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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
                     AMERICA'S INSURANCE INDUSTRY:
                          KEEPING THE PROMISE

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 26, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-45

                        U.S. GOVERNMENT PRINTING OFFICE
75-519                          WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 26, 2001...........................................     1
Appendix:
    September 26, 2001...........................................    65

                               WITNESSES
                     Wednesday, September 26, 2001

Benmosche, Robert H., Chairman and CEO, MetLife, Inc.............    36
Ferguson, Ronald E., Chairman, General Re Corporation, on behalf 
  of the Reinsurance Association of America......................    40
Mosher, Matthew C., FCAS, MAAA, Group Vice President-Property/
  Casualty Ratings, A.M. Best Company, Oldwick, NJ...............    39
O'Hare, Dean R., Chairman and CEO, The Chubb Corporation.........    38
Pitt, Hon. Harvey L., Chairman, U.S. Securities and Exchange 
  Commission.....................................................     7
Sebelius, Hon. Kathleen, Commissioner of Insurance, State of 
  Kansas; President, National Association of Insurance 
  Commissioners, on behalf of the National Association of 
  Insurance Commissioners........................................    32
Serio, Hon. Gregory V., Superintendent of Insurance, New York 
  State Insurance Department.....................................    30
Sternberg, Sy, Chairman, President and CEO, New York Life 
  Insurance Company..............................................    29

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    66
    Baker, Hon. Richard H........................................    71
    Bachus, Hon. Spencer.........................................    68
    Carson, Hon. Julia...........................................    73
    Ford, Hon. Harold E..........................................    75
    Grucci, Hon. Felix J., Jr....................................    76
    Kanjorski, Hon. Paul E.......................................    78
    Kelly, Hon. Sue W............................................    80
    Benmosche, Robert H..........................................   181
    Ferguson, Ronald E...........................................   207
    Mosher, Matthew C............................................   198
    O'Hare, Dean R...............................................   190
    Pitt, Hon. Harvey L..........................................    85
    Sebelius, Hon. Kathleen......................................   156
    Serio, Hon. Gregory V. (with attachments)....................   106
    Sternberg, Sy................................................   103

              Additional Material Submitted for the Record

                                                                   Page

Bachus, Hon. Spencer:
    ``Oil Money is Fueling Sudan's War,'' The Washington Post, 
      June 11, 2001..............................................    69
Maloney, Hon. Carolyn:
    ``A Nation Challenged: The Insurance,'' New York Times, 
      September 20, 2001.........................................    82
Benmosche, Robert H.:
    Written response to questions from Hon. Michael G. Oxley.....   188
Mosher, Matthew C.:
    Written response to questions from Hon. Michael G. Oxley.....   203
    .............................................................
O'Hare, Dean R.:
    Written response to questions from Hon. Michael G. Oxley.....   196
Pitt, Hon. Harvey L.:
    Written response to questions from Hon. Paul E. Kanjorski....    99
    Written response to questions from Hon. John J. LaFalce......   101
Sternberg, Sy:
    Written response to questions from Hon. Michael G. Oxley.....   105

 
                     AMERICA'S INSURANCE INDUSTRY:

 
                          KEEPING THE PROMISE

                              ----------                              

                     WEDNESDAY, SEPTEMBER 26, 2001

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                    Washington, DC.
    The committee met, pursuant to call, at 9:39 a.m., in room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley, 
[chairman of the committee], presiding.
    Present: Chairman Oxley; Representatives Roukema, Baker, 
Bachus, Royce, Kelly, Weldon, Ose, Biggert, Shays, Grucci, 
Hart, Capito, Ferguson, Rogers, Tiberi, LaFalce, Kanjorski, 
Waters, C. Maloney of New York, Watt, Bentsen, Hooley, Carson, 
Sandlin, Inslee, Moore, Capuano, Ford, Hinojosa, Lucas, and 
Shows.
    Chairman Oxley. The hearing will come to order.
    My friends and fellow committee Members, today as I speak 
before you I believe that our country is undergoing a great 
metamorphoses. While the tragedy of September 11 will forever 
stain our Nation's history, it has also been a great awakening 
for our country. We will never forget the pain and loss of life 
of innocent civilians from all parts of the world that worked 
in the World Trade Center. But these cowardly attacks have also 
brought our country together, renewing our focus on American's 
priorities. The American people stand united in their faith. We 
will become stronger than we were ever before.
    In trying to cripple the long-term foundations of our 
Nation's economy, this attack will inevitably be viewed 
historically as an abject failure. Last week, the stock markets 
opened back up and handled a record volume of trading. While 
the market lost enormous value during that tumultuous week of 
trading, the most important thing was that it was working and 
working well. The free market, that which is the underpinning 
of this country's economy, was touched, but not stopped by the 
terrorists. And Monday of this week showed us the power and the 
beauty of those free markets with the fifth largest ever point 
increase in the Dow Jones Industrial Average.
    The banking industry also cast off any lingering effects of 
the damage, helping the Fed pump hundreds of billions of new 
liquidity into the economy, new resources that will help our 
country recover from the economic lethargy; and the insurance 
industry is coming through with flying colors, expediting the 
processing of individual claims to provide immediate comfort to 
injured victims and their families in this time of need.
    Some of the worst-hit companies have been the first to step 
forward with commitments to fulfill their policyholder 
obligations. In fact, I would like to publicly commend all of 
our company witnesses before us today for their good faith in 
responding to this attack.
    The September 11 attack will exceed Hurricane Andrew as the 
most expensive disaster on American soil. But our country's 
financial sector has absorbed the most egregious attack in 
history and remains strong for now and the future, and for that 
we should all be proud. Reports from A.M. Best, Standard & 
Poor's and other rating firms have proclaimed that the 
insurance industry was well capitalized and is financially 
strong. In fact, today we will hear from A.M. Best, a company 
that has been providing analysis of the insurance industry for 
over 100 years.
    The short-term profitability of insurance companies may 
have been hit, but not the industry's fundamental soundness and 
safety. This Committee is dedicated to working with the 
financial industry to keep the promise alive for all Americans. 
We are strong and will continue to build on that strength well 
into the future.
    This morning we will first hear from the distinguished new 
Chairman of the SEC, Harvey Pitt, who is making his first 
appearance before our committee.
    I want to commend Chairman Pitt for his leadership in these 
trying times. He and the Commission acted swiftly and wisely to 
use for the first time their emergency authority to reduce 
regulatory restrictions that might have dampened liquidity and 
otherwise impeded the marketplace. The Commission was also 
careful not to impose new rules in the name of reducing market 
volatility that would have harmed rather than helped the 
marketplace. The remarkable success of the U.S. securities 
markets reopening is due in no small part to the leadership and 
vision of Chairman Pitt and the commissioners.
    Today Chairman Pitt will offer the Commission's 
perspectives on the state of our capital markets in the 
aftermath of the terrorist attacks. He will also discuss how 
money laundering enforcement affects our securities markets and 
how money laundering regulation might be used in the context of 
those markets to track, block, and freeze funding of terrorist 
activities.
    I would like to welcome Chairman Pitt and our distinguished 
panel of insurance industry regulators and CEOs. We are 
especially grateful that Superintendent Serio from New York 
could take the time to speak with us here today. Thank you all 
for joining us, and I look forward to all of your testimony.
    That completes the Chair's opening statement.
    I now yield to the gentleman from New York, the Ranking 
Member, Mr. LaFalce.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 66 in the appendix.]
    Mr. LaFalce. Thank you, Mr. Chairman.
    The events of September 11 have rippled through every 
aspect of our lives. The wounds are deep, and the long-term 
financial effects will only be known over time. What we do know 
is that all Americans owe a great debt of gratitude to the 
efforts of Harvey Pitt, Dick Grasso, Wick Simmons, the Treasury 
Department, the Fed, amongst many, many others, for their 
heroic work to get our markets on line and functioning 
efficiently.
    Mr. Pitt, when the President asked you to serve your 
country, I suspect you never imagined that you would be facing 
the issues you are facing today. Thank you for your efforts and 
your steady hand during this unbelievably difficult time.
    I would also like to thank Greg Serio, the Superintendent 
of New York Insurance, for his efforts in moving quickly to 
address the enormous human needs of this tragedy.
    I spoke both with Harvey and Greg as soon as possible, and 
I was relieved at how steady they were. I was relieved when 
Greg told me that every insurance company he had spoken to was 
going to be extremely forthcoming. That was a great solace.
    In the face of enormous obstacles, the SEC worked with 
other financial regulators, other Federal agencies and New York 
State and New York City officials to bring our markets on line, 
but, recognizing the operational challenges, I shared the New 
York Stock exchange and other stock exchanges' view that the 
market should not open until the necessary infrastructure was 
in place to allow the markets to operate efficiently and meet 
investor demand. I think it was very, very wise and prudent to 
have sequential opening of the diverse markets, very wise to 
have a test run the Saturday after the 11th.
    In spite of enormous volume and considerable investor 
anxiety when the markets did open, they functioned very well. 
In particular, I applaud the SEC's actions under Section 12-K 
to, amongst other steps, to permit public companies to 
repurchase their own shares, injecting needed liquidity into 
the market.
    That was one side of the coin. On the other side of the 
coin, I am a bit concerned about the coordinated short selling 
that may have been taking place, perhaps putting those who are 
responding to your exercise of authority of 12-K particularly 
in jeopardy; and I am sure you will comment on that in your 
opening statements.
    I am also eager to hear from you, Mr. Pitt, whether you 
believe that the SEC has all of the clearcut authority it needs 
to be active and vigilant to protect our future markets from 
future volatility.
    When you were in the train going to New York and we 
chatted, we had a conversation; and it was my thought at the 
time that it might have been advisable to have more explicit 
authority. But, again, I will be interested in your comments on 
that.
    Of course, as I have expressed to you in conversation and 
in writing, I am very concerned about the reports that 
affiliates of Mr. bin Ladin may have used the capital markets 
to fund terrorist operations. So I want to be assured that the 
SEC has the resources it needs to open this new front on the 
war on terrorism and to cope with volatility such as this.
    With regard to the insurance industry, given current 
estimates I believe the industry has the resources to weather 
this crisis and make the injured whole and remain a vibrant, 
vital industry. I have been encouraged by the strong statements 
that the industry has made that they will, in fact, honor their 
commitments and put New York, the families of the victims, 
businesses and our economy on the road to healing.
    Having said that, I also recognize that loss estimates have 
been very uncertain and that they may move higher because of 
unknowns like measuring business interruption. Our committee 
should be vigilant in exercising our oversight responsibility 
as the contours of this crisis become better known over time.
    In my meeting with industry officials and experts, I am 
also aware of the need to study ways to ensure that affordable 
insurance coverage remains available for citizens and 
businesses to protect them financially at least against any 
future incidents of terrorism; and we might need to give 
serious consideration to proposals in which Government and 
industry can partner to provide critical insurance coverage for 
future terrorism catastrophic acts.
    Some have suggested looking at Great Britain as a model for 
terrorism insurance. That is one possibility we should look at. 
Maybe there are a number of others. Maybe it is not necessary, 
but it is something we should look at and look at seriously.
    I look forward to working with all of you in all those 
endeavors. Thank you.
    Chairman Oxley. I thank the gentleman.
    The Chair would, before recognizing the subcommittee Chair 
and Ranking Member, the appropriate subcommittee Chair and 
Ranking Member, would announce without objection that all 
Members' opening statements will be made a part of the record. 
The Chair strongly encourages Members to submit opening 
statements, given the time constraints and also our witnesses.
    I now recognize the gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman. I want to thank you and 
the witnesses for appearing here today.
    I know this is a difficult time indeed, when they have many 
pressing matters before them. The World Trade Center was a 
demonic assault, but I dare say that the actions of those who 
will testify today were incredibly responsive to unbelievable 
circumstances. In my view, they may be described as 
inspirational to us, more so than any well-intentioned 
assistance we might attempt to devise.
    It really is the resiliency and spirit of the private 
enterprise marketplace that has made the country prosperous and 
able to recover in these difficult hours. It will inevitably 
lead us to full recovery from the current difficult 
circumstance.
    Just brief examples, Mr. Chairman, for the record of what 
has transpired since that morning.
    PaineWebber provided the employees of Lehman Brothers, 
their competitors, office space from which to work.
    The New York Exchange allowed the American Exchange, its 
competitor, trading platforms and all necessary equipment in 
order to conduct necessary activities and then to allow the 
revenue generated from that activity to be maintained by that 
Exchange.
    Verizon and Con Edison went to really inexhaustible efforts 
to provide material and electrical resources to ensure not only 
the systems were functional, but redundancy was there to ensure 
there will be no failure.
    New York Life's Foundation contributed $4 million to the 
relief fund at a time they were making extraordinary progress 
in paying off countless claims, and other insurance companies 
followed this practice.
    I point out these actions to my fellow Members because of 
my cautionary note against imposing additional rules or 
restrictions at the precise time when our capital markets are 
in dire need of expanded freedom to use their capacity to 
recuperate. Instead, perhaps we can make it our goal to show 
the same level of restraint within the public/private 
partnership that helped bring the markets back open.
    Sometimes the most meaningful contribution a Congress can 
make is simply to stand aside and let those in the market 
perform. I believe this is truly one of those times to support 
our President and the executive branch, allow them to use their 
authority and resources to stimulate the market and get America 
working.
    I certainly don't need to remind Chairman Pitt of the SEC 
along with protecting investors a secondary mission is 
promoting and facilitating capital formation. We know there has 
been much conversation in recent days about how to regain 
consumer investor confidence. To that end, at the appropriate 
time I would ask you, Mr. Pitt, and the staff to evaluate the 
concept of extraordinary incentives for investors to return to 
the market. Perhaps the elimination of any gains made on 
investments before year end, if the investment is held for some 
terminal period of time, 18 months perhaps, the idea being that 
that 20 percent net benefit would enure to the benefit of the 
broader market, bringing additional liquidity and capital to 
the marketplace. But whatever your staff determines is an 
advisable course of action, I certainly will stand supportive 
of any recommendation the agency chooses to make.
    With regard to the insurance industry's commendable 
response to these events, every report I have read indicates 
there is sufficient capital adequacy to meet the projected $70 
billion potential list of claims. While we are not here today 
to discuss potential legislative agenda, there has been much 
press about how the industry will react to the new underwriting 
environment, from opening the Fed discount window to making the 
Federal Government the insurer of last resort.
    I would like to offer a general observation in the context 
of future Federal responsibilities in such catastrophic events. 
As a general rule, I do not think the Federal Government should 
intercede to prop up a marketplace unless the President of the 
United States and in consultation with the Federal Reserve has 
determined that a failure in that marketplace would lead to a 
precedent event for a systemic risk result.
    In this case, in my capacity of the Chairman of the 
Oversight Committee, I would be extremely reluctant to look at 
a plan that puts the taxpayer on the hook for insured losses 
when there is no Federal office that exercises any real 
jurisdictional oversight with regard to the solvency of those 
enterprises.
    In other words, I would like to summarize by saying if you 
are going to throw your saddle on someone else's horse you 
can't really gripe where that horse may take you. We should 
exercise extraordinary caution in moving forward in this arena.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Richard H. Baker can be 
found on page 71 in the appendix.]
    Chairman Oxley. The Chair now recognizes the Ranking 
Member, the gentleman from Pennsylvania, Mr. Kanjorski.
    Mr. Kanjorski. Mr. Chairman, because I serve as the ranking 
Democratic Member on the Subcommittee on Capital Markets, which 
has jurisdiction over securities and insurance matters, I have 
great interest in today's hearing to examine the consequences 
to our Nation's financial services system as a result of the 
September 11 attacks on the World Trade Center and the 
Pentagon. In my view, our country cannot and shall not allow 
terrorists to alter the effective functioning of the U.S. 
securities and insurance markets, the strongest in the world.
    Our hearing today will consist of two panels. With our 
first panel, we will discuss the current state of our Nation's 
capital markets and the efforts of the Securities and Exchange 
Commission to facilitate the reopening of our exchanges. While 
our fixed-income markets successfully resumed trading just 2 
days after the terrorist attack, our equities and options 
exchanges experienced the longest shutdown since World War I. 
Nevertheless, the successful reopening of the stock markets 
last week and their subsequent rebound this week has 
demonstrated to everyone the resiliency and strength of our 
Nation's financial system.
    Our second panel will discuss the state of the insurance 
industry. Some experts have noted that the September 11 
disaster resulted in a clash event. That is, the insurance 
industry incurred multiple losses in different lines of 
coverage arising from the same underlying cause. Clash events 
are riskier for insurers as they give rise to claims from a 
variety of different customers under different types of 
policies in a scenario outside of normal assessments for 
aggregate exposure. Our second panel will help us to understand 
the magnitude of this clash event and its effects on the 
marketplace.
    Without question, the assaults of September 11 represent 
the costliest disaster in American history. Estimates of 
insured losses from these attacks presently range from $20 
billion to more than $70 billion. The U.S. insurance industry, 
however, is a large and dynamic marketplace, accounting for 2.4 
percent of our country's gross domestic product.
    Additionally, according to some analysts, the property 
casualty insurance sector already has approximately $300 
billion available to respond to this increased demand for 
claims. Moreover, at this time there are no indications that 
any major insurer is at risk of default. In the 15 days since 
the attack on the World Trade Center, we have received numerous 
assurances that the insurance industry will rise to meet the 
occasion and pay their claims. Many have also assured us that 
they will not attempt to invoke the acts of war exclusions 
contained in their policies.
    These public pledges by the industry's leaders are 
promising. I therefore hope and expect that the entire 
insurance marketplace will work in good faith and with due 
diligence to honor its obligations. In the long run, the 
American insurance industry will prosper if it follows this 
course.
    Mr. Chairman, I am also pleased that we worked together to 
invite a balanced set of witnesses to today's hearing. As a 
result, regulators, insurers, reinsurers and industry analysts 
will all have an opportunity to inform us about their concerns. 
Each witness will provide us with a valuable perspective in 
understanding the health of the financial services industry and 
the need for any changes in the public policy in the wake of 
September 11.
    In recent days I have heard and read about a variety of 
proposals to assist the insurance and securities industries in 
their efforts to respond to the collapse of the World Trade 
Center. From my perspective, we must move cautiously and 
methodically when considering any legislative proposal to 
assist these important sectors of our economy. These industries 
are complex and could experience unintended consequences if we 
move too hastily. To the extent possible, we must also consider 
allowing market discipline to respond to these events without 
Government intervention.
    Nevertheless, Mr. Chairman, we may ultimately determine 
that we need to provide the insurance industry with some 
flexibility in terms of meeting its capital requirements, 
increasing its liquidity, and providing terrorism reinsurance 
coverage. We may also need to take steps to modify our Nation's 
securities laws with respect to money laundering. If we decide 
to continue to pursue legislative reforms of the securities and 
insurance industries during the 107th Congress, I hope we will 
follow a prudent course and continue to act on a bipartisan 
basis.
    Mr. Chairman, thank you again for the opportunity to 
comment on these matters and for calling this hearing today.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 78 in the appendix.]
    Chairman Oxley.  The gentleman's time has expired.
    The Chair will now turn to our first witness, the 
distinguished Chairman of the Securities and Exchange 
Commission, Harvey Pitt. Again, Mr. Pitt, welcome to the 
committee for your first appearance; and we look forward to 
your testimony.

