatory efforts and other factors such as sinkholes and
mold.
Whether capital markets can enhance the capacity of an
industry affected by so many forces remains to be seen. Who
must act to stimulate the trading of risk-linked securities.
Can they generate the kind of resources necessary that would
motivate both primary insurers and reinsurers to confidently
write more policies in Florida? Earlier this year, Chairwoman
Kelly convened a hearing looking at the risks associated by not
passing federal terrorism insurance legislation. During that
hearing, Alice Schroeder, senior U.S. non-life equity insurance
analyst for Morgan Stanley, stated that, quote, "Insurance
companies generally destroy, rather than create, value for
their shareholders." I look forward to hearing from today's
witnesses how risk-linked securities may overcome this dynamic,
and I again thank you for calling this hearing.
I yield back.
Chairwoman Kelly. Thank you very much, Dr. Weldon.
Since there are no more opening statements, we will begin
with the witnesses on our first panel. Presenting the GAO
report is Ms. Davi D'Agostino, the director of financial
markets and community investment division from the General
Accounting Office. Accompanying her is Mr. Bill Shear, also
from the same division. Next we will turn to the first of our
two witnesses from the great state of New York, and I would
like to welcome Mr. Michael Moriarty who is the director of the
capital market bureau for the New York Department of Insurance.
Mr. Moriarty appears on behalf of the National Association of
Insurance Commissioners and serves as the vice chair of the
NAIC securitization committee.
We thank you for joining us today to share your expertise
on these issues. Without objection, your written statements
will be made part of the record. Ms. D'Agostino has agreed that
GAO will be given an extended period for its oral testimony,
given the presentment of the report. All of our other witnesses
will be recognized for a five minute summary of their
testimony, and if you have not testified here before, at the
end of the table there is a box that has different colored
lights in it. Red lights mean stop; yellow light means you have
one minute to sum up; and a green light obviously means go.
With that, we turn to you, Ms. D'Agostino, and we greatly
appreciate your presence here today.
STATEMENT OF DAVI D'AGOSTINO, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, GENERAL ACCOUNTING OFFICE
Ms. D'Agostino. Thank you very much, Madam Chairwoman.
Madam Chairwoman and members of the subcommittee, I am pleased
to be here today before you to discuss our work on how risk-
linked securities are used to address catastrophic risks.
These risks arise from natural events such as hurricanes
and earthquakes. Population growth, real estate development and
rising real estate values in hazard-prone areas increasingly
expose the nation to higher losses from natural disasters than
in the past. More than 68 million Americans live in hurricane-
vulnerable coastal areas and 80 percent of Californians live
near active earthquake faults. A series of natural disasters in
the 1990s, including Hurricane Andrew and the Northridge
earthquake raised questions about the financial capacity of the
insurance industry to cover large disasters--these are
important words-- without limiting coverage or substantially
raising premiums.
They also called attention to ways of raising additional
sources of capital to help cover catastrophic risk. The
insurance industry and capital markets developed risk-linked
securities which both supplement the insurance industry's
capacity and do provide an alternative to traditional property
casualty reinsurance, which is insurance for insurers. Today, I
will talk about one, how the insurance and capital markets
provide coverage for catastrophic risk; two, how risk-linked
securities, specifically catastrophe bonds, are structured and
how they work; and three, how regulatory, accounting, tax and
investor issues might affect the use of these securities and
the advantages and disadvantages of potential changes.
First, catastrophe risk is a global phenomenon, and
insurance and reinsurance companies with global operations
often provide coverage. The color map before you on the screen,
as well as in our report, highlights the areas of the United
States that are most likely to experience certain types of
natural catastrophes. Most insurance companies try to limit the
amount and type of catastrophe risk they hold on their books.
For example, if property casualty insurers have written too
many policies concentrated in California or Florida, they need
ways to diversify and transfer that risk. One way is through
reinsurance, where for all or part of the premiums collected,
the reinsurer agrees to compensate all or part of an insurer's
claims as they are incurred. When reinsurance prices or
availability became problematic in the mid-1990s, insurers
turned to risk-linked securities as an alternative way to
spread catastrophe risk. Now, I will turn to the second area of
my statement, which is how risk-linked securities are
structured and how they actually work.
If you turn to page three of the written statement, you
will see a graphic that will help you walk through how they are
set up, at least in basic terms. Most risk-linked securities
are catastrophe bonds these days, and they have complicated
structures, as you can see, that are created off-shore. And
they are created through special purpose entities which
generally receive non-investment grade ratings. To develop a
catastrophe bond, a sponsor, which is usually an insurance or
reinsurance company, creates a special purpose reinsurance
vehicle or an SPRV, which you will see in the graphic before
you, to provide reinsurance to the sponsor and to issue bonds
to the securities market. SPRVs, which are typically located
off-shore for tax and other advantages, receive payments in the
form of insurance premiums, interest, and investor principal;
invest in Treasury and other highly rated securities; and pay
out to the investors in the form of interest.
The reinsurance provided to the sponsor through catastrophe
bonds is different from that provided through traditional
reinsurance contracts. Most of the recently issued catastrophe
bonds are non-indemnity based. This means that they are
structured to make payments to the sponsor upon the verified
occurrence of specified catastrophic events. The payments are
also based on pre-agreed financial formulas. The payments from
the investor's principal to the insurer/sponsor are not
directly related to the insurer's actual claims, and they are
triggered by an event that meets an objective index or measure
such as wind speed in the case of a hurricane. In this way, the
investors avoid exposure to the risk that the sponsor or
primary insurer has poor underwriting or claims settlement
practices.
This very point is important to understanding some of the
issues that were identified by industry observers to us and the
third area of my testimony, the regulatory, accounting, tax and
other investor issues that challenge catastrophe bonds.
Accounting treatment for risk transfers occurring through non-
indemnity-based catastrophe bonds is a challenge for
regulators. With traditional indemnity-based reinsurance, an
insurer gets credit for reinsurance on its balance sheet in the
form of a deduction from liability for the risk transferred to
the reinsurer, and can reduce the amount of regulatory risk-
based capital required. Credit for reinsurance is designed to
ensure that a true transfer of risk has occurred, and that any
recoveries from reinsurance are collectible.
Calculating the credit with indemnity-based coverage is
fairly straightforward. In contrast, it is very complicated to
value the true amount of risk transferred to determine credit
for reinsurance with nonindemnity-based coverage. The National
Association of Insurance Commissioners is considering revising
accounting treatment to accurately calculate and recognize
nonindemnity-based reinsurance.
While these changes could facilitate the use of catastrophe
bonds, it is very important that the credit accurately reflect
the true risk transferred. Another development that could
affect the use of catastrophe is a proposed change being
considered by the Financial Accounting Standards Board to
address consolidation of certain special purpose entities on a
sponsor's balance sheet. The proposed guidance may increase the
outside equity capital investment required and add other tests
for a sponsor to treat an SPRV as ``off balance sheet''.
While the proposed guidance is intended to improve
financial transparency in capital markets and to stem potential
abuses of special purpose entities, it could also increase the
cost of issuing catastrophe bonds. We also explored some of the
tax issues raised by industry representatives. These
representatives are considering a legislative proposal that
would encourage domestic issuance of catastrophe bonds by
eliminating U.S. taxation of the SPRV. If special tax treatment
were legislated, expanded use of catastrophe bonds might occur.
On the other hand, under certain conditions, the federal
government could experience tax revenue losses and other
industry sectors might pressure the government for similar tax
treatment. Also, some elements of the insurance industry
believe such legislation would create an uneven playing field
for domestic reinsurance companies.
Finally, unlike other bonds, catastrophe bonds, most of
which are non-investment grade, have not been sold to a wide
range of investors. While investment fund managers we
interviewed appreciated the diversification aspects of
catastrophe bonds, the risks are difficult to assess and
investors are concerned about the bonds' limited liquidity and
track record. Madam Chairwoman, members of the subcommittee,
that concludes my oral summary and I would be happy to answer
questions.
[The prepared statement of Davi D'Agostino can be found on
page 56 in the appendix.]
Chairwoman Kelly. Thank you very much, Ms. D'Agostino.
