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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

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

(III)

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

(IV)

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

(1)

AMERICA’S INSURANCE INDUSTRY:

KEEPING THE PROMISE

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.

2

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,

3

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.

4

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.

5

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.]

6

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

7

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.

8

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.

9

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

10

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

11

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.

12

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.

13

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 subVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
14

way 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.

15

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

16

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

17

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 repVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
18

resent, 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.

19

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

20

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?

21

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

22

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 counVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
23

tries. 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 apVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
24

preciate 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

25

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.

26

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

27

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.

28

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.

29

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

30

to the victim’s surviving relatives by their New York Life agent

this past Saturday.

Analysts have estimated that the total life insurance claims re- sulting 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

31

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

32

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

33

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

34

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;

35

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.

36

[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.

37

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

38

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.

39

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 expoVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
40

sure 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.

41

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 pretax. 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.

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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 indus- try 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,

43

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.

44

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.

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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 naVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
46

ture, 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’ reservaVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
47

tions 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

48

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 comVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
49

mercial 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

50

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.

51

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

52

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.

53

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

54

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 TreasVerDate 11-MAY-2000 07:38 Mar 01, 2002 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 75519.TXT HBANK1 PsN: HBANK1
55

ury 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?

56

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

57

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

58

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.

59

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.

60

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

61

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

62

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.

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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 propertycasualty 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,

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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.]

(65)

A P P E N D I X

September 26, 2001

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