  STATEMENT OF HON. HARVEY L. PITT, CHAIRMAN, SECURITIES AND 
                      EXCHANGE COMMISSION

    Mr. Pitt. Thank you, Chairman Oxley.
    I appreciate the opportunity to be here, and I want to 
thank Chairman Oxley for these timely and important hearings 
and the enormous amount of support that you have provided to 
the Commission and to me personally.
    I would also like to thank Ranking Member LaFalce, who has 
been in frequent contact with us and has been of enormous 
support and encouragement.
    With respect to the oversight subcommittee, I would like to 
also express my thanks to Chairman Baker, who has been an 
effective partner for the SEC, and also to thank Mr. Kanjorski 
for his support as well.
    So this is, for me, the first appearance, and I regret that 
the subject matter of this appearance is something as tragic as 
the terrorist attacks. But I think it is important for this 
committee in its oversight functions to understand what the 
philosophy of the SEC is, how we intend to try to solve 
problems when they come up, and how we intend to work with you 
very closely to make sure you are always aware of what we are 
planning, what our reasons are, and what information we can 
share with you. We view our relationship as a partnership.
    The attacks of September 11, as we all know, caused 
irreparable loss of innocent life and untold physical damage. I 
cannot in any way, shape, or form minimize the impact of that. 
In fact, as I am sure is true of many, people whom I was close 
to were killed or are missing in the aftermath of that 
destructive effort, both on highjacked planes and in lost 
buildings. But, although we grieve for the lost friends and 
relatives, I think we can be proud that the Nation's 
extraordinary responses to these events demonstrate, among 
other things, that our capital markets are the world's 
strongest and most resilient.
    I think that the efforts that we went through reflect 
exceedingly well on our national character, and I hope it is 
not unseemly for me to say I am very proud to be an American. I 
am very proud to be in the Government at this particular 
moment, and I am proud of my heritage as a New Yorker, because 
I think New York responded with unquestionable alacrity and 
efficiency and competence.
    The attacks that arose on the 11th did not arise in a 
vacuum. So we at the SEC coordinated our efforts with the 
larger Federal Government of which we are a part, and we also 
worked cooperatively with the industry we oversee.
    We embraced two critical roles: first, to assist in 
implementing national policy and, second, to evaluate and 
facilitate the industry's planned responses, ensuring fidelity 
to the protection of investors and national interests. We 
sought to provide certainty to facilitate the reopening of fair 
and orderly markets and to restore public confidence. We 
reached out to major market participants to determine whether 
we could provide appropriate temporary regulatory relief. And 
for the first time, as has been noted, we invoked our emergency 
powers that this committee was instrumental in providing to the 
Commission; and we issued several orders and interpretive 
releases.
    We also provided relief from certain filing deadlines and 
issued guidance on how the market closures affect the 
application of certain Commission rules. We considered many 
things. One of the things, as Congressman LaFalce indicated, 
that we did not do was ban short selling, although it had been 
proposed to us and it was carefully considered. We did not do 
so because, in the final analysis, we thought that short 
selling has a legitimate place in market activities. It is used 
as a hedging device, and it can help make more efficient 
markets.
    We think that our rule regarding short selling--Rule 10A-1 
under the Securities and Exchange Act--prevents improper short 
selling to push a market downward. We considered that, in the 
history of this country going back even to the attack on Pearl 
Harbor and the Kennedy assassination, there has never been a 
ban on short selling; and, finally, we thought that when the 
markets reopened we wanted investors to be met with the same 
markets that they had seen before the catastrophe.
    Mr. Chairman, I am still in the middle of my remarks, and I 
don't want to use up my welcome here. If I can, I would go on 
with my statement, but if that is not acceptable I would be 
happy to answer questions.
    Chairman Oxley. No. Go ahead and finish your statement, and 
we will have plenty of time for questions.
    Mr. Pitt. One of the things we believe very strongly is 
that Government is and must be a service industry, so we made 
certain we would be accessible to investors and market 
participants. We set up telephone and Internet hotlines and 
placed additional information for investors and market 
participants on our website.
    Many of the things we did for investors we have done 
before, but for the first time in our history we established 
dedicated telephone lines for inquiries for market participants 
and for firms seeking additional relief. We received over 100 
calls every day last week, and we have found that reaching out 
to those who have to practice their trade in this industry has 
been a successful way of assisting investors. It is a device 
that we intend to use frequently in the future.
    The decision to reopen the markets was made by the private 
sector, the markets, and major market participants in 
consultation with the SEC. On Thursday, the 13th of September, 
the fixed-income markets and the futures markets successfully 
resumed trading; and on Monday, September 17, all U.S. 
securities markets resumed trading without incident.
    The markets did not give way to panic selling. They simply 
did what they do best. They assessed and responded to the 
crisis rationally, and the time that we took to allow the 
markets to regroup worked to the advantage of investors in this 
country.
    The measures that we adopted pursuant to our emergency 
authority will expire at the end of this week. Under Section 
12(K)(2) of the Exchange Act, we can impose emergency measures 
for 10 business days or 2 weeks. We are monitoring the markets 
closely, and we have solicited the input of market 
participants. We are considering whether we should take 
additional steps to ensure that our markets remain orderly, to 
remove regulatory restraints that, in light of current 
conditions, inappropriately slowed down the capital-raising 
process, and to further the program recently enacted by the 
Congress to assist distressed industries.
    One of the things that we are doing is trying to expedite 
the ability of airlines and insurance companies to reach our 
capital markets without any significant delay that would come 
from the normal operation of the regulatory process, and we 
have reached out to representatives of those industries to find 
out whether there are other things that the Commission can do 
to facilitate the ability of those industries to reach the 
markets with alacrity.
    I must say that one of the items on my personal agenda is 
to speed up and make more efficient the capital-raising process 
for all industries, but I think that, at this particular time, 
paying special attention to the airline and insurance 
industries makes sense and follows the examples set both by the 
Administration and the Congress.
    As you know, our Northeast Regional Office, which was at 7 
World Trade Center, was destroyed in the aftermath of the 
attacks. To our tremendous relief, every one of our employees 
has been accounted for and is safe.
    Like many affected businesses, however, we are in the 
process of rebuilding. The most important part of the 
rebuilding is to deal with the human issues that affect people 
who saw this destruction up close, who had to flee their 
business home, in a sense, and who were left homeless as a 
result of this destruction with no office to return to. I think 
we are doing a good job with our people. We have taken pains to 
assure everyone that the most important thing is their well-
being and secure feeling, as opposed to any particular item 
that they may have been working on.
    We have just signed a lease for new office space that will 
also be in the financial district, and we expect to be in our 
new offices by mid-October. In the interim, we are very 
grateful to the U.S. attorney's Office for the Eastern District 
of New York, which has made space available to our people.
    We have also brought our enforcement resources to bear in 
the wake of the September 11 attacks. Although any securities 
violation is minor in relation to the atrocities that were 
perpetrated, we, along with Federal and State authorities, must 
canvass all possible evidence to identify the perpetrators. 
Because of the extraordinary circumstances of the current 
situation, we made an exception to our longstanding policy on 
not commenting on investigations. We, along with other U.S. and 
international authorities, are providing all assistance 
requested of us and possible to the FBI as they track down 
those responsible for these heinous attacks; and we are working 
with foreign market regulators as well.
    The September 11 terrorist attacks also bring a new impetus 
to the Commission's and the securities industry's participation 
in the Government's anti-money laundering efforts. I am 
confident that the securities industry and the SROs stand as 
one with the Commission and our partners in Government, 
including Congress, in our firm resolve to deny criminals the 
use of the Nation's financial institutions, including broker 
dealers, to launder the proceeds of crime for profit, or for 
the furtherance of their criminal activities and especially 
terrorism.
    As the events of last week demonstrate, it is not possible 
to destroy our free markets. They are not located in any one 
building or city or place. They are an amalgamation of people 
and ideas and, above all else, freedom. They are emblematic of 
our great Nation. I think we can all be justifiably proud of 
our Government and market participants in the way they have 
performed in this crisis. These are extraordinary times, and 
all Americans have responded and performed extraordinarily.
    On behalf of the Commission, I appreciate this opportunity 
to submit our views on the state of the securities markets in 
the wake of the recent terrorist attacks; and I will be happy 
to try to respond to any questions that the committee may have.
    [The prepared statement of Hon. Harvey L. Pitt can be found 
on page 85 in the appendix.]
    Chairman Oxley. Thank you, Mr. Chairman; and, once again, 
our congratulations for a job well done.
    You and I both witnessed the markets performing very, very 
well last Monday in New York; and it was a gratifying feeling, 
I think for all of us, to understand the resiliency of that 
marketplace, which brings me to my first question. That is that 
some commentators suggested that the bombings brought to the 
surface what has been apparent for quite some time, namely the 
capital markets' overreliance on physical location in lower 
Manhattan. What can be done or should be done to ensure that no 
future attack on a physical location can disrupt the U.S. 
capital markets for several days?
    Mr. Pitt. One of the most important things that enabled the 
markets to get up to speed was the ability to replicate 
existing records and to do so quickly and to have alternate 
trading sites.
    There is no question that when the dust settles, both 
literally and figuratively, on this terrible incident that we 
intend to sit down with the securities industry to review the 
preparedness of the industry, which I think was remarkable in 
the face of these events, to satisfy all of us that there are 
alternative mechanisms and that vital institutions like the New 
York Stock Exchange and the Nasdaq market are protected. 
Because, far from just being private sector entities, they are 
of public utility and value and we have an obligation to make 
sure that they are protected. So we intend to review the state 
of preparedness of the industry.
    From what we saw, we thought all of the major firms had 
very good duplicative facilities. And the American Stock 
Exchange was able to move from a physical location that was 
made unusable for a time to a different physical location in a 
matter of days, both with respect to equities and with respect 
to options: their equities were moved to the New York Stock 
Exchange and their options were moved to the Philadelphia Stock 
Exchange. It gives me a great sense of comfort that the 
industry had the foresight to have appropriate duplicative 
facilities.
    But in the wake of this, I think we will owe you a much 
more detailed report, and we intend to sit down with the 
industry to make certain that the American investing public is 
satisfied that we have looked at the problem and have left it 
in a good position.
    Chairman Oxley. There have been some reports that there are 
still some telecommunications problems regarding some firms and 
the inability of some investors to access their brokers. Can 
you bring us up to speed as to where that is right now, 
particularly in regard to the firms?
    Mr. Pitt. There were some incidents, although our 
experience was that there was not an incredible amount of 
difficulties. The consumer assistance lines that we created 
enabled us to put investors in direct contact with their 
brokerage firms. If they could not reach their brokerage firms, 
we were quite successful in making certain that we put the 
investor in touch with the firm and the firm was then 
responsive.
    Chairman Oxley.  Indeed, the initial reports were that I 
think there were 19 of 32 firms located at the World Trade 
Center that were not heard from. Was that an initial report or 
was that the----
    Mr. Pitt. That was an initial report that Nasdaq put out. 
Of 32 firms in the World Trade Center, 19 initially had not 
made contact with Nasdaq, and there were concerns. By the time 
the markets opened on Monday, there were only a handful of 