Mr. Shear, do you have anything you want to add to that?
Mr. Shear. No, I do not think so.
Chairwoman Kelly. All right, thank you.
Mr. Moriarty? Before you start, let me just say that we
have for the audience facing this direction, you may not have
seen the map that the GAO had up on the back screen. I wonder
if we could put that map back up. I do not know how many people
saw that. You may be interested in taking a look at that. Can
we leave it up there for a little bit?
Good. Thank you.
I am sorry, Mr. Moriarty. Please go on.
STATEMENT OF MICHAEL MORIARTY, DIRECTOR, CAPITAL MARKETS
BUREAU, NEW YORK DEPARTMENT OF INSURANCE, ON BEHALF OF THE
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. Moriarty. Thank you, Madam Chairwoman. It is a pleasure
to be here today to provide the subcommittee with an update on
the state regulatory practices that deal with reinsurance and
the related use of securities to transfer insurance risk. You
have my written testimony, and I will try to use this allotted
time to summarize the major points. State regulators are
responsible for supervising activities of insurance companies
that sell products here in the United States.
One of our main tasks is monitoring the financial condition
of these insurance companies to ensure that they are able to
honor the obligations to their policyholders and to claimants.
Insurers that write policies here in the United States for the
public invariably transfer some of the risk written to other
entities in the insurance marketplace, primarily via the use of
reinsurance. Like other financial services, companies and
insurers try to spread and diversify risk among many of the
market participants.
Because a primary insurer is under obligation to honor
these direct or original insurance contracts, it is critical to
their financial well being that reinsurers are able to
reimburse a ceding company for losses that are incurred. Hence
it is incumbent upon regulators to effectively supervise the
reinsurer and any other form of risk transfer. License
reinsurers are subject to financial regulation similar to
direct writing insurers.
Transactions with unlicensed reinsurers, especially those
based abroad, are subject to regulation that focuses on
securing collateral. A detailed explanation of the manner in
which state regulators supervise reinsurance is included in my
written testimony. Insurance securitization is another means to
transfer insurance risk. Instead of transferring risk to the
insurance marketplace, it is transferred directly to capital
markets investors.
The NAIC formed a working group on insurance securitization
in 1998 to determine our regulatory response to developments in
insurance securitization. The NAIC's position is that U.S.
regulators should encourage the development of alternative
sources of capacity such as insurance securitizations, provided
adequate standards governing these transactions are applied.
Further deliberations of the working group at the NAIC led to a
determination that it will be preferable if insurance
securitizations could be done here in the United States instead
of off-shore.
To further that position, the NAIC has adopted separate
model acts to facilitate on-shore securitization using two
different methods--protected cells and special purpose
reinsurance vehicles. Under the protected cell method, a
segregated unit of the insurance company would issue the debt
securities. The funds taken in from the sales of these bonds
would be kept separate from the insurer's general fund. If
there is a loss to the insurance company or a triggering event,
money can be kept by the insurance company. If not, it is paid
back with interest to the bondholders.
The second method is the establishment of a special purpose
reinsurance vehicle. This vehicle's only purpose is to transfer
insurance risk to the capital markets via investment
securities.
As Ms. D'Agostino indicated, it is our understanding that
an impediment to the utility of both of these options here in
the United States is tax uncertainty. Both of these methods
depend on certain tax treatment which may require amendments to
the tax code. The special purpose reinsurance vehicle needs a
pass-through tax treatment. The protected cell needs to be
recognized as part of the insurance company. The majority of
the securitizations to date have been done off-shore. Many
states do not have the laws to enable securitization vehicles
and, as I indicated before, there are tax disadvantages or at
least some uncertainty when doing these deals on-shore.
From a regulatory perspective, doing these deals on-shore
would provide more transparency and better oversight. Even with
traditional catastrophe reinsurance, coverage placed with non-
U.S. reinsurers entails a certain amount of credit risk to the
United States ceding companies. U.S. laws require collateral,
but only of incurred losses. The sufficiency of collateral
provided by off-shore reinsurers can only be known for certain
after a catastrophic loss has occurred. Credit and collateral
risk are clearly reduced by the use of securitization since
they are required under the model laws to be fully funded.
Due to that security, companies that transfer risk via
securitization now get credit on the balance sheet and income
statement for the transfer of risk. Insurers' underwriting
accounts, which measure the profit and loss for insurance
transactions are adjusted accordingly for these indemnity-based
transactions. The use of index-based triggers on non-indemnity
transactions is more challenging. It is important that the
basis risk in these types of transactions be measured or
managed by the ceding company, and the NAIC is working with the
industry on developing means to both measure and manage this
basis risk. In conclusion, the NAIC supports creating an
environment that facilitates a more fluid transfer of insurance
risk to the capital markets.
Given the amount of capital in the property and casualty
industry, a major catastrophe or series of catastrophes could
strain the ability of the industry to respond to its customers.
Capital markets have the capacity and apparent willingness to
take on insurance risk. Capital markets also have precedence in
the securitization of other risks such as mortgages, credit
card receivables and other types of cash flows. The
securitization of insurance risk is not a cure-all for the
funding of catastrophe risk. We see it as an addition, rather
than a replacement to traditional reinsurance. We cannot gauge
the appetite of capital markets investors for these securities.
However, the NAIC believes it is important to enable the
marketplace to make that determination. Other initiatives to
address capacity needs for catastrophe and for other types of
coverage should continue to be explored.
This concludes my oral summary and I would be happy to
address any questions the subcommittee may have.
Thank you.
[The prepared statement of Michael Moriarty can be found on
page 72 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Moriarty. Ms. D'Agostino,
in your report you break down the analysis of cat bonds into
four main areas--regulatory accounting treatment,
capitalization requirements, taxation and assessing the
investment risk. Based on your analysis, can you rank the
relative order of importance of these areas and offer
recommendations to address them?
Ms. D'Agostino. I think that it would be very difficult to
rank them in order of importance. Some of them hinge upon each
other and some of them are totally unrelated to each other. The
accounting and tax treatment are mainly issues pertaining to
whether these SPRVs come on-shore or not, and also in terms of
the Financial Accounting Standards Board proposal, there are
arguments that say that if the 10 percent outside equity
capital requirement applied to these vehicles, then they would
probably go away.
We are not sure about that, but we know that they would
become a lot more expensive to issue and create. One of the key
areas I think that really has an impact, and I think some of
the people who will talk later will talk to this even more, is
the investor-related issues. These are relatively new
securities instruments so they do not have a great track
record, and people are looking for a track record. There are
some attractive elements to the bonds, especially the fact that
they do not correlate with other risks in a portfolio.
At the same time, very few are issued, there is limited
liquidity in them, and it is very difficult for people to
evaluate the risk or get a comfort level with the risks in the
catastrophe bonds. Further, some people who have not bought
these--because we did try to find out from people who have not
bought catastrophe bonds why they have not bought--and there
were some concerns raised about their suitability for a certain
element of investors in, say, a mutual fund--the more moderate
income investors. I think that is a pretty important challenge
to overcome.
Even if you took care of some of the other issues, you
still would have that hurdle to deal with--trying to educate
investors and make them more comfortable with purchasing
catastrophe bonds and finding a place in their portfolio for
them.
Chairwoman Kelly. Ms. D'Agostino, have you any
recommendations for creating or helping people have some sense
that these instruments are worthy of investment?
Ms. D'Agostino. No, I do not. These instruments are very
high-risk and high-return-type instruments, and they are
noninvestment-grade bonds, not that that is a deterrent in and
of itself, but GAO is not in the business of recommending bonds
and the like. We do not have any recommendations for this,
otherwise our report would have included them. I think our
whole point of doing the work for you was to present the
information to you and allow the policymakers to decide on
where to go with this. We feel that we have gone as far as we
can go in this area.
Chairwoman Kelly. Thank you. I thought it was worth a try.
[Laughter.]
Mr. Moriarty, I believe that the NAIC and possibly you have
seen a draft of this report, and I wanted to know if you would
care to comment, either for yourself or for the NAIC?
Mr. Moriarty. We have not reviewed it at the NAIC level, so
I will just give you my preliminary comments, Madam Chairwoman.