firms that had decided not to open, but almost all had been 
heard from. And, as you had pointed out in your opening 
remarks, the ability to test the system on the Saturday before 
the opening of the markets on the 17th gave us great 
confidence, because Nasdaq and the New York Stock Exchange were 
able to make contact with their principal members and everyone 
who wanted to begin trading on the following Monday.
    Chairman Oxley. Thank you. The Chair's time has expired.
    The gentleman from New York, Mr. LaFalce.
    Mr. LaFalce. Thank you very much.
    Mr. Pitt, was there any authority that you didn't have that 
you wish you had? Is there any implicit authority that you feel 
you clearly have, but would prefer be explicit?
    Mr. Pitt. I think that we have been given some important 
tools that we had never used before. The Section 12(K)(2) 
emergency powers are a good example of that.
    I would suggest that it would be very useful to the 
Commission if we had the ability to extend our emergency relief 
beyond 10 business days. I recognize that an unlimited 
authority to change rules and to suspend any of our rules is 
inappropriate, just as a citizen I don't think Government 
agencies should be given that broad range of power. But I think 
that a more logical timeframe would be 30 business days, with 
the ability to extend beyond that if certain conditions were 
satisfied that Congress would specify. And we would be willing 
to work with this committee to develop appropriate legislation 
to that effect.
    I apologize for going on, but there is one other area where 
I think the SEC can use help. I am not in favor of wanton 
expansion of Government agencies, even in times of emergencies. 
However, I do believe we have to be prudent and be able to deal 
with all of the problems.
    The SEC, in my view, has two critical needs that money 
would be useful in solving.
    The first is that the SEC needs infinitely more economists 
than it presently has and economists of the highest caliber. It 
strikes me that the SEC is an agency that should have the best 
economists who can detect market trends and economic trends and 
be of assistance to this committee and the Congress as a whole 
as well as to investors.
    The second area is technology. I believe that the SEC has 
to be at the forefront of understanding the capabilities of 
modern technology. As it stands now, I believe that the SEC is 
behind the times and that it always trails the industry; and I 
think that is another place where authority would be helpful.
    Mr. LaFalce. I thank you very much for that response, 
because I have been advocating that since we assumed 
jurisdiction over the securities industry. The Customs 
Department has been advocating for years for what they call 
ACE, Automated Commercial Environment, but we are talking about 
a billion dollars or so to do that. And I couldn't agree with 
you more that you need the human resources such as the 
economists and the technological resources to see, for example, 
if certain activity was taking place on September 10 that you 
might have been able to detect. Do you have a dollar figure 
for--are you in the process of preparing some estimates of what 
your additional human resource and technological needs might 
be?
    Mr. Pitt. I don't have a number at the moment, and I want 
to stress that first I would like to see whether there are ways 
in which we can reduce our existing expenses. I think we have 
an obligation to use all of the resources we have been given 
and to use them efficiently.
    The second thing I would want to do would be to consult 
with people in the Office of Management and Budget. I believe 
that the Commission is an independent agency and ultimately it 
will be asked for its own view, but I also believe that the 
Commission is a part of Government and I would not want our 
agency to be advocating positions that were inconsistent with 
the national policy.
    Mr. LaFalce. Let me ask my last question. Explain to me 
Rule 10A that gives you the authority to prevent improper short 
selling. What would that be?
    Mr. Pitt.  Well, the rule basically is what is known as a 
``tick test'' rule. It was adopted in 1938, and it is largely 
still in the form in which it was initially conceived. It 
provides that exchange listed securities can only be sold short 
at a price above the price at which the immediately preceding 
sales were affected. That is sort of a plus tick. Or the last 
sale price, if it is higher than the last different price, that 
is a zero plus tick, and it prevent sales on minus ticks and 
zero minus ticks.
    Mr. LaFalce. Is that all it does? That is almost nothing 
then. I mean, I shouldn't say almost nothing, but----
    Mr. Pitt. I think it is not almost nothing. One of the 
things that we did was monitor the extent of short selling on 
the markets in the week that the markets reopened, and what we 
found was that the extent of short selling was slightly lower 
than it had been in the weeks preceding the terrorist attacks.
    Mr. LaFalce. Did you look at it in an industry-by-
industry--for example, the airline insurance?
    Mr. Pitt. We did have that data. I don't have it with me, 
but we looked at it from an overall market perspective and 
otherwise.
    Mr. LaFalce. I would like you to give me that data broken 
down with at least with respect to the airline and insurance 
industry.
    Mr. Pitt. I would be happy to supply that to the committee.
    [The information can be found on page 101 in the appendix.]
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. I want to welcome you, Mr. Pitt. I know this is 
your first formal committee hearing. I don't know if anyone 
could have possibly had the ability to forecast what was to 
follow after your appointment to this position, but I can 
certainly say that given your experience and knowledge of the 
SEC, your market experience, that the number of folks who could 
have stepped into this responsibility in light of the difficult 
circumstances to follow at least were very limited, and I am 
very pleased that we had your guidance and knowledge in this 
capacity during these difficult days and I thank you.
    Mr. Pitt. Thank you very much.
    Mr. Baker. And that is expressed by the fact that there was 
very careful and thorough analysis given with consultation in 
the industry with the reopening of the market. I think there 
was great anxiety, at least in my part, not what the market 
performance would result, but whether there would be a 
momentary glitch, thereby undermining what shaky consumer 
confidence exists. And the reasoned careful approach ensuring 
that the system would--I know employees were there over the 
weekend, even to the extent of putting people on the metro, 
making sure they could get in on the subway to get into work 
was an extraordinary level of effort, and for that I want to 
commend you.
    In our last conversation we were engaged in the relocation 
of some 330 new employees to new space. Has that proceeded as 
expected?
    Mr. Pitt.  It has. We signed a new lease this week. It is, 
I think, five or six blocks from where our old offices were, so 
it is still in the Financial District, which is what the 
employees in our New York office wanted. And I also think it is 
useful to show support for the Financial District in New York. 
So we hope to have the space completely configured and people 
actually working in it by mid-October.
    Mr. Baker. Should circumstances dictate--I know that no one 
can predict all the needs at this moment. We are not even sure 
what the needs are, but in your view, is there anything that is 
lacking in your ability to reconstruct, organize, make fully 
operational the agency's activities within the New York arena 
that this committee should address?
    Mr. Pitt.  I appreciate that question, because there has 
been some speculation in the press as to whether or not we 
would lose cases or other matters, and I would like to assure 
this committee that to the best of our knowledge, we will lose 
no significant case, investigation or examination. All of the 
items that we would have wanted to pursue, we will be able to 
pursue. The ability to replicate records in each of those areas 
differs. And one of the things that comes out of this event for 
us, before we turn to the industry, is to make sure that our 
own recordkeeping gives us all the comfort level that we are 
not in jeopardy of ever losing any particular matter.
    Mr. Baker. Well, I was of that opinion, but I thought it 
important for the public record for those affected by pending 
matters to know that business would proceed as expected. With 
regard to a whole array of issues, which are certainly 
appropriate for a review at some point, I would just like to 
request at a future time from the standpoint of the redundancy 
of operational systems, review of current form filings and what 
may be set aside in the current environment, which are done 
electronically without the necessity of paper filings today, 
which may be of great help, being aware of whatever investment 
recommendations that might be made from the agency's 
perspective to instill consumer confidence, a review and 
perhaps careful consideration of the employee safety--the 
structure itself, once fully operational, what are we going to 
do different today, tomorrow, that is different than today with 
regard to that issue from an agency perspective. I don't expect 
any immediate answer. I know you are engaged in frankly much 
more important work at the moment. I just wanted to leave open 
the record with future discussion with the agency on any and 
all matters that would assure consumers and, frankly, taxpayers 
that anything will be done to assure the sound and safe 
operations of markets. They are the strongest, deepest and most 
liquid markets in the world, and we will do everything to 
assure immediate recovery for our overall economic prosperity.
    Mr. Pitt.  Thank you, Congressman.
    Chairman Oxley. The gentleman from Pennsylvania.
    Mr. Kanjorski. I have not had an opportunity to 
congratulate you in your first several weeks in office in 
having met the challenges of this monumental task. You 
certainly make us proud that the commissions, bureaus and 
agencies of the Federal Government are manned by exceptional 
people.
    Mr. Pitt.  Thank you.
    Mr. Kanjorski. I was listening to some of your potential 
needs. Recently, the Congress enacted some legislation on the 
House side to reduce transactional fees and other income that 
could be used by the Securities and Exchange Commission for 
modernizing or updating or increasing staff of the economists 
that you mentioned. Would it be wise for us to reexamine that 
piece of legislation, which passed the House, to perhaps 
authorize the Commission to use some of these fees at its will 
to move without using the appropriations that fund the 
Commission on a regular basis?
    Mr. Pitt.  Well, the question you raise is very pertinent, 
and I can say speaking for the Commission that the Commission 
has supported the combined legislation, which provides for the 
reduction of transaction fees, because they effectively operate 
as an undeclared tax and, second, pay parity for our employees, 
which in the light of this tragedy becomes even more 
significant. I believe that legislation makes sense. I have 
often thought that if there were some way in which the 
Commission could be self-funding, but in which it was still 
required to comport with the national budget policy of the 
Administration, that would be ideal. But I am an advocate of 
reducing the transaction costs in the current legislation, and 
my strong hope would be that the Senate and the House, both of 
which have now passed legislation that I think is almost 
identical, could get together and enact that into law, and then 
we would be happy to work with the Administration and Congress 
to figure out ways in which the SEC could be put on a self-
funding basis.
    Mr. Kanjorski. Thank you. I do not like to sound ghoulish, 
but what would occur if we have a second terrorism attack? How 
prepared are the security markets to function properly, and 
what kind of impact do you see in a second similar or larger 
attack?
    Mr. Pitt.  I actually think that if, God forbid, there were 
another attack, all of us would perform even better than we did 
this time. Let me start by saying, if destruction is attempted, 
there is no way to predict how devastating that destruction can 
be. But the one thing that amazed me was that, as unaware as 
the entire industry and Government was about the onset of this 
attack, we responded quickly and we responded effectively and 
our markets came back up as strong as ever. In fact, the New 
York Stock Exchange had record volume on the first day it 
opened. We have learned a lot from that. And, in my view, we 
will do a better job in providing redundancy measures and 
applications so that we could get back up to speed.
    The most important aspect of the recovery effort has been 
human heart, and that resolve was strengthened, and I believe 
it will only grow stronger as a result.
    Mr. Kanjorski. Very good. I was just interested in whenever 
an event like this occurs, there are always those portions of a 
society that try to take advantage of the situation. There are 
possibilities that exist which operators within the market 
would take advantage of it. Now with more than 50 percent of 
the forces of the Justice Department and the FBI allocated to 
the terrorist examinations, in my opinion a proper allocation, 
new challenges arise. The effect could be that some of the 
prosecutorial talent will not proceed on other second 
priorities, such as criminal activity within the securities 
industry.
    Do you think it would be wise for us, exercising some 
authority for the President under national emergency 
provisions, to have a moratorium on the statute of limitations 
and institute a hiatus statute, so that pressure isn't there 
for a period of 6 months, a year, 2 years, at the will of a 
national executive in a national emergency?