I think the GAO did a very good job in setting out the issues,
certainly from a regulatory perspective. With respect to the
appetite of the marketplace, the investor concerns and even the
tax issues there are outside of the purview of insurance
regulators. I do not mean to operate in a vacuum here, but just
looking at the financial solvency of the ceding companies, we
think the biggest issue is with the non-indemnity-based
transactions, which I think the capital marketplace would buy
more of, so to speak, than the indemnity-based. I do think,
though, that the basis risk can be addressed.
There are not best practices in terms of the insurance
industry in measuring basis risk, partly because there have not
been these transactions out there before and they have not had
to measure it. But nonetheless, there is a great deal of talent
in the industry in measuring and managing this risk, and we do
think that disclosure of how companies measure basis risk when
using these instruments can provide the regulators with a good
basis to determine whether there has been in fact transfer of
risk.
But again, going back to the report, we think it does state
all of the issues that have been out there over the past four
or five years in an accurate manner.
Chairwoman Kelly. Thank you very much. I am out of time.
Dr. Weldon, any questions?
Dr. Weldon. Yes, thank you very much, Madam Chairman.
Ms. D'Agostino, maybe you cannot answer this, but I will
ask it anyway, how much capacity for coverage of natural
disasters is likely to be added through risk-linked securities
in the near future?
Ms. D'Agostino. We did not undertake to try to project the
future market for risk-linked securities. They have been
covering a growing segment of reinsurance and catastrophe
reinsurance, but I do not think that we are in a position to--
Dr. Weldon. I think your report, correct me if I am wrong,
indicates it is one-half of one percent?
Ms. D'Agostino. That is according to a Swiss Re report.
Dr. Weldon. So you say it is growing--it went from zero to
one-half of one percent?
Ms. D'Agostino. Well, it is growing in real dollar terms as
well, into the billions of dollars.
Dr. Weldon. Is that right?
Ms. D'Agostino. Yes. And actually catastrophe bonds have
been written to cover Florida hurricanes as well as California
earthquake perils.
Dr. Weldon. Okay. Would you agree it is kind of hard to
speculate at this time the potential performance in the future,
even though the real dollar amounts may be growing? As a
percentage of risk, it is still quite negligible?
Ms. D'Agostino. It is very difficult to project, for us
anyway.
Dr. Weldon. You did not look at all at the rate of growth?
Is it linear? And is it affected by economic variables at all?
Ms. D'Agostino. Bill, do you want to take that?
Dr. Weldon. I know we did not ask you to study all these
things, so I am not--I am just trying to get answers to some of
these questions.
Mr. Shear. The growth has been relatively unlevel, and you
would expect that because one of the major determinants is the
price and availability of reinsurance through traditional
reinsurers. So it has largely been dependent on certain events
that affect the pricing of traditional reinsurance.
Dr. Weldon. Mr. Moriarty, in your estimation are we
currently facing a capacity crisis? You say yes, is that right?
Mr. Moriarty. Well, I think in terms of looking at the
availability and the affordability of reinsurance, it has
clearly spiked in the last year or year and a half. Throughout
the 1990s, resinsurance was by all measurements very available
and very affordable.
Certain events--certainly when you talk about the events of
9-11 with respect to terrorism coverage, and the availability
of capital in the insurance industry, it is a hard market. So
it has become more difficult to get insurance, and one would
think that this would be the marketplace where alternatives
such as insurance securitization would see a spike in activity.
Whether it is an availability and affordability crisis, at this
point I do not think so, but again clearly it is becoming more
difficult to get reinsurance on terms that are favorable to
ceding companies.
Dr. Weldon. Do either of you from GAO, Mr. Shear and Ms.
D'Agostino want to add to that at all? Do you disagree or
agree?
Mr. Shear. I do not disagree that recently it appears from
the information we analyze that there have been increases in
prices in certain types of reinsurance, and reduced
availability. Part of the question which again we do not want
to forecast, is how large the response would be to catastrophe
bonds and potentially other forms of risk-linked securities.
Dr. Weldon. Mr. Moriarty, would you characterize the crisis
as national or regional? Is it based on the nature of the risk?
Mr. Moriarty. I would characterize the increasing prices
and the increasing lack of coverage to be national.
Anecdotally, I have heard that it is becoming more difficult in
certain catastrophe-prone areas to secure reinsurance, but that
is more anecdotal. But clearly, across the board the prices of
reinsurance and the terms that ceding companies have been able
to secure are becoming more difficult across the board.
Dr. Weldon. And you do not see a specific impact of a
certain kind of peril on that availability at all? It is across
the board, nationwide, and not affected by the peril being
insured for?
Mr. Moriarty. On a very broad basis, I think commercial
reinsurance is more difficult to secure, and clearly terrorism
coverage stands by itself on the side as being very unavailable
and very unaffordable.
Dr. Weldon. Thank you, Madam Chairman.
Chairwoman Kelly. Thank you, Dr. Weldon. I would like to go
back to you, Ms. D'Agostino. The GAO's report states that SPRVs
are typically located off-shore for tax, regulatory and legal
advantages. Wouldn't consumers be better advantaged if we
improved our tax and regulatory treatment and bring the SPRVs
back into the country, both for capital investment and for
regulatory control?
Ms. D'Agostino. I think arguments can and have been made on
both sides. With every action one could take to improve the
conditions for domestic SPRVs and catastrophe bonds on-shore,
there could be a co-related trade-off. I mean, everything
involves trade-offs. It is really up to the Congress to weigh
those trade-offs and decide for itself as a matter of policy
and law which direction it wants to take.
Chairwoman Kelly. That is a very interesting answer.
Thank you.
Mr. Moriarty, how soon can we expect the NAIC to revise its
accounting treatment for risk transfer to help facilitate
securitization of disaster risk?
And once the NAIC adopts the changes, who has to promulgate
the changes in order to have them be effective?
Mr. Moriarty. I will separate that into two responses. With
respect to the indemnity-based transactions which reimburse the
ceding company on a dollar-for-dollar basis, the NAIC has
already promulgated accounting standards to allow, or have
accounting standards in place with respect to special purpose
vehicles, to allow companies to take credit for this transfer
of risk. With respect to the model laws that allow the
formation of protected cells, I believe that seven states thus
far have enacted that model. With respect to special purpose
reinsurance vehicles, two states have adopted the model.
The other part of the answer with respect to the non-
indemnity-based triggers, my sense is that the NAIC would be in
a position next year to promulgate accounting guidance with
respect to index-based securitization transactions. Being an
accounting standard, it need not be adopted on a state-by-state
basis. Most state statutes adopt the NAIC codification of
statutory accounting principles once they are adopted by the
NAIC, although states have the option of not adopting NAIC-
specific principles. So I think we are looking at next year to
finalize the accounting rules with respect to nonindemnity-
based transactions.
Chairwoman Kelly. Thank you. Mr. Moriarty. What concerns do
you have with the use of off-shore SPRVs? Do you share a
similar concern with traditional reinsurance provided by off-
shore entities?
Mr. Moriarty. Well, the securitization deals that have been
done off-shore have been done by a select number of either
companies or investment banks who have been more than willing
to share information with us. Nonetheless, the fact that they
are done off-shore could lead to a concern for transparency
when looking at a transaction.
We think that there would be a lot of benefit in terms of
sheer transparency if they were done on-shore, if they were
subject to review by state regulators. Clearly, that would
enhance our ability to get all the details should there be a
concern sometime in the future. But that being said, the deals
that have been done off-shore, they are not inherently bad.
Just from a pure transparency viewpoint, regulators would be
better served if they were done on-shore.
Chairwoman Kelly. Thank you. I would like to ask you both,
based on your discussions with private sector people, what
segment of the market is most likely to use these risk-linked
securities? Can you give me a reason why? I have a follow-up
question to that, but I would like to hear your answer to this.
Can you give me--either one of you--just please answer that one
question. Ms. D'Agostino, do you want to start?
Ms. D'Agostino. If you are talking about the investment
side, it is institutional investors. Part of that is driven by
the nature of the catastrophe bonds, and part of it is driven
by how they are issued under a specific type of rule, 144b,
that the SEC is in charge of. If you are talking about from the
issuance side, mostly insurance companies and reinsurance
companies issue them. The other interesting fact is that
insurance companies and reinsurance companies also buy them. So
it is just--it is an interesting area.
We have learned a lot, and some of the things I cannot
explain, like why a part of the industry that both buys them
and issues them might feel uncomfortable with risk-linked
securities coexisting in the marketplace with regular
reinsurance.
Chairwoman Kelly. Would transparency help? Would increased
transparency help, as Mr. Moriarty pointed out?
Ms. D'Agostino. I am really not sure. I think the
transparency might make certain investors more comfortable with
them.
Chairwoman Kelly. Mr. Moriarty, would you like to answer
that question? MORIARTY: Sure, Madam Chairwoman. From the
insurance industry point of view, most of the deals done to
date have been securitization of the very high level
catastrophe risk, and we would see that trend continue in view
of the apparently increasing price for reinsurance coverage as
the return to investors in a securitization deal would better
match the risk that they are undertaking. Again, I have heard
from the investor's viewpoint, I think establishing those is
correct.
These have been big institutional investors and you will
hear from one of them this afternoon--and there apparently is
some attractiveness to these types of securities in terms of
their non-correlation to the rest of their investment
portfolio, as the happening of a catastrophe has nothing to do
with the sliding real estate market or concerns in the equity
of the bond market. But again, the utility of these bonds and
these deals to date have been to provide the upper layers of
catastrophe covers, and I would think that they would continue
along those lines. Conceptually, I think it could cover any
high level type of risk.
Chairwoman Kelly. Thank you. Dr. Weldon, have you another
question?
Dr. Weldon. I just have one or two more questions, Madam
Chairman. For the GAO witnesses, could you expand on the fact
that risk-linked securities are considered non-investment-
grade, and do they help diversify a portfolio? Could these
securities be considered a hedge to help investors reduce
market risk? Is that the proper way to describe them? Do they
therefore then become not an investment of first choice?
Ms. D'Agostino. Where do we begin?
Mr. Shear. Yes, where do we begin?
Ms. D'Agostino. Maybe the--
Dr. Weldon. Mr. Moriarty, you are free to comment on that.
Mr. Shear. The noninvestment-grade bonds--as we know, there
are fairly large transparent markets for noninvestment-grade
bonds generally. These are different types of noninvestment-
grade bonds. They have the advantage of not being correlated
with other forms of credit risk. In terms of some of the
questions with transparency, by definition a bond market is
going to have greater transparency than the traditional
insurance market, which is governed by private contracts.
To some degree in terms of talking about where this could
go and why we are so uncomfortable projecting where these would
go, the extent to which any changes along tax or regulatory
fronts, other types of fronts, could facilitate use of risk-
linked securities, there are advantages to the greater
transparency that could occur. There could be more discovery in
the marketplace. But this could be a circular argument in the
sense that we say there is limited liquidity which limits their
attractiveness, yet that limited liquidity in a sense is
searching for a larger market.
So that becomes the big question. We are not quite sure
what the response would be to any legislative or other changes.
But by the same token, the hope of the market--I think you will
hear more on that from the second panel--would be if liquidity
could be increased, you might have greater transparency and
perhaps a larger investment base.
Dr. Weldon. Did you want to add to that at all, Mr.
Moriarty, or would you rather steer away from the issue?
Mr. Moriarty. Again, they are generally noninvestment-grade
securities, but there are many noninvestment-grade securities
out in the marketplace. Rating agencies review these securities
and they assign a rating based upon the probability of default.
These bonds have a probability of default, i.e. of a
catastrophe happening, the same as any other noninvestment-
grade bond. When we look at insurance company portfolios, we
look at their credit quality; we look at diversification.
To the extent that a life insurance company would hold a
catastrophe bond would not alarm us any more than they would
hold any other noninvestment-grade bond. Clearly, if they made
up a large part of their portfolio or if they did not have the
capital to support it, it would cause a concern. But again, I
do not think these stand out there as a class by themselves in
comparison to all the other noninvestment-grade-type
securities.
Dr. Weldon. Thank you very much, Madam Chairman.
Chairwoman Kelly. Thank you, Dr. Weldon. If there are no
further questions, the chair notes that some members may have
additional questions that they may wish to submit in writing.
Without objection, the hearing record will remain open for 30
days for members to submit written questions to these witnesses
and to place their responses in the record. The first panel is
excused, with this committee's great appreciation for your
time.
If the second panel will take their seats at the witness
table, I will begin the introductions. On our second panel, we
will begin with Mr. Christopher M. McGhee, who is the managing
director of the Marsh and McLennan Securities Corporation,
testifying on behalf of the Bond Market Association. Next, we
will hear from Mr. John Brynjolfsson, who is the executive vice
president of PIMCO, the Pacific Investment Management Company,
one of the world's largest fixed-income managers with over $270
billion in fixed income investments.
Finally, we will hear from Mr. Dan Ozizmir, who is the
senior managing director of trading for the Swiss Re Financial
Products Corporation, whose American headquarters is located in
Armonk, New York. I want to thank you all for taking time out
of your busy schedule, and I really appreciate the fact that
you are with us today. So without objection, your written
statements will be made part of the record.
You will each be recognized in turn for a five-minute
summary of your testimony. If you are ready, Mr. McGhee, we
would like to begin with you.
STATEMENT OF CHRISTOPHER M. MCGHEE, MANAGING DIRECTOR, MARSH &
MCLENNAN SECURITIES CORPORATION, ON BEHALF OF THE BOND MARKET
ASSOCIATION
Mr. McGhee. Good afternoon. On behalf of the Bond Market
Association, I would like to thank the committee for holding
this hearing on risk-linked securities. My name is Christopher
McGhee and I am a Managing Director of Marsh and McLennan
Securities Corporation in New York. I also serve as chairman of
the Risk-Linked Securities Committee of the Bond Market
Association. This committee includes representatives of
securities firms that are active in the primary distribution
and secondary trading of risk-linked securities.
I should note that my firm is an affiliate of Marsh and
McLennan Companies, a global professional services firm whose
operating companies include the world's leading insurance and
reinsurance brokers.
I have submitted a statement for the record that includes a
diagram of standard catastrophe bonds transactions. I will
summarize my written statement here and will be happy to answer
any questions the committee may have at the end of testimony.
Risk-linked securities developed in the wake of the major
catastrophes of the 1990s. Following Hurricane Andrew in 1992
and the Northridge quake in 1994, catastrophe reinsurance
prices more than doubled and became much more difficult to
obtain. Risk securitization had been discussed in years
preceding the natural disasters of the 1990s, but it really
took the capacity crunch and price spike caused by Andrew and
Northridge for securitization to be seen as a realistic risk-
transfer mechanism. Risk securitization has the potential to
generate significant sources of catastrophe risk-taking
capacity on the part of insurers and reinsurers.
This would, in turn and most importantly, enable insurers
to assume greater amounts of catastrophe risk from their
policyholders. Much as the secondary mortgage market brought
the cost of home finance down significantly, we hope that
insurance securitization could make catastrophe protection more
broadly and more cheaply available to policyholders.
We hope that such an increase in coverage would
substantially reduce the burden on the federal government to
provide emergency disaster relief to uninsured homeowners
following a natural catastrophe. Bear in mind, at the end of
2001 only 17 percent of Californians had earthquake insurance.
Since 1997, 45 catastrophe bond transactions have been
completed, with a total risk limit securitized of almost $6
billion. While this figure is not insubstantial, it could be
larger.
We do believe there are certain actions which could be
taken which would facilitate the development of this
marketplace. These include, first, permitting reinsurance
special purpose entities to be treated as flow-through vehicles
from a tax perspective. As in all securitizations, repackaging
risk requires the use of a special purpose entity. Establishing
the SPE in the jurisdiction of the U.S. tax code would subject
the RLS transaction to two layers of U.S. federal tax and
perhaps even state taxes, making the transaction more costly
for issuers and less attractive to investors. As a result, the
bulk of all these transactions today take place off-shore in
jurisdictions with no entity-level tax.