    Mr. Pitt.  I think that is an interesting thought and one I 
had not considered, and it would be one, with your permission, 
I would like to reflect on before responding in a definitive 
way. But I think it would be worth considering the issue.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from New Jersey, Mrs. Roukema.
    Mrs. Roukema. I appreciate you speaking here today. And as 
a Member who represents a district who, in many districts, is a 
bedroom community for New York financial services, we have had 
a lot of loss in our district. But also speaking again on 
behalf of my constituents and the economy of our region, I am 
so grateful for the positive presentation you have made here 
today, and we are going to deal in a very realistic way with 
keeping the SEC operating and operating well.
    Mr. Pitt.  Thank you.
    Mrs. Roukema. But one of my concerns and it has been a 
concern of mine over the past year-and-a-half, having held 
hearings in my previous subcommittee on the subject of money 
laundering, we have had hearings and you have referenced the 
question of money laundering. I want to ask you to be more 
explicit in that regard, telling you that I have introduced, 
with Congressman LaFalce, the bulk cash smuggling bill, which I 
think will be moving ahead quickly. But more importantly than 
that is the more comprehensive question that integrates both 
financial services with the judiciary, and that is a 
comprehensive money laundering act.
    We haven't really looked, as far as I know, and haven't 
been looking on this for a long time, haven't looked at the SEC 
potential component of this. We have almost exclusively focused 
on the banks. By the way, you also mentioned with respect to 
working with foreign market regulators, and so it seems to me 
if we are going to really deal comprehensively with money 
laundering--and the Attorney General Ashcroft is also composing 
a bill--could you give us help on how we should integrate the 
SEC or the securities markets with respect to that, both 
domestic as well as the foreign markets?
    Mr. Pitt.  Yes. Any money laundering has now taken a front 
and center position, and perhaps it should have had that in the 
past, but it certainly has it now and appropriately so. We are 
working closely with the Treasury Department, and we are of the 
view, as is the Treasury, that there are sufficient differences 
between securities firms and banks that we have to come up with 
a program that is tailored to each one. And the principal 
difference in lay terms, as I gather it, is the banks involve 
initial acquisition of money to be laundered, but the 
securities firms involve the subsequent placement. So some of 
the procedures that work for banks would not make sense in the 
securities industry.
    I am pleased to say that there is an enormous degree of 
voluntary activity on the part of the securities industry to 
deal with these issues, and we are working with the Treasury 
now to make certain that the securities industry is as covered 
as the banking industry.
    Mrs. Roukema. Well, I am glad to hear that, but at the same 
time it is my understanding that the Administration through the 
Attorney General will be presenting a piece of legislation in 
the very near future, if, in fact, it isn't going to be 
presented this week. But Treasury, Attorney General, the 
Justice Department, I would hope would be working together with 
you in that regard, and certainly I would like to be in close 
communication with you as to how our own piece of legislation 
can be adjusted and modified appropriately.
    Mr. Pitt.  I would welcome that communication, and we are 
working closely with all of those agencies at the moment. One 
of the things that we have stressed is cooperation with other 
branches of the Government.
    Mr. Roukema. Thank you very much. I appreciate that, and we 
can't leave this loophole out of the bill. Thank you.
    Chairman Oxley. Gentlelady's time has expired.
    The gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. I also want to express my praise to the SEC. 
I had recently visited your employees at 7 World Trade Center 
after the passage of the SEC--the individual investors or 
reduction fee that also included a portion that raised parity 
payment for the employees with other financial institutions, 
and they were very appreciative of the work of the committee.
    But Mr. Pitt, you, working along with Dick Grasso at the 
New York Stock Exchange, Wick Simmons at Nasdaq, the ECNs and 
the entire investment community, the SEC provided the industry 
with the regulatory flexibility needed to reopen the markets as 
quickly as possible.
    I was personally at the reopening of the New York 
Mercantile Exchange and I believe it was symbolic of the 
efforts taking place on Wall Street. The staff and senior 
executives had worked around the clock to reopen. There were 
interruptions in power supplies and terrible logistics. They 
could not even get to the Exchange. They had to bring their own 
employees by boat, because of the debris and not to mention the 
great grieving that many in the industry feel, having lost so 
many of their colleagues.
    I can tell you that during this crisis--every day was a 
crisis, and the day before the markets opened a lot of us 
couldn't sleep. We were really concerned about what would 
happen. I truly believe that buying stocks is a patriotic act. 
We had Liberty Bonds in World War I, War Bonds in World War II. 
And I think in the terrorist war we have stocks. And many, many 
Americans went out and did just the opposite of what the 
terrorists wanted, they invested in the American economy and I 
believe they are great patriots. I just want to mention that 
one of my industries that I represent, Metropolitan Life, their 
Chairman, Mr. Benmosche, who is here with us, they went out and 
invested $1 billion last Friday during the market's worst week, 
and I feel that is a great patriotic statement. And many of my 
colleagues here in Congress and the people that I have the 
honor of representing are doing the same. Many Members of 
Congress are going to the site this coming Monday and they 
expressed what they wanted to do was to buy stocks to also show 
their support.
    In your testimony, you stated--although I didn't see it in 
the written testimony--that you made a conscious decision not 
to invoke Section 10(a) that would ban the selling of short 
stocks, that you wanted investors to see the same market that 
they saw before it closed. And in New York, there were many 
reports on this. It was on the radio, television--really a 
call, a patriotic call not to sell short, not to sell airlines, 
not to sell tourism. And it was reported that there was a 
gentlemen's agreement among hedge funds and others not to sell 
short. And there were other rumors that many companies and 
individuals had come forward and pledged to do the opposite. I 
know our State Controller, Carl McCall, said he would do the 
opposite, and there was a huge effort not to sell short. And I 
believe in free markets, but I would like you to comment 
further.
    Was there this huge effort that was reported to appeal to 
Americans not to sell short? Was this gentlemen's agreement 
honored? Could you expand in that area, because there was 
concern that there would be tremendous short selling in this 
particular crisis that would have been problematic?
    Mr. Pitt.  I don't believe there was a gentlemen's or 
ladies' agreement not to engage in short selling. I think that 
many institutions gave careful consideration to the impact of 
their own trading. All of those institutions have a variety of 
obligations and they received, I thought, very good advice in 
terms of their ability to restrain themselves in engaging in 
short selling. So I think people were aware of the issue. I 
don't know that there was any agreement. We certainly, in the 
many hours before the markets opened, spoke to many 
institutional investors and others to make certain that we were 
in touch with them, that we could answer any questions they 
have. And they understood the importance of the markets opening 
as normally as possible.
    In my view, notwithstanding the calls for banning short 
selling, I think that our restraint and allowing our existing 
rules to take care of that preserved two things. One, it did 
exactly the right thing for investor confidence and, second, it 
preserved a free and competitive market and an open market. So 
my own view was that that was the right decision. I will say 
that the Commission spent a good deal of time exploring that 
particular question before we reached a conclusion on it.
    Chairman Oxley. Gentlelady's time has expired.
    The gentleman from Alabama, Mr. Bachus.
    Mr. Bachus. I want to first congratulate the way SEC has 
handled the financial crisis that has faced the Nation. Having 
said that, you are aware that the Administration has just begun 
a well publicized assault on the financial resources, and I 
would suppose that the SEC is a part of that effort.
    Mr. Pitt.  We are.
    Mr. Bachus. Knowing that, are you aware that terrorism and 
slaughter in Sudan, which has actually led to the loss of over 
2 million innocent men, women and children, that is funded by 
United States venture capital for oil exploration and 
development?
    Mr. Pitt.  Congressman, I am aware that there are 
atrocities being committed in Sudan that I think are 
reprehensible. As to the role of venture capital in American 
enterprise, I have to say that I have seen some reports 
regarding that, but I don't have any firsthand direct knowledge 
of it.
    Mr. Bachus. You don't dispute the fact that the oil is 
funding the war and the war is resulting in people getting 
killed. And when I say war, it is a one-sided war. You are 
aware of that?
    Mr. Pitt.  Again, I am aware of the concerns that have been 
expressed, and I think that they are legitimate concerns. I do 
not have, I think, as much information at my disposal as I 
believe you do. So I have no reason to disagree with you. It is 
just that I am not personally familiar with it.
    Mr. Bachus. I accept that. I wanted to leave with you and 
submit for the record an article, June 11 article, in The 
Washington Post entitled ``Oil Money Is Fueling Sudan's War: 
New Arms Used to Drive Southerners From the Land.'' I would 
like to supply you also with a copy of that so you will be more 
aware of that.
    Chairman Oxley. Without objection.
    [The information can be found on page 69 in the appendix.]
    Mr. Bachus. Let me turn to a totally different subject. To 
me, it seems to be clear that the U.S. domestic reinsurance 
industry will bear the brunt of some pretty extraordinary 
losses. You would agree, I suppose?
    Mr. Pitt.  I do.
    Mr. Bachus. It appears to me that they are very strong and 
well capitalized. The top 50 U.S. reinsurers have over $53 
billion in surpluses. In addition, they have affiliations with 
major companies such as Berkshire Hathaway and General 
Electric, which can provide additional capital if necessary. Do 
you believe that they are up to the crisis?
    Mr. Pitt.  Congressman, I believe from everything I know 
that they are up to the crisis and committed to dealing with 
it. I also believe that this is an extraordinary event. No one 
could have anticipated this, and it is up to all of us to make 
certain that the burdens of resolving these problems do not 
fall disproportionately on the shoulders of any one industry. 
And that is one of the reasons why in our own way we want to 
facilitate more instantaneous access to the capital markets by 
insurance companies and do what we can to make this an easier 
process.
    Mr. Bachus. Do you think that the U.S. domestic reinsurance 
market has the strength and financial human capital to meet its 
obligations to its customers, enabling them in turn to meet 
their direct obligations to the individuals and businesses that 
were victims of the September 11 attack?
    Mr. Pitt.  Congressman, I don't have any reason to doubt 
their ability. But I think on the next panel you will have some 
very knowledgeable representatives of the industry, and I think 
it would be more appropriate for me to defer to their 
statements about their abilities than to surmise for myself 
what I think they are capable of doing.
    Mr. Bachus. Thank you. I will close simply by saying, Mr. 
Chairman, I look forward to hearing from Ron Ferguson on the 
state of our reinsurance market. In times of great crisis, I 
think we can all be grateful for the critical role played by 
reinsurance in protecting the solvency of the insurance 
marketplace and in ensuring that the primary insurance is 
available to customers, small businesses and commercial 
property owners. Thank you.
    Chairman Oxley. Gentleman's time has expired.
    The gentleman from Texas, Mr. Bentsen.
    Mr. Bentsen. I want to join with my colleagues, you and 
your staff and your fellow commissioners have done an 
extraordinary job in this extraordinary event. This is I guess 
as big as 1929 or 1987, and it must be interesting for you 
having just become Chairman about 30 days ago.
    Mr. Pitt.  Well, thank you. I do have to say that the 
notion of on the job training is overrated.
    Mr. Bentsen. Last week, the market lost 13 or 14 percent of 
its value and some of that is to be expected. One of the 
reasons for the sells--at least it was reported--was because 
there were a number of investors, including some rather large 
investors, that had margin calls and were having to call to 
raise cash. Is that a problem you think we are going to see 
going forward in this market and is it something that should 
raise concerns about the margin lending system? And I know you 
have some responsibility and the Fed has some responsibility 
over that.
    Mr. Pitt.  It really is something that needs to be 
monitored, and you are right. We share authority with the Fed. 
The Fed sets the policy, and we help implement it. And my view 
is that the Fed is in incredibly capable hands, and they are, 
along with our staff, doing a good job of monitoring the 
situation and making sure that investors are not unduly 