To fix this problem, Congress could permit reinsurance SPEs
to be treated as flow-through vehicles that would not be
taxable at the entity level. This has already been done with
mortgage-backed securities under REMICs and FCTs This would
encourage risk securitization to come on-shore and as such
would be less costly and less complicated to transact. We
believe that this would result in an increase in transactions
overall, and as noted, policyholders would be the ultimate
beneficiary of this new risk capacity.
This issue is, of course, a matter involving the tax code
and as such we recognize that this is not subject to the
jurisdiction of this committee, but rather than of the
Committee on Ways and Means. Therefore, we mention this here
only so that we can be complete on the issues facing the
marketplace.
The second action would be to ensure that the economic
substance of all these transactions are taken into account
under the pending accounting rules concerning the consolidation
of SPEs. In short and in general, we do not believe that any
entity other than the SPRV should be made to consolidate the
risk-linked security onto its balance sheet, specifically
neither the sponsor of the transaction or any investor should
be required to consolidate the full transaction.
Accounting consolidation we think would produce misleading
financial statements because the consolidation does not reflect
the economic exposure of the parties to the transaction.
Let me conclude with these final points on behalf of the
association. First, risk-linked securities are beneficial to
policyholders as they can help expand the availability of
competitively priced catastrophe insurance. Second, the RLS
market can relieve pressure on governments to insure
catastrophe risk.
Third, flow-through tax treatment of RLS would bring
transactions on-shore and we believe would encourage the
further development of this marketplace. Again, we recognize
that any action on this matter is within the purview of the
Committee on Ways and Means.
Fourth and finally, the proposed FASB accounting rule as
currently contemplated should not require consolidation of the
SPE's balance sheet in the financial statement of any party
involved in the transaction.
A contrary result would be severely detrimental to the
development of the RLS marketplace. Thank you for providing the
Bond Market Association the opportunity to testify.
[The prepared statement of Christopher M. McGhee can be
found on page 64 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. McGhee.
Mr. Brynjolfsson?
STATEMENT OF JOHN BRYNJOLFSSON, EXECUTIVE VICE PRESIDENT, PIMCO
Mr. Brynjolfsson. Madam Chair and members of the Committee
on Financial Services, I welcome this opportunity to share my
expertise and recommendations. This testimony is offered in my
capacity as an individual with extensive experience relating to
risk-linked securities, and not in my official capacity as an
officer of PIMCO.
I believe that the risk-linked securities market holds
great promise for your constituents and our nation more
generally. I therefore am strongly supportive of your efforts
to foster the unfettered development of this market. The
committee has forwarded to me six questions, four of which I
will answer now orally. Question one, what attracts investors
to risk-linked securities?
Risk-linked securities can provide investors with a
handsome yield in exchange for absorbing a small amount of
risk. I will give an example. Five years ago in 1997 and every
year since, PIMCO, my employer, has participated in a
transaction known as residential reinsurance. This risk-linked
security allowed USAA, one of the nation's largest insurers of
military personnel, to cede $400 million of super-catastrophic
risk to the capital markets. PIMCO purchased 17 percent of that
transaction, representing $69 million of catastrophic hurricane
risk.
In particular, the risk-linked security PIMCO bought was
only exposed to the most catastrophic of hurricanes--for
example, a category five hurricane passing directly over Miami,
where a large number of retired and active military personnel
reside, would have triggered a loss on this bond. In contrast,
a category four hurricane passing 20 miles south of Miami, as
Hurricane Andrew did in 1993, would not have triggered a loss.
Despite a relatively handsome yield, the risk of loss on these
bonds could be quantified as a once in 100-year event.
Question two, what factors have limited your investment in
risk-linked securities? One factor that has limited our use of
risk-linked securities is that our competitors rarely use them.
As a result, upon the first serious loss, our use of risk-
linked securities may become a lightning rod for journalists
and lawyers who would be quick to second-guess our decision.
Question three, should individuals invest in risk-linked
securities? The risk-linked securities market is by no means
appropriate for the direct participation of individual
investors. Generally, all risk-linked securities issued in the
U.S. have been issued under the framework of regulation 144(a)
that limits participation to qualified professional asset
managers. Individuals can and do, however, appropriately access
the risk-linked securities market in a very small dose through
broadly diversified mutual funds managed by competent
professionals.
Question four, what does the future hold? I would suggest
that the risk-linked securities market is currently struggling
to get any notice whatsoever. This is temporary and simply
caused by the substantial turmoil that the equity and corporate
bond market are currently experiencing. Ultimately, the risk-
linked securities market will likely develop into an
instrumental part of the global reinsurance infrastructure.
Before I conclude, allow me to more concretely and
specifically highlight for you how I think the development of
the risk-linked securities market will impact your
constituents.
First, the risk-linked securities market has the potential
to substantially and dramatically increase the capacity and
lower the cost of capacity in the reinsurance market. This is
particularly true in the case of capacity relating to super-
catastrophic risks--those once in a hundred-year events that
inevitably occur and fill the pages of Life magazine.
Increasing this capacity frees up the limited capacity
reinsurance companies have to address more complex risks such
as terrorism. Ultimately of course, expanding capacity benefits
both individual and small business consumers of insurance
services. Your constituents may benefit a second time when the
premiums the insurance industry charges are passed through in
the form of interest on bonds to your constituents' pension
plans, mutual funds and other investment vehicles.
One last constituent is the IRS, whose revenues have the
potential to benefit from the development of a robust risk-
linked securities market. As the risk-linked securities market
develops, premiums traditionally earned by distantly domiciled
insurance companies will begin to be earned instead by
taxpayers. I commend this committee for its proven success in
making the U.S. financial markets more competitive globally.
Specifically with respect to risk-linked securities, I am
supportive of your efforts to firstly lower barriers to
development of the risk-linked securities market; two, to
encourage the understanding and foster prudent use; three, to
enhance market efficiency by promoting increased transparency
and risk disclosure; four, solidify the contractual nature of
risk-linked securities; five, streamline regulation and enable
on-shore domiciling of special purpose reinsurance vehicles;
six, standardize the fragmented nature of state insurance
regulations. Most distinguished members of this committee,
thank you for your interest. I am of course available to answer
your questions.
[The prepared statement of John Brynjolfsson can be found
on page 33 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Brynjolfsson.
Mr. Ozizmir?
STATEMENT OF DAN OZIZMIR, SR. MANAGING DIRECTOR OF TRADING,
SWISS RE FINANCIAL PRODUCTS CORPORATION
Mr. Ozizmir. I would like to thank Chairwoman Kelly and
Chairman Oxley for holding this hearing on risk-linked
securities, an important and growing segment of the fixed-
income and reinsurance markets. My name is Dan Ozizmir. I am
the senior managing director and head of trading with Swiss Re
Financial Products, a subsidiary of Swiss Re, the largest
reinsurer in North America and second largest in the world.
Swiss Re is also a member of the Reinsurance Association of
America and the Bond Market Association. Swiss Re has an
interest in this market from two primary perspectives.
We structure and underwrite new risk-linked securities and
we access the risk-linked securities market as an alternative
source of capital. Insurer motivation--to make sure it can pay
claims after a catastrophe, an insurer can do the following:
raise more equity capital by selling company stock; transfer
risks to the reinsurance markets; limit risks by underwriting
and asset management process. While not a perfect substitute
for any of these approaches, transferring risks to the risk-
linked securities market is a useful, fixed-cost, multi-
accompaniment to these other tools for certain peak
catastrophic risks to the insurance industry, such as east
coast hurricanes and California earthquakes.
As an aside, an insurer needs to hold significantly more
equity to underwrite peak exposures, like a Florida hurricane
and California earthquake, than it does to underwrite non-peak
exposures such as a single house fire or an auto accident. In
fact, equity is an extremely efficient source of capital for
non-peak exposures, as we can use the same dollar of capital to
underwrite many dollars of coverage.
The lower the cost of capital to insurers, the greater the
availability of affordable insurance to policyholders. Making
affordable insurance more available has important public policy
implications. For example, as of the end of 2001, only 17
percent of California homeowners had earthquake insurance.
Presumably if earthquake coverage were less expensive, more
consumers would obtain coverage. This in turn would reduce the
potential burden on the government to provide emergency
disaster relief following a major catastrophe. Investor
motivation--generally, bond investors buy risk-linked
securities, often known to them as cat bonds, to diversify
their investment portfolios.
Adding risk-linked securities to a fixed-income portfolio
reduces the expected standard deviation for the portfolio. In
other words, the returns stay similar, but the portfolio risk
goes down. This occurs because defaults on corporate bonds and
natural disasters are not correlated. Given these
diversification benefits, an obvious question is, why have many
significant fund investors stayed on the sidelines. I have a
more complete response in my written testimony, but the short
answer is that some professional investors take the time to
learn about the sector and get comfortable, while others have
not yet done so. Mr. Brynjolfsson from PIMCO today is an
exception.
The risk-linked securities market current status and future
directions--at present for our company, risk-linked securities
represent a relatively small, but strategically important
source of capital. At present, we believe that while some low-
rate insurers and reinsurers might face capital strain from the
equivalent of two natural catastrophes on the order of
Hurricane Andrew, yet industry as a whole remains capable of
meeting its obligations. Note that notwithstanding the
estimated insured losses from September 11, which were greater
than Hurricane Andrew and the Northridge earthquake combined,
reinsurance remains readily available.
A major exception, of course, to this rule is terrorism
coverage, which is either not available or extremely expensive.
On the whole, we expect the risk-linked securities market to
continue to grow in several ways. First, we would anticipate
the absolute amount of securities outstanding to continue to
grow as new investors begin to participate and existing
investors devote more capital to the sector. Second, we
anticipate that over time, innovation will gradually broaden
the types of risk securitized. On the second point, I would
note in particular that the risk-linked securities market is
not a near-term solution for providing capacity for terrorism
risk. Terrorism risk cannot be quantified.
We believe that the only solution to this important and
difficult problem is passage of a government backstop. In
conclusion, we believe that the risk-linked security market
plays a useful role in providing additional capital to the
reinsurance and insurance industry. To the extent that it
succeeds, it can also help increase the availability of
affordable insurance to policyholders exposed to peak perils
and therefore reduce the amount of uninsured losses from
natural catastrophes. This concludes my testimony. Thank you
very much.
[The prepared statement of Dan Ozizmir can be found on page
215 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Ozizmir.
I have a question for you, Mr. McGhee.
If the FASB adopts new rules governing SPRVs to increase
their equity requirements, how would that affect your
securitization efforts to help protect consumers against
natural disasters?
Mr. McGhee. We think it would clearly inhibit the growth of
that sector. It would add expense, certainly. The equity
component of a transaction would need to be paid more than they
currently are under the fixed-income approach, so there would
be an expense component there.
But in addition, there is a challenge in finding equity
investors for these kinds of transactions. This is
traditionally been a fixed-income market for fixed-income
investors. Finding equity investors for this transaction we
think is complicated and difficult. So we actually believe it
would be a significant impediment to the growth of this
marketplace.
Chairwoman Kelly. Thank you. Mr. Brynjolfsson, how can we
facilitate the acceptance of natural disaster bonds by the
investment marketplace? Do you think we need to help
standardize information parameters or to improve the disclosure
requirements? I asked this question of the prior panel. I would
be interested in what you have to say.
Mr. Brynjolfsson. Sure. At our firm, we have done
everything that we can do to, let's say, maximize disclosure;
and to actually limit these securities strictly to portfolios
where the clients have previously acknowledged that we have the
authority to invest in these bonds. Even there, we are still
somewhat concerned about liability associated with our
investing in these types of bonds.
It may just be a matter of education. What the committee is
doing today in the form of publicizing, in effect, the GAO
report and having hearings on this topic may help move the
market in the direction of acceptance. Investors quite
appropriately are concerned about the risk in their portfolios,
now more so than ever. We have invested time and effort in
developing the expertise to invest in these bonds.
To some extent, I have tried to facilitate our competitors'
developing expertise by speaking at the Bond Market Association
conferences on these topics and so on. But ultimately, my job
is to take care of my investors and I hope others do the same
for their investors.
Chairwoman Kelly. How would you assess the current market
for these risk instruments?
Mr. Brynjolfsson. Well, we have been an aggressive
purchaser of these bonds, sometimes buying 25 percent or even
30 or 40 percent of individual transactions that have come to
market over the past five years. In the past 12 months or so,
we have been a little bit less aggressive. Part of the reason
for that is the appetite for risk among the capital markets has
been waning.
We have to some extent anticipated that, to some extent
just been a victim of it. But the whole purpose of integrating
the reinsurance market with the capital markets is to bring the
reinsurance markets away from the reinsurance cycle that you
may be aware of where reinsurance rates harden and soften and
harden and soften. Unfortunately, capital markets also have a
cycle where capital market investors get driven by fear and
greed and then fear and then greed. Right now, fear is the
dominant sentiment in capital markets.
Chairwoman Kelly. I have another question for you, and that
is, do you really need a Ph.D. in physical sciences in order to
understand this risk?
Mr. Brynjolfsson. You know, I have spent the past 12 years
intensely focusing on the financial markets. Obviously, these
securities are by and large a financial security. The firms
that model the risk of this will have a dozen or more than
that--50 or 60--Ph.D. scientists all evaluating the latest
theories in earthquake, hurricane and so forth. Having some
credentials in the physical sciences at least gives me some
confidence that I can, let's say, read the reports that these
scientists publish. I do not know if I would want to write
them.
Chairwoman Kelly. Our hat is off to the GAO, I guess. I
have run out of time here, so I am going to turn to
Dr. Weldon. Dr. Weldon, have you questions?
Dr. Weldon. Yes, thank you, Madam Chairman. I have got a
question for Mr. McGhee and maybe Mr. Brynjolfsson, you can
comment on it, too. There was some discussion--Mr.
Brynjolfsson, you purchased a bond for a category five
hurricane going over Miami.
Mr. Brynjolfsson. Correct.
Dr. Weldon. Let me start with you, Mr. McGhee. What do you
think would be the impact on the market if that were to happen?
Mr. McGhee. If there were an event like that?
Dr. Weldon. Next week.
Mr. McGhee. We have talked a lot about that question. The
concern has always been that a big loss occurs and as a result
investors exit the market. Our sense is that the investor
universe in this particular category is extremely well
informed. They understand the risks they are running, and we
believe that it is unlikely that they would immediately exit
the marketplace.
We think in fact that this might draw more investors in
because the opportunities to buy more bonds at increased prices
or increased yields we think would be available. So our sense
is that investors would not cut and run; that they would
actually stay there. We think this marketplace does have
staying power.
Dr. Weldon. Do you agree with that, Mr. Brynjolfsson?
Mr. Brynjolfsson. Well, there are two parts to that
question. One is will the capacity we provide be there when an
event occurs. As a major hurricane occurs, market participants
start to get white knuckles and start to brace. Trading
activity, pricing of the risk may occur. Bond prices may fall.
However, our firm is not really well positioned to monitor
the minute-to-minute development of hurricanes. As a result, we
are essentially buying these bonds ahead of time with the
belief and plans to hold them throughout any disaster. Then we
will see how the sword falls, and I hope avoid dying by the
sword, if you will.
So what that means is that the capacity that is provided is
there and will be there for the event that occurs. The second
part of the question implicitly is, on subsequent events, would
we necessarily step up and provide additional capacity.
As Mr. McGhee suggested, probably not unless the price were
even more attractive than initially. There is actually a market
for what we call second event bonds, and we do participate in
the second event bond market. That is a market where we are
actually paid a premium in order to absorb the possibility of
two major catastrophic events occurring.
The second event market is really a good example of how the
capital markets can step in to provide not just backup
capacity, but backup capacity to the backup capacity.
Dr. Weldon. I was not aware of this. This is a developing
market, you are saying?
Mr. Brynjolfsson. Well, it is part of the risk-linked
securities market, and just as you have wind-risk bonds,
earthquake-risk bonds, hailstorm bonds and so forth, you have
something called a second event bond, which would not trigger
on the first category five hurricane that hit Miami, but the
second one would trigger it.