burdened, but that our economy and the market safety issues are 
preserved.
    Mr. Bentsen. In your testimony, you said you eased some of 
the regulations--I think this is right--for firms with their 
net capital requirement rule of reporting. Have you detected as 
a result of this any firms that are having trouble meeting 
their net capital requirements and is this something we need to 
be concerned about?
    Mr. Pitt.  No, we have not. But that doesn't mean it isn't 
something we shouldn't be concerned about. We are spending a 
very large amount of time making certain that we are in contact 
with firms and that we have a good understanding of what their 
situations are, and the self-regulatory bodies are even more on 
the scene than that. So the one thing I can tell you is I don't 
think it is a problem. I don't believe it will become a 
problem, but I am confident if there were any movement in that 
direction we would be able to deal with it instantly.
    Mr. Bentsen. Regulation Fair Disclosure has been 
controversial and been debated in this committee and I think it 
is a good reg. But given the huge chaos in the markets after 
September 11, it is not something you stated in your testimony, 
but is that something you all are perhaps granting some leeway, 
or is the position the same post-September 11 as it was pre-
September 11?
    Mr. Pitt.  We are reaching out to affected companies as 
well as representative groups like the National Investor 
Relations Group and attempting to ascertain how the rule is 
working in actuality. I testified at my confirmation hearings 
the underlying concept that no one should have an unfair 
advantage is unassailable. That part is correct. The issue, 
however, as you allude to, is whether in operation the rule is 
having untoward effects. And in connection with the events of 
September 11, the concern would be to make certain that the 
rule doesn't contribute to market volatility. We are looking at 
those issues and trying to monitor it so that we can come up 
with empirically based data.
    Mr. Bentsen. If I might quickly ask, the Chairman alluded 
to the fact of the other regional exchanges around here, and 
how the market operates when you have a crisis like this when 
New York and Nasdaq were affected and some of its member 
companies. And we have the Cincinnati Exchange, and others are 
out there. Is the Commission going forward at how best to 
structure our exchanges so that markets can operate through 
this? And to that end, you know, I realize that Nasdaq has had 
proposals that it wants to expand and change its format. There 
are some controversies around that, or some questions around 
that from other participants in the market. But do the events 
of September 11 and its effect on the markets affect your 
viewpoint toward the future of the markets and how you are 
going to address these?
    Mr. Pitt.  I would have to say it absolutely affects my 
view. September 11 affects my view of almost every issue, 
including personal issues. The structure, or the potential 
structure of the markets is a very serious issue and one that I 
had intended to put at the very top of the Commission's list of 
priorities upon assuming the chairmanship. I think we have to 
recognize that we have conflicting goals. One is to promote 
competition and free and open marketplaces; another is to 
provide opportunities to investors to get the best execution 
and the best prices that may be available to them in the 
market, which means that the SEC should be playing a role with 
the entire industry to come up with a structure that meets 
those goals. And we will do that and hopefully do it soon. But 
I think at the moment we are focused on some more immediate 
questions. But there is no question that I agree with your 
concern in that area and that we intend to move on it.
    Chairman Oxley. The Chair would announce that, because of 
some severe scheduling problems for the panelists on the second 
panel, the insurance panel, the Chair would like to limit the 
questions to 2 minutes for each Member. I apologize for that, 
but we do have some issues with the Jewish holiday that we have 
to deal with and we would ask the cooperation of the Members 
that we ask questions for 2 minutes to the SEC Chairman and 
then we can proceed to the second panel.
    Under that constriction, I recognize the gentleman from 
California, Mr. Royce.
    Mr. Royce. I want to commend you, Chairman Pitt, and the 
Securities and Exchange Commission and the industry. You have 
done an admirable job in the face of this horrendous tragedy. 
And my question--I am for unencumbered markets, but my question 
goes only to those who had prior knowledge of this attack. We 
have been reading and listening to press accounts that describe 
a plot by some terrorists and their associates to manipulate 
our capital markets to fund and profit from their terrorist 
activities. And in particular, it is my understanding that some 
of the associates of the terrorists have been short selling or 
purchasing put options on stocks of companies that they felt 
would be most affected by these terrorists attacks. And two of 
the examples that have been given are American and United 
Airlines, where they allegedly made millions. And I understand 
you may not be able to speak to this issue because of the 
ongoing investigation; however, I think all Americans would 
like to better understand how these types of transactions work 
and what authority the Security and Exchange Commission has to 
monitor them, and to that end would you explain how short sales 
and put options work and information that the Commission 
normally obtains in connection with these activities might help 
to track down those people associated with acts where they may 
have had prior knowledge.
    And, second, with regard to transactions initiated outside 
of the United States in foreign countries, I would like to know 
if the Commission is obtaining all of the information it needs 
from foreign regulators to track down this activity and what 
are the legal obligations of foreign authorities to cooperate 
with the SEC in such cases, and does the Commission need 
enhanced authority to pursue any of this information to catch 
the cowards that planned and profited off of this attack?
    Thank you, Mr. Chairman.
    Mr. Pitt.  The way in which trading operates on short sales 
is somebody either sells a security that they don't own, or, if 
they own it, that they are not going to use, and they borrow 
securities to complete the transaction. Their hope is at a 
later point in time they will be able to buy the necessary 
securities to cover the borrowing at a price lower than the 
price at which they sold it. So it is an assumption in these 
situations that the market will go down. Put options involve, 
in effect, the future ability to put certain securities to the 
other side of the transaction--the purchaser--at a specified 
price. The options markets are fairly standardized, certainly 
on the exchanges. And there are dollar amounts and expiration 
periods. So mostly every quarter, you have the expiration of 
puts that have been sold. And one of the most tell-tale 
examples of potential illegal trading is when somebody buys a 
security--such as an option that is out of the money--that 
looks like it never could possibly reach where it is and then 
suddenly it hits.
    The rumors and reports that you have referred to are things 
that we have been aware of and we have been aware of them from 
several sources, including a number of the regional exchanges 
who called us and spotted excessive volume that seemed abnormal 
to them and referred it to us. We have very good market 
surveillance techniques. The people who purchase any of these 
securities in our markets can run, but they cannot hide. We 
will find whoever the purchasers are. The issues really relate 
to who the ultimate purchaser is or seller of a security, 
because people can use nominees and foreign entities and so on. 
But we get the information. And, once we do, we try to track it 
down, not only using our own abilities, but we have agreements 
with most of the major foreign countries. Many of those are 
referred to as memoranda of understanding in which we agree to 
mutually assist one another. And indeed, Congress passed 
legislation a number of years ago that enables the SEC to 
conduct an investigation at the behest of a foreign securities 
regulator even though there is no SEC interest.
    So there is an enormous amount of authority there, and I do 
want to assure you that we are not the least bit shy of 
exercising every bit of it to find anyone who is responsible 
for this conduct.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from Oregon, Ms. Hooley.
    Ms. Hooley. Most of the questions I had were asked or 
answered in your testimony. I want to thank you and the 
Commission for the incredible job that you have done.
    Mr. Pitt.  Thank you very much.
    Chairman Oxley. I thank the gentlelady for her courtesy and 
understanding.
    The Chair recognizes the gentlelady from New York. And I 
understand it is her birthday. Happy birthday.
    Mrs. Kelly. Thank you, Mr. Chairman. Thank you very much, 
Mr. Pitt, for appearing. I just want to be brief and focus on 
one thing that I am concerned about.
    Insurance companies invest the monies that they have in 
various ways. There are insurance companies who are invested 
with billions of dollars in municipal bonds, and I am concerned 
about whether or not it will have an effect on the economy if 
these insurance companies start selling off the municipal bonds 
that they owned in order to pay the necessary claims. And I 
wonder if you would address that and answer whether or not you 
think anything needs to be done in order to forestall this 
potential problem.
    Mr. Pitt.  Your analysis of the situation is correct. 
Because of the large amounts of holdings of both equities and 
bonds of insurance companies, if they are forced to sell off 
securities, that could have a distinctly negative impact. Most 
of the insurance companies have well diversified portfolios and 
they have prepared for the eventuality of having large claims, 
although nobody could have forseen this.
    Again, I think that the representatives on the next panel 
will be able to tell you whether they need additional 
resources, although I have read and seen certain suggestions 
that anything that would prevent the large sale--selling of 
securities might be desirable. But I think I would leave that 
question to the next panel.
    Mrs. Kelly. Thank you. And Mr. Pitt, as a New Yorker, I 
thank you very much for everything you have done to help us get 
our markets back in order. It was wonderful to stand with 
Chairman Oxley on September 17 with Richard Grasso and Wick 
Simmons and people from all over the markets standing there 
ending the markets that day. Anyone who wanted to trade could 
trade on September 17, and that is a remarkable resiliency and 
we thank you very much for your part in that.
    Mr. Pitt.  Thank you.
    Chairman Oxley. The gentlelady's time has expired.
    The gentleman from Texas, Mr. Sandlin.
    Mr. Sandlin. My questions revolve around selling short in 
the securities firms, and I think you have answered those and 
we appreciate those answers. I want to be clear on the issue of 
puts and make sure I understood what you said.
    Do you have the ability to and do you intend to track every 
single person and/or entity that had a put, particularly as it 
involves the airline industry?
    Mr. Pitt. With any trades that take place in our markets, 
we have the ability to track down who the immediate purchasers 
or sellers were through our blue sheet processing. That is not 
the end of the inquiry, however, as I was trying to indicate, 
because I might be listed as a seller of a security, but, in 
fact, I might have been acting for somebody else. So we have to 
go beyond that. And, once you get past the immediate purchaser 
or seller, that requires far more detailed investigative 
techniques.
    Mr. Sandlin. I guess my question is this. I know it is a 
big job and I know you clearly have the ability, but will you 
and do you intend to take every single transaction that 
involved a put and put in that effort and dedicate the 
resources and time to trace that transaction regardless of the 
time or effort that it takes to do that?
    Mr. Pitt.  In a technical sense, I suppose the answer to 
you is yes. In a practical sense, it is not necessarily the 
case that we would track down every single transaction. We 
would look at them and try to use the resources available 
efficiently. But the answer certainly is that with enough time 
and enough resources, we could track down the purchasers of the 
securities.
    Chairman Oxley. The gentleman's time has expired.
    The gentlelady from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you, 
Chairman Pitt, for being here. This morning in the Wall Street 
Journal there was an article called ``Under the Rubble'' that 
said the New York Mercantile Exchange is inaccessible but safe, 
and also mentions certificates on securities. And I would like 
to know if any of the securities transactions depended on, or 
are dependent upon, such certificates and, if so, are there 
plans to eliminate this kind of antiquated practice now?
    Mr. Pitt.  I read the article with interest, Congresswoman. 
And I guess I would say the following: About 95 percent of all 
securities transactions are done without certificates. They are 
done electronically. But there are some people who like the 
feel of a stock certificate; and, although there has been an 
enormous amount of pressure to eliminate all stock certificates 
so that the entire system is basically recoverable through 
computers and so on, it has been a somewhat slow process. If 
you compare it to the checking system, which is 100 percent 
done through book entries, that is a goal we aspire to. Part of 
it is educating people that they don't have to have the actual 
certificate in their possession. It is a cultural issue and we 
are trying to be sensitive to it as we move toward a completely 
book entry system.
    Mrs. Biggert. Thank you. Thank you, Mr. Chairman.
    Chairman Oxley. Thank the gentlelady.
    The gentleman from Kansas, Mr. Moore.
    Mr. Moore. Thank you, Mr. Chairman. I want to join my 
colleagues in congratulating you on the good job you have done 
in handling this crisis, Chairman Pitt, and other Members of 
this committee have already asked my questions, so I yield back 
my time, Mr. Chairman.
    Chairman Oxley. I thank the gentleman.
    The gentleman from New York, Mr. Grucci.
    Mr. Grucci. Thank you, Mr. Chairman, and thank you for 
bringing us together at this hearing. It has been very 
enlightening so far. Chairman Pitt, in our desire to try to be 
helpful in wanting to figure out all the ways we can do so, 
there has been some discussion among some Members about 
reverting back to what was done during World War II, which is 
to float bonds. At that time it was War Bonds, but perhaps 
something similar to that, not just to fund the war on 
terrorism, but to also help fund the reconstruction and the 
rebirth of not only the Pentagon, but of Lower Manhattan. It 
has always been my understanding when you buy bonds, you take 
money from the market to do so. And if so, would that be the 
wise thing to do at this point in time? And could you enlighten 
me on what your position would be on bonds versus allowing 
moneys to flow into the marketplace?
    Mr. Pitt.  Well, I would say the following, sir. I think 
that in a time like this there are two important aspects. One 
is what you do substantively, and the other is how you appear 
as a practical matter to people. I support rebuilding New York 
and its infrastructure. I think that it is very important that 
these projects be undertaken, because they will stimulate our 
economy and they will also provide the best defense spiritually 
against terrorism. As to whether the Government should be 
issuing bonds to pay for it or not or whether it can happen 
from the private sector, I think that is a more difficult 
question. In the first instance, I am always reluctant to see 
the Government intercede. But, if those responsible for this 
national policy in the Treasury and to some extent the Fed 
believe that the Government should step in as well, then I 
think obviously that would be a very good thing. I guess it is 
not my province to figure out national policy as to whether or 
not we should use bonds. I would say though--from my personal 
opinion, not as an SEC opinion--that, to me, the most important 
thing is to get these projects underway and preferably as much 
of it in the private sector as is possible.
    Chairman Oxley. The gentleman's time has expired.
    The gentleman from Kentucky, Mr. Lucas.
    Mr. Lucas. Mr. Chairman, we have got a lot of financial 
industry leaders here today and with busy schedules, so I am 
going to pass to another day.
    Chairman Oxley. You get a gold star.
    The gentleman from Florida, Mr. Weldon.
    Mr. Weldon. Mr. Chairman, I would like a gold star as well. 
I am also really quite interested in the reinsurance issues. I 
am interested to get to that part of the program.
    Chairman Oxley. Thank you.
    The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. I want to ask one 
question. But prior to that I want to commend you also, as my 
colleagues, you and your SEC staff, for your excellent work 
during these difficult times.
    Mr. Pitt.  Thank you.
    Mr. Hinojosa. My question is, following the attack you 
issued a rule temporarily relaxing SEC regulations governing 
companies' ability to buy back their own shares. Do you have an 
idea of the extent to which companies took advantage of this 
rule and repurchased shares of their own stock and what role 
you believe this practice may have played in stabilizing the 
financial markets?
    Mr. Pitt.  Yes. We have been tracking that. And there was a 
decided upsurge in the amount of repurchasing, first in the 
number of plans that were announced and then second in the 
actual repurchasing activities. Companies felt comfortable. One 
of the things we had to do is give accounting relief, which had 
never been done before as well, so that companies that did 
repurchase were not subject to adverse accounting consequences 
in connection with their acquisitions.
    So I believe there was a discernible and significant 
increase. I think the ability of companies to repurchase, and 
the willingness of the Government to allow that, had a very 
positive effect on peoples' attitudes toward the market. They 
realized that there would not be as emotional a reaction in the 
marketplace as one might expect. So I believe it was a very 
successful effort, and that is why we have continued it and may 
indeed continue it further.
    Mr. Hinojosa. Good work.
    Chairman Oxley. Gentleman's time has expired.
    The gentleman from California, Mr. Ose.
    Mr. Ose. Thank you, Mr. Chairman.
    Mr. Pitt, if I may, you indicated some difficulty in 
tracking down who the ultimate beneficiary is of selling these 
put contracts and the like, beyond which you are also 
confronted with the problem of identifying who the ultimate 
beneficiary might have been in whole or in part. I just want to 
reinforce what I am sure the rest of the Members of this 
committee and this Congress otherwise feel, and that is that if 
there are people who have perpetrated these acts and profited 
from them, there is not anything you could ask from us that we 
would deny you to identify who those people are. And we would 
even go into the SEC fees that you all collect that we had a 
long debate about earlier this session to fund that 
examination. But I just want to make sure you understand that, 
which I think you do, given the tenor of your comments earlier, 
and I wanted to reinforce that.
    Mr. Pitt.  Thank you. I want to reassure you that we will 
use every effort and tool at our disposal in order to bring the 
responsible parties to justice. This is our number one 
priority, and to the extent that there was any connection 
between the terrorists and market trading, we will do 
everything within our power to track those people down and 
bring them to justice.
    Chairman Oxley. Gentleman's time has expired.
    The gentlelady from California, Ms. Waters.
    Ms. Waters. Thank you very much. I would like to thank you 
for appearing here today and we do appreciate your work. I 
would like to just draw your attention to some of what Mr. 
Bachus said today. I think it is very important. And I also 
think that what the President did recently in his executive 
order freezing the assets of individuals who are associated 
with terrorism groups, nongovernment organizations and even 
leveraging with some countries that may be harboring terrorists 
by freezing their assets if they don't cooperate with us, and I 
like that. I like this war that is being waged in the financial 
community on these terrorists and these activities. I have long 
believed that we need to take these kinds of actions as it 
relates to brutal dictators who send their money to our banks 
and whose bloodied money finds its way into the capital 
markets.
    So whether it is terrorists, brutal dictators or drug 
traffickers, we have to do a better job. Everybody is saying we 
must see the world differently now, and I certainly hope we 
will get some leadership in doing that. Do you have any role in 
the implementation of the President's executive order dealing 
with the freezing of assets and the identification of assets?
    Mr. Pitt.  We are completely committed to the policies that 
the President has articulated, and one of the things that we 
have done is to touch base with the Administration upon the 
issuance of that to make certain that in every way possible we 
are supportive of national policy in that regard. So I would 
like you to feel comfortable that we consider ourselves part of 
one Government, and we intend to do everything we can to 
buttress the President's policies.
    Chairman Oxley. Gentlelady's time has expired.
    The gentleman from New Jersey, Mr. Ferguson.
    Mr. Ferguson. I appreciate the fact you are here and your 
leadership. We in New Jersey, our families and companies, have 
been devastated by this situation and are trying to get back on 
our feet emotionally, physically and financially, and your 
leadership in making sure our markets remain strong and sure is 
vital to that. And I know I speak for people across my district 
and New Jersey when we thank you for your leadership and your 
strong stewardship.
    In the interest of time, Mr. Chairman, I yield back.
    Chairman Oxley. Thank you, gentleman.
    Gentlelady from Indiana.
    Ms. Carson. My constituents have reported to me about Osama 
bin Laden's brother in Boston who has humongous resources, 
property and structures. Without intruding on any area of 
secrecy, is there some way to discern whether or not any of 
those resources actually were filtered in by the terrorists or 
his brother or may possibly be used for further attacks on this 
country?
    Mr. Pitt.  From the SEC's point of view, the answer is yes, 
if those assets were used in any illegal conduct. There are 
agencies of Government that start with the money and trace 
where it went. We look at the securities markets and trace it 
back to the money. Between us and the other agencies we cover 
100 percent of the waterfront.
    Chairman Oxley. I thank the gentlelady.
    Mr. Chairman, we appreciate your testimony today in your 
first appearance before our committee, obviously not the last, 
and look forward to a long and fruitful relationship with you 
and the rest of the SEC and your very capable staff. I know 
this is a very difficult time to have your maiden appearance 
before the committee, but obviously your reassuring words I 
think are very, very helpful for the committee as well as the 
Nation, and I thank you for your service.
    Mr. Pitt.  Thank you for having me, and I assure you of our 
complete cooperation on all of these issues.
    Chairman Oxley. The Chair knows that some Members may have 
some additional questions for this witness. If anyone wishes to 
submit in writing, without objection the hearing record will 
remain open for 30 days, to place their responses in the 
record. So ordered.
    We now would like to call up our second panel, the 
insurance panel. While we are impaneling the next panel, I know 
that we have two Members wishing to recognize a particular 
witness and introduce them, and let me turn now to the 
gentlelady from New York, Mrs. Maloney, for presentation of a 
couple of witnesses.
    Mrs. Maloney. Thank you, Mr. Chairman, for granting me a 
point of personal privilege to welcome the leaders of two major 
insurance companies based in the district that I represent, Mr. 
Sy Sternberg of New York Life and Robert Benmosche of MetLife. 
They have both been working incredibly hard in displaying great 
leadership in this crisis.
    Mr. Sternberg is Chair of the ACLI, who sent out a notice 
to all of the member organizations right after the crisis, 
after the tragedy, calling upon all of the companies to pay 
their claims quickly and thoroughly. I can't tell you how 
important this is. After the crisis, there were grief centers 
with the organizations and businesses opened up to gather with 
their employees. And the day after the crisis, there were many 
questions about the industry invoking the act of war for 
exclusions. In fact, one company had been told by their 
insurance company that they would invoke the act of war and not 
pay their claims. They have since rescinded. So this statement 
in support of paying the claims is very, very important, and 
the industry has followed.
    One of my companies lost 700 people, many of whom lived in 
the district that I represent. One of their CEOs called me 
before this hearing to say that both of you are absolute 
angels. And he spoke of his insurer, MetLife. He called Mr. 
Robert Benmosche a great man, because some of his employees had 
not opted to renew their group insurance, yet MetLife is 
honoring their insurance. Thank you very much.
    Another friend and colleague, very briefly, is the New York 
State Insurance Department, Greg Serio. We will hear from him 
how his office is helping process claims.
    And I have to close by saying that our former 
Superintendent, Neal Levin, is among the missing. He is 
currently the Chair of the Port Authority and he did a 
brilliant job prior to Greg Serio as the State Insurance 
Department Superintendent, and we remember him and everyone 
else who is lost or missing.
    Thank you, Mr. Chairman.
    Chairman Oxley. The gentleman from Kansas.
    Mr. Moore. Thank you, Mr. Chairman.
    I have the honor of introducing this morning our Kansas 
Insurance Commissioner, Kathleen Sebelius. Ms. Sebelius was 
elected in 1994 and, I believe, is in her second term as 
Insurance Commissioner of Kansas and is presently President of 
the National Association of Insurance commissioners. I am very, 
very proud of her and glad to have her with us this morning.
    Thank you, Mr. Chairman.
    Chairman Oxley. I thank the gentleman.
    Let me recognize, then, our panel today: The Honorable 
Gregory V. Serio, Superintendent of the New York Insurance 
Department; the Honorable Kathleen Sebelius, Commissioner of 
the Kansas Department of Insurance and President of the 
National Association of Insurance Commissioners, speaking on 
behalf of the National Association of Insurance Commissioners; 
Mr. Sy Sternberg, the Chairman, President and CEO of New York 
Life Insurance Company; Mr. Robert H. Benmosche, Chairman and 
CEO of MetLife, Inc.; Mr. Dean O'Hare, Chairman and CEO of the 
Chubb Corporation; Mr. Matthew C. Mosher, Group Vice President, 
Property-Casualty Rating from A.M. Best Company; and Mr. Ronald 
Ferguson, Chairman and CEO of General Reinsurance Corporation.
    We thank you profusely for your patience and for waiting.
    I am going to recognize Mr. Sternberg first. I understand 
he has some potential travel and timing problems. So let us 
begin with Mr. Sternberg as our first witness.