And they are usually structure so that you would need two
smaller events like two category four hurricanes to hit in the
same season, which again we can probabilistically model.
Dr. Weldon. Mr. McGhee, based on the diagram on page four
of your testimony, the issuance of catastrophe bonds has
decreased or flattened--is that true? Do you feel that it is a
tax issue that is causing it to happen? Why do you think it is
flattening out?
Mr. McGhee. It is hard to speculate, because I think there
are a series of things that are feeding into why this
marketplace has stayed relatively flat. The central issue is
that catastrophe bonds are perceived by the potential sponsors
of the transactions--insurance companies and reinsurance
companies--as still relatively expensive as risk transfer
mechanisms.
So essentially it is a cost issue. There is a certain large
fixed cost component to issuing cat bonds. That relatively
large fixed transaction cost means that there are a relatively
small number of potential issuers because they must be issuing
large transactions to spread that cost over the large
transaction size. So it is essentially a cost issue, and if
those costs could be brought down, we think that the capacity
being sought in the capital markets would increase. So it is
really a cost issue.
Mr. Brynjolfsson. I would also add that it is my sense, and
I do not have the data to back this up but perhaps one of the
other panelists could verify what I am going to presume and
that is, that recent transactions have tended to be multi-year
transactions. This means that for any given amount of capacity,
or for any given amount of issuance, rather than covering one
year of risk, it is covering, say, three years of risk. From a
capacity point of view you could multiply these reported
numbers by a factor of three, because new bonds do not have to
be reissued as frequently just to cover the same risk.
Mr. Ozizmir. In fact, I believe the number right now of the
outstanding capacity in the market is on the order of about
$2.5 billion. So even as a dimension, if you issue $1 billion a
year and they are multi-year transactions, over time the actual
capacity that exists in the market that the reinsurance and
insurance companies can take advantage of is in excess of that.
Dr. Weldon. I believe my time has expired. Madam Chairman,
I did have a follow-up question.
Chairwoman Kelly. Go ahead and ask your follow-up question.
Dr. Weldon. In the GAO report, they have got on page 12,
figure 2, Hurricane Andrew was $30 billion, with about $15
billion being insured and a little less than half uninsured.
Northridge was $30 billion.
Then they show the World Trade Center, $80 billion--again
about half is insured, half is not insured. It is very
interesting--they have Kobe, Japan, the 1995 earthquake there,
$147 billion of which $142.9 billion was uninsured. The
impression I get is that relative to the amount of risk we have
out there, this may be a growing segment and in dollar amounts
it may be growing.
This is really a drop in the bucket relative to the amount
of risk that is out there. Is that an accurate statement? It
sounds like a good way to try to address the risk, and I am not
in any way trying to knock the industry, but it is not covering
a lot of risk.
Mr. Brynjolfsson. Looking at just these four events and the
decade or more they cover, if we were just to average the
annual loss per year, we would be looking at something that
appears in the neighborhood of $30 billion. As pointed out,
this market is $2 billion or more. The capital markets in total
are typically seen measured in terms of $30 trillion. So the
capital markets clearly have the ability to absorb $2 billion,
as they currently are, or $4 billion or $8 billion or $12
billion of catastrophic risk. Any of those numbers is not just
a noticeable fraction, but a substantial fraction of
catastrophic risk.
Dr. Weldon. So you think the market could absorb the risk--
more of the risk, substantially more?
Mr. Brynjolfsson. Yes.
Dr. Weldon. But as I understand your testimony, and all of
your testimony, the two principal stumbling blocks are the tax
treatment and the nature of the market. It is very complicated
to get into and there are a lot of people in the industry who
do not have the expertise or the willingness to get acquainted
with the complexity of this type of investment instrument.
Mr. Ozizmir. Let me add a couple of things to what you said
there. I would add that marginal cost is important. I mean, we
discussed the fact that the risk-linked securities market is
relatively small percentage. But in any market, I think the
marginal cost is often what defines the overall price. So I
think that we need to look at the growth of this market in the
context of that.
The second thing that I would like to talk about is, we are
talking about a lot of knowledge here from the point of view of
investors. We at Swiss Re and many other participants in this
market are really not focusing just on knowledge to the
investors, but also to the potential sedants or the insurers
who are using this product.
I think that that is something that also needs to grow as
well. For example, there were some conversations here about the
NAIC looking very carefully at how to define basis risk, when
it is acceptable and when it is not. That is the same process
that we and other insurers go through when they look at these
parametric structures, because since we are not able to sell
indemnity risk into the capital markets as well for the obvious
reasons of transparency and disclosure and objectivity, it is
important that the knowledge is not just on the investor side,
but also on the user side.
Dr. Weldon. I thank you, Madam Chairman.
Chairwoman Kelly. Thank you. Mr. Ozizmir, how do you relate
the current situation with terrorism to the potential use of
the risk-based securities? You mentioned terrorism before.
Mr. Ozizmir. Yes. Our view at Swiss Re is that the critical
element of this market is developing knowledge, objectivity and
transparency in how transactions are structured. We feel that
terrorism risk, even away from the securitization process, is
not quantifiable.
So if it is not quantifiable in the traditional insurance
and reinsurance market, we do not see anything in the near term
that would permit the risk-linked securities market to transfer
risk in the terrorism market.
Mr. McGhee. May I just add to that?
Chairwoman Kelly. By all means.
Mr. McGhee. I would say that there are a lot of very smart
people with lots of initials after their names, like Ph.D.,
that are working very hard on exactly this problem of
terrorism. There are modeling firms that have all recently come
out with early, early issues of models that try to assess the
probability of loss of terror attacks.
If those models were to become generally accepted, and we
believe this will take some time, then it is possible, we
think, that with time securitization of terror risk is a
possibility. But, I should stress, this is very early days in
this marketplace, though there are many people who are working
very hard on this issue.
Chairwoman Kelly. Thank you, Mr. McGhee. I really
appreciate that. We have worked very hard on terrorism and
trying to address the situation, and both of you have shed some
light that may help us along our way, so thank you very much.
I would like to go back to you, Mr. Ozizmir. According to
the Institutional Investor last month, several European
insurers are now seriously considering securitization as an
alternative source of capital to fund their underwriting
capacity. How can reinsurers take advantage of their unique
ability to analyze high-level risk and work with the securities
market and investors to bring confidence into these deals? What
do you think Congress can do to facilitate this?
Mr. Ozizmir. I will start with the whole issue, and go back
to the initial issue of knowledge. It is critical that there is
transparency in the transactions. I think it has been mentioned
that bringing the transactions on-shore has various benefits,
and we do agree with that. That said, we do believe that the
transactions, the parametric structures that are currently
being done are adequate from a transparency point of view in
terms of how the risks are modeled and how the risks are
disclosed.
The critical thing that a reinsurance company needs to do
if they decide to access the capital markets is recognize a few
things. One is that since this is a new market, the cost of
getting coverage in the capital markets is high. In some cases,
it is higher than traditional reinsurance; in some cases, it is
about the same; and in some cases slightly lower. But the fact
is, it is not a lower cost of coverage. So a reinsurance
company needs to make sure that they control and manage the
basis risk.
This is a very, very critical issue. The investors, again,
are going to accept transparent modeled objective structures.
The reinsurer or the insurer is going to have their own book of
business which may change in a multi-year period of time. For
example, if you do a four-year structure, much of the
reinsurance or insurance you have written is a one-year
contract. So a reinsurer will have to anticipate how their book
of business may change over time.
They are also going to have to look very carefully at where
their risk is. We talk about category four hurricanes, category
five hurricanes. In the case of Europe, it would be what would
be called a European windstorm would be the predominant risk,
such as Lothar that hit France a few years ago. So the
reinsurer needs to, with the help of the modeling agencies and
their own internal analytics, determine at a certain wind speed
what their losses would be. This is a very, very complicated
process, but something that needs to be done.
Chairwoman Kelly. I would like to thank you.