  STATEMENT OF SY STERNBERG, CHAIRMAN, PRESIDENT AND CEO, NEW 
                  YORK LIFE INSURANCE COMPANY

    Mr. Sternberg. Thank you, Mr. Chairman.
    I am Sy Sternberg, Chairman, President and CEO of New York 
Life Insurance Company. I also serve as Chair of the American 
Council of Life insurers. However, today I will be speaking 
solely in my capacity as head of New York Life.
    I want to thank Chairman Oxley and Congressman LaFalce for 
the opportunity to testify on this issue of national 
importance. I also want to express my appreciation to all 
Members of Congress for the incredible hard work and 
bipartisanship demonstrated during this very difficult period.
    In the hours and days that followed the September 11 
terrorist attacks, people throughout the Nation were looking 
for ways to offer assistance, to do something constructive in 
response to this terrible tragedy. At New York Life we summed 
up our response in one sentence: We will pay our claims quickly 
and compassionately.
    Mr. LaFalce. Mr. Sternberg, would you please lower the 
microphone a bit? Thanks.
    Mr. Sternberg. We have been working closely with the New 
York Insurance Department, and we thank Superintendent Greg 
Serio for his strong leadership in this crisis. While a death 
certificate is normally required by life insurers before a 
claim can be paid, it can be time-consuming or even impossible 
to obtain one in a disaster of this magnitude. Instead, we are 
contacting employers, consulting the passenger manifests from 
airlines, and gathering obituaries and other lists of those 
presumed dead. We are supplying families with the next-of-kin 
affidavit developed by the New York Insurance Department, and 
we are relying on certification from our own agents who in many 
cases know the families well and can attest to the loss.
    As of last Friday, we received 21 claims, but that number 
will grow as the hope to find thousands of people missing 
gradually dims. The first of those claims was paid on the life 
of a young Cantor Fitzgerald employee. The $190,000 death 
benefit was delivered to the victim's surviving relatives by 
their New York Life agent this past Saturday.
    Analysts have estimated that the total life insurance 
claims resulting from September 11 could be in the range of $2 
to $6 billion. While the amount of these claims is staggering, 
the monetary exposure is, in fact, a fraction of the $52 
billion in death claims paid last year by the life insurance 
industry as a whole and therefore will not have a material 
adverse impact. In the case of my company, which pays out 
almost $1.5 billion in death benefits per year, we expect the 
total amount of New York Life policyholder claims related to 
the tragedy to be in the range of $100 million. This is less 
than a 7 percent increase in total annual claims. Our ability 
to pay is backed by $40 billion in life reserves and another $8 
billion in surplus.
    Claims for the September 11 event will not be a problem for 
our company, nor will I expect it to be a problem for the life 
insurance industry. I should note, however, that the life 
insurance companies are major investors in corporate America. 
We are holders of corporate bonds, real estate mortgages, and a 
small percentage of our portfolio is in the equity market. If 
the economy worsens, some life insurers could have problems on 
the asset side of the balance sheet. I know this committee and 
the NAIC, led by Commissioner Sebelius, will monitor this 
closely.
    With more than 150 years in the New York City business 
community, we feel a special obligation to stand at the 
forefront of the relief effort. The New York Life Foundation is 
making a contribution of $3 million to the September 11 Fund 
administered by the New York Community Trust and United Way, 
and we are matching our employee contributions to the American 
Red Cross with a minimum contribution of $1 million.
    Additionally, we are donating some $1.5 million of 
television advertising time that was originally intended for 
New York Life commercials to the American Red Cross.
    I am gratified by the way our industry has responded to 
this ordeal. This is a time for the insurance industry to be 
visible. This is a time for us to be charitable, and this is a 
time for us to stand as a pillar of stability in a none too 
stable world.
    Thank you for the opportunity to testify, Mr. Chairman.
    [The prepared statement of Sy Sternberg can be found on 
page 103 in the appendix.]
    Chairman Oxley. Thank you, Mr. Sternberg, for appearing; 
and, as we say, we understand your time constraints. Please 
feel free to stay as long as you can. We are hoping we can wrap 
this up no later than 1 o'clock, if that gives you some idea.
    Mr. Serio.

 STATEMENT OF HON. GREGORY V. SERIO, SUPERINTENDENT, NEW YORK 
                      INSURANCE DEPARTMENT

    Mr. Serio. Good morning, Mr. Chairman, Mr. LaFalce, Members 
of the committee.
    When the Insurance Department was formed in 1860, our seal 
was inscribed with the motto ``Bear ye one another's Burdens.'' 
the unprecedented events of September 11 bring new dimensions 
to that charge for the burdens brought about by the vicious 
attacks on the World Trade Center go beyond and I will say far 
beyond the payment of claims and the covering of future risks.
    Indeed, at this time, the property, casualty and life 
industry in New York State and their reinsurers appear to have 
the resolve and the resources to meet the obligations arising 
out of the World Trade Center incident. From industry 
reputations and commitments, many that you will hear today, to 
the Insurance Department's own initial analysis, all 
indications are that the insurance industry will bear the 
financial burden.
    The Insurance Department, along with insurance entities, 
were materially impacted on September 11, as were all 
businesses in lower Manhattan; and, like many others who 
witnessed and lived the events of that day, the Insurance 
Department found itself with the burden of, A, insuring that 
its work force was safe, B, finding alternative space for 
relocating operations, and, C, planning for the return to our 
own main offices.
    The Insurance Department, perhaps unique among our 
neighbors in the financial district, also needed to meet the 
additional challenge of responding to the disaster immediately 
to help ease the burden of others. We were also concerned for 
our friend, as Congresswoman Maloney said, Neil Levin, who was 
in Trade Center One that day.
    I am proud and pleased to say that the New York Insurance 
Department and its 1,000 dedicated employees met the challenges 
posed by September 11 through preplanning for disaster 
responses, through ongoing financial risk assessments, 
practices and knowledge of the financial condition of our 
regulative parties and through sheer determination and will to 
keep our agency on the front lines of the State's and city's 
unified response to the disaster and to return as quickly as 
possible to our home in lower Manhattan, which we did on 
September 17.
    The Department has been working since the hours after the 
disaster to bear the burdens of the others, the victims and 
their families, as insurance consumers, the dislocated insurers 
and brokers and the constituencies who call upon us in the 
course of our normal duties. They will continue to successfully 
do so in the weeks and months ahead.
    The incident of September 11 put into action a disaster 
plan devised and implemented by the Department in May of this 
year. The Department's Emergency Operation Center, which houses 
the major carriers writing in affected areas, is connected to 
the State emergency managers and the governor's staff by 
various communications and data links for the purpose of 
exchanging critical information relating to the incident. 
Through this real-time exchange of information, emergency 
managers and Department financial analysts were able to 
determine the amount of insured versus uninsured loss and take 
estimate from there, where public assets will be necessary, and 
where the industry can be best staged to start facilitating 
claims activity. The insurance industry as it has since the 
onset of the disaster was very responsive to the call to our 
emergency operations center.
    The industry has also been highly effective at moving 
assets into New York City, including catastrophe response teams 
and mobile claim centers. A sizable insurer presence at the 
Families Services Center at Pier 94 on Manhattan's west side in 
conjunction and coordination with the Department's staff at 
State and City Emergency Operation Centers will allow expedited 
movement of insurers into areas deemed best for administering 
to those insureds.
    Equally important to the mission of facilitating connection 
between insurers and insureds is the Department's mission to 
make certain that claims are, in fact, paid in a timely manner 
and that there are adequate resources to meet those 
obligations. Again, on both counts the industry has indicated 
and exercised a willingness to pay claims without regard to 
exclusions or other contractual restrictions.
    Future challenges await us in the recovery process. Long-
term financial analysis, particularly as better data concerning 
losses is developed, is a critical function. Likewise, planning 
for gaps or limitations in coverages, gaps brought on not by a 
reluctance or a recalcitrance of insurers to pay, but rather 
the sheer unlikelihood of events of these dimensions will need 
to be anticipated and addressed. Business interruption coverage 
will be closely monitored to determine if losses brought on by 
long-term closures in certain areas of lower Manhattan will be 
covered.
    In the meantime, the Department will maintain its 7-day-a-
week schedule, its hotline telephone numbers, its outreach 
centers in Manhattan, Westchester, Nassau, and Suffolk 
Counties, its 24-7 presence at our standing emergency 
management office, and our active presence at and near ground 
zero to make certain that consumers' needs are being met.
    The Department will also continue to actively monitor 
carrier financial conditions, its financial analysis and 
modeling activities to assure ongoing financial liability, 
including liquidity and solvency in response to this disaster 
and future challenges.
    Thank you very much for having us here today, and we will 
answer questions when the time comes.
    [The prepared statement of Hon. Gergory V. Serio can be 
found on page 106 in the appendix.]
    Chairman Oxley. Thank you, Mr. Serio. Spoken very quickly, 
like a true New Yorker.
    Ms. Sebelius.
    Mr. LaFalce. New York or New York City, Mr. Chairman?
    Chairman Oxley. I should have been more specific. New York 
City.