I would like to, Mr. Ozizmir, ask you another question. In
your testimony, you state, reinsurance remains readily
available. It seems to me that any discussion that we have here
on reinsurance capacity ought to cover catastrophic events,
ought to include a discussion of the price of covering
catastrophic events because price may mean that reinsurance is
not readily available. So I would like to have you discuss that
a bit.
Mr. Ozizmir. Okay. One of the reasons we do support the
development of this market is we agree that prices have
increased over the last few years and in spite of the fact that
they increased from a relatively low level in the late 1990s,
clearly capacity coming into the market will reduce the cost.
We think that that is good for primarily all constituents
here in terms of having greater coverage. That said, the
capital markets, as I said, are not providing distinctly
different prices than what is available in the reinsurance
markets right now.
Chairwoman Kelly. We may give you a written question to
follow-up on that. I am out of time. Dr. Weldon, have you any
other questions?
Dr. Weldon. Yes, I just have one more follow-up question.
Mr. Brynjolfsson, let's go back to Miami, category five comes
over the city. Does the catastrophic bonds that we have been
talking about that cover that type of event do anything to help
the people who are living, say, 20 miles south or 20 miles
north of the city?
Mr. Brynjolfsson. Sure. The example I gave is actually not
specifically part of the contractual nature of the bond. The
way the contract that is written for the specific bond that I
was describing is that if USAA lost more than $1 billion, then
the cat bond would in effect indemnify that insurance company
for losses of greater than $1 billion.
The firms that I alluded to that do the modeling of
catastrophic risks were able to quantify for us relatively
objectively that $1 billion was high enough a threshold that
the insurance company itself could cover those losses out of
the first $1 billion of coverage through its general operating
reserves and the like, and that in order to have more than $1
billion of losses, either one large hurricane hitting a
metropolitan area would have to occur, or alternately a smaller
hurricane that hit successively three or four or five
communities would have to occur.
For example, if a hurricane went up the coast, it could
trigger $1 billion or more in losses. So there is no exclusion
of any particular homeowner or anything like that. It is more
just a function of how the industry works. Now, more generally,
obviously the way an insurance company works is they try to
write as many premiums as they can without exceeding certain
capital constraints. Any cat bond that helps relieve their
capital usage frees up capital to underwrite in other areas.
The capital markets are, I believe, best equipped to
protect against super-catastrophic risks, meaning those one in
one-hundred year events that I alluded to, and also relatively
generic risks which I as a bond manager can contemplate,
understand and have modeling firms advise me on. Very specific
risks relating to the intricacies of workman's compensation or
intricacies of business liability or for that matter even
intricacies of terrorism coverage, at this stage I am not ready
to contemplate. I am not saying that I would never contemplate
anything along those lines. However, I do know on the other
hand that I am comfortable contemplating straightforward simple
risks like massive hurricanes and massive earthquakes.
Dr. Weldon. Go ahead.
Mr. McGhee. I was just going to add to that if I could. It
touches back on your question about the size of the cat bond
market relative to reinsurance, and it plays in here as well.
As Mr. Brynjolfsson said, the cat bond market really plays in
that sort of super-cat layer, that area in excess of the one in
one hundred year return period.
One of the things that my firm has done is that we have
been looking at the size of risk transfer capacity bought from
the cat bond market and from the reinsurance market in this
very remote area. We believe that there is a relatively small
amount purchased from reinsurance for those super-cat events.
It may be as little as $3 billion in total capacity. If that is
the case, then catastrophe bonds may represent about 40 percent
of the overall risk transfer market in that segment right now.
It is a little-understood fact that cat bonds are a very
important part of this super-cat marketplace, We think cat
bonds could actually add significantly to the synthetic capital
that is being created for insurance companies and reinsurance
companies that can be then used to provide more coverage to
their policyholders.
Dr. Weldon. I just want to make sure I come away from this
hearing properly understanding this issue. It is a very complex
issue. We have taken testimony that there is a capacity crisis
and then we have taken testimony that there is plenty of
capacity out there. Could you, Mr. Brynjolfsson or Mr. McGhee,
answer that question for me?
Mr. Brynjolfsson. Sure. I would be happy to address that.
In the area of super-catastrophic risk in the area of hurricane
risk and the area of earthquake risk, there clearly is not a
capacity crisis. We have been looking to buy catastrophe bonds
at spreads that were previously available that are no longer
being offered to us because to some extent there is capacity
for those types of risk.
On the other hand, and I do not want to get excessively
anecdotal, but when it comes to very specific types of risk
that I am not involved in at PIMCO, then there clearly are
problems, even in the area of, well, workman's comp, other
things that were directly brought to the industry's attention
by the disasters at the World Trade Center.
For example, the idea that 6,000 people could
simultaneously have their lives put at risk was not something
that typical workman's comp policies had contemplated or life
insurance policies prior to 9-11. My understanding is that air
frame and aircraft insurance similarly has become almost
unavailable.
Mr. McGhee. May I add to that?
Dr. Weldon. Yes.
Mr. McGhee. I think you might not characterize it as a
crisis, but it may be a crisis that people do not yet recognize
as a crisis, if I can put it that way. In California, only 17
percent of homeowners have earthquake insurance. In Florida, as
you know, there is a state-sponsored government entity, the
Florida Hurricane Cat Fund, that exists because of the need to
intercede and provide some quasi-governmental support to make
homeowners insurance for hurricanes more readily and cost-
effectively available.
So our sense is that there could be much more insurance
being sold to consumers were it available at a competitive
cost. We think that this marketplace could help encourage
that--perhaps not solve all the problems, but could encourage
the availability of more and cheaper capacity.
Chairwoman Kelly. Mr. Ozizmir, I would like you to answer
that question as well, if you do not mind.
Mr. Ozizmir. Okay. In terms of relating capacity to the
impact of the risk-linked securities market, I would like to
basically agree with what my panel members said. One thing I
would highlight here is that again we are talking about
quantifiable, objective and transparent risks.
Now, for that reason, if you look at the actual secondary
market trading or the spread of new issues on California
earthquake, Florida windstorm, European windstorm and even
Tokyo earthquake risks in the market, and if you observe that
the trading levels over the last few years, what you will see
is that rates have been pretty much stable, except for the
fourth quarter of last year, after September 11.
What that tells me is that in the types of risks that can
be specifically addressed by the risk-linked securities market,
there are capacity issues possibly, but it is not showing up in
the trading of those instruments. Where we are seeing in
general the greatest price increases are the non-quantifiable
risks like terrorism, if it is even available; hull insurance
and other things like that for planes--those have increased
dramatically. So again, in the risks that this market can
address, we are not seeing as significant an increase in price
or as great a dearth of capacity.
Chairwoman Kelly. Thank you. Mr. Inslee, do you have any
questions for this panel?
Mr. Inslee. I do. This may be on the periphery of this
hearing, but I wanted to ask about the sort of general
assessment of risk for weather-related losses, and whether the
global warming phenomena is causing any concern, any thoughts
in the industry in general.
We see these relatively rapid loss patterns from weather-
related events, and I just wonder, is the industry concerned
about global warming and how it affects catastrophic losses in
that regard? Or is that something you all can comment on? That
is a question to anyone who cares to--if anyone wants to tackle
it.
Mr. McGhee. Well, I can jump in there. It is absolutely
clear that the reinsurance industry is thinking about just
these issues, and certain large reinsurance companies in Europe
have in fact done some studies with respect to the impact of
global warming on the incidence of natural catastrophe and the
severity of natural catastrophe.
I do not think anybody has drawn a firm conclusion as to
what the result will be, but certainly because the reinsurance
and insurance industries, they take the hits when they happen,
are concerned about this and trying to assess the potential
risks associated with global warming.
Mr. Inslee. Thank you. Thank you, Madam Chair.
Chairwoman Kelly. Thank you, Mr. Inslee. If there are no
further questions, the chair notes that some members may have
additional questions they may wish to submit in writing.
Without objection, the hearing record will remain open for 30
days for members to submit written questions to these witnesses
and place their responses in the record.
This panel is excused with the committee's great thanks and
great appreciation for your time. This hearing is adjourned.
[Whereupon, at 3:48 p.m., the subcommittee was adjourned.]
A P P E N D I X
October 8, 2002
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