   STATEMENT OF HON. KATHLEEN SEBELIUS, COMMISSIONER, KANSAS 
  DEPARTMENT OF INSURANCE; PRESIDENT, NATIONAL ASSOCIATION OF 
INSURANCE COMMISSIONERS, ON BEHALF OF THE NATIONAL ASSOCIATION 
                   OF INSURANCE COMMISSIONERS

    Ms. Sebelius. Thank you, Mr. Chairman. Good morning to 
Chairman Oxley and Members of the committee.
    Speaking for myself and my fellow insurance commissioners 
from across America, we appreciate the opportunity to update 
Congress and the public today regarding the impact on our 
Nation's insurance system from the September 11 terrorist 
attacks.
    I think you have just seen an example of Director Serio's 
leadership, and I want to assure you that he has done a 
magnificent job in the face of this incredible disaster of 
helping to formulate what I think is very sound policy to move 
forward.
    You heard Chairman Pitt talk about some personal SEC 
experiences with this disaster, and I wanted to start with the 
NAIC, the National Association of Insurance Commissioners, 
personal losses.
    Our Securities Valuation Office was in building 7 which, as 
you know, collapsed at the end of the day on Tuesday. The 44 
employees in that agency were all safe from any physical harm, 
although the trauma of the day's events I think will be with 
them for probably months and years to come.
    In terms of the ongoing operations of the office, we have 
backup data for that very sophisticated system which was 
captured immediately in Kansas City. The office was back 
running the following day. We signed a lease yesterday in 
Manhattan for new office space that the SVO should be in by the 
first week in October.
    But the operations of evaluating securities, which is 
critical to companies' portfolios, has really not been 
interfered with in spite of the terrific loss. My testimony 
today is going to contain the best estimates of the losses 
calculated and updated constantly for the last 2 weeks. The 
estimates have been revised several times and may increase 
further as the full impact of events are known.
    Let me start by saying we do have reassuring news to 
report. The NAIC believes that the American insurance industry 
is well capitalized and financially able to withstand the 
pressures created by these terrible attacks. The United States' 
insurance industry is a $1 trillion business with assets on the 
books of more than $3 trillion. Preliminary loss estimates of 
$30 billion represent just 3 percent of the premiums written in 
the year 2000.
    In addition to the industry's overall strength, the State 
insurance guarantee funds have another $10 billion of capacity 
to compensate American consumers in the event of 
insolvencies.The insurance companies have shown their ability 
previously to respond to huge disasters such as Hurricane 
Andrew in 1992 and the Northridge earthquake in 1994.
    For some committee perspective in using inflation-adjusted 
figures, these events, which occurred within a 2-year period of 
time, resulted in almost $26 billion in insured losses. That 
gives you some perspective of what we are looking at now; and, 
as you know, the industry remained alive and well.
    We are heartened by the initial response of the Nation's 
insurers in the current situation, and we anticipate that they 
will fully meet their responsibilities to victims in terrorist 
attacks and applaud their stepping forward to do that. As 
regulators, my colleagues and I will continue monitoring the 
process.
    Mr. Chairman, I think that this hearing is very important, 
and the terrorist attacks on September 11 are a stark reminder 
that insurance is different from other financial services, 
because it is involved in every aspect of our lives when we 
leave home every day. Insurance products provide the necessary 
assurance of financial safety that allows Americans to accept 
daily risks in business, travel, personal activities of every 
sort that we have come to believe are normal to the American 
way of life.
    Insurance coverage is unique in that it is a product that 
most people only encounter when they are under the stress of 
unhappy and often extreme circumstances. Although insurance 
payments will never fully compensate for personal and emotional 
losses, they offer one of the first glimpses of hope for those 
who face the daunting prospects of starting life all over 
again.
    Insurance regulators are keenly aware that people need to 
know that we will have promised financial resources available 
quickly to help them begin the process of recovery, and we 
understand the true role of insurance in America lies as much 
in rebuilding faith and hope as in rebuilding or replacing 
offices, homes, and property. The key to delivering on the true 
promise of insurance is prompt, caring, and effectively 
handling of policyholders' claims and payments. You have heard 
from Sy Sternberg and you will hear from the other insurers 
that that is what they see their commitment is and are in the 
process of doing.
    As regulators, our first responsibility was to find out 
what happened, determine how it was going to affect 
policyholders and insurers, and identify gaps or weaknesses; 
and I want to bring you up to date on what we have done. We 
have been coordinating reports throughout the community of 
regulators since September the 13th, which have included 
financial data calls and special conference calls of the 
various working groups on financial analysis, reinsurance, and 
international insurance issues.
    We also adopted an action plan unanimously in mid-September 
which includes three elements: to assess the solvency impact on 
the global insurance industry, information from insurers, 
reinsurers and the Lloyds of London syndicates; to identify 
legal, financial, policyholder and claims issues stemming from 
the tragedies; and to identify specific insurers that may 
require regulatory surveillance or specific attention.
    The scope of the project right now is focused on roughly 50 
insurance groups comprising 275 companies, which account for a 
substantial part of the affected insurance markets in New York, 
New Jersey, and Connecticut.
    With respect to reinsurance, the project will look at 
approximately 30 global reinsurance groups, 35 individual 
companies and 90 syndicates at Lloyds of London. It appears in 
that nucleus that there are about 12 groups with estimated 
losses exceeding $500 million and, of those, four groups which 
have losses in excess of $1 billion.
    The action plan will include the following steps:.
    To identify the insurance companies with business 
operations in the Wall Street District, particularly the World 
Trade Center Towers and buildings 5 and 7, and assess the 
impact on those insurers with substantial ``back-office'' 
operations;
    To identify and calculate individual insurers New York, New 
Jersey and Connecticut books of business in relationship to 
their total business, break down premium writings by the line 
of business and evaluate the company's exposure to further 
decline, as referenced earlier, in the equities market;
    Associate all insurers identified with their parent, 
affiliate and subsidiary insurers because, as you know, 
withholding companies--a primary company might be in New York, 
but the subsidiary may be somewhere else, and those assets need 
to be watched closely;
    Identify insurance groups and insurers with potentially 
heavy loss exposures;
    Conduct a survey, which is under way right now, to capture 
information on each insurer's net and gross estimated losses, 
as well as general information on the insurer's reinsurance 
program, reinsurers and anticipated cash flow needs.
    State insurance departments are also coordinating their 
disaster response activities to help New York, Virginia, the 
District of Columbia.
    The affidavit that is being used currently in New York to 
certify death certificates is actually an affidavit developed 
in the Oklahoma Department, at least the prototype after the 
Oklahoma City bombings, and that kind of information is 
available.
    We also stand ready with emergency teams if the flow of 
consumer complaints becomes excessive for the New York 
Department to handle and are developing a protocol so that that 
assistance can be given either in a virtual fashion, through 
toll-free hotlines, or specially trained examiners around the 
country.
    We have an insurance summit scheduled for mid-October to 
continue the collaboration with industry, Federal regulators, 
and Members of Congress on these very key issues.
    What can Congress do to help? We think there could be a 
tendency in the insurance industry to react to the dramatic 
events of September 11 by taking prospective steps to limit 
exposure for similar events in the future. This can occur 
through introducing coverage exclusions or canceling policies 
most likely to cause a future loss. If that happens, we feel it 
won't be good for the American economy.
    There are a couple of things we would like to put on the 
radar screen for Congress to think about for the future.
    We know the industry can't withstand multiple events of 
this magnitude in a short period of time without harm to all 
consumers, and we look forward to working with Congress down 
the road to look at proposals so that the risk of loss from 
terrorist activities in the future, should they occur, can be 
spread as broadly as possible.
    Second, we would urge you to continue the dialogue and 
collaboration with insurance regulators and key members of the 
industry to ensure that foreign and domestic companies who must 
work through this tragedy together continue to fulfill the 
promises made to consumers in America. We need to make sure 
that the chain of insurance and reinsurance protecting American 
citizens doesn't falter or fail in meeting its 
responsibilities.
    Finally, Mr. Chairman, insurance regulators believe the 
insurance industry is strong and that it stands ready to meet 
its obligations to provide funds where due under the contracts 
it is issued. State insurance regulators are working together 
to help ensure that any glitches which do appear don't disrupt 
the process of getting people's lives back in order and 
American business back to work.
    The NAIC and its members plan to work closely with Congress 
and its fellow regulators as set forth in the Gramm-Leach-
Bliley Act to meet the needs of Americans in a timely and 
compassionate way.
    [The prepared statement of Hon. Kathleen Sebelius can be 
found on page 156 in the appendix.]
    Chairman Oxley. Thank you very much.
    Mr. Benmosche.

 STATEMENT OF ROBERT H. BENMOSCHE, CHAIRMAN AND CEO, METLIFE, 
                              INC.

    Mr. Benmosche. Thank you, Mr. Chairman, Ranking Member 
LaFalce, and Members of the committee.
    Our Nation is still struggling to come to terms with the 
horrific events of September 11, and the human toll remains 
foremost in our minds. We all want to do our part to bring 
comfort to those who lost a loved one.
    Just as a comment, and emotionally for me, we lost two 
people; and it is very hard, as you think about all of the lost 
lives that went through this tragedy.
    Mr. LaFalce. I am sorry. You lost how many?
    Mr. Benmosche. Two.
    Mr. LaFalce. Would you bring the microphone a little bit 
closer?
    Mr. Benmosche. The two that we lost, the devastation for 
those who survived is emotionally draining for all of us.
    We welcome this opportunity to reassure you and the 
American public that we are fully prepared to meet all of our 
obligations. In addition, our financial soundness and the 
dedication of our employees has enabled us not only to assist 
quickly those directly affected by this tragedy, but also to 
continue to invest in the economic future of this country.
    MetLife was founded in 1868, and today we are the largest 
U.S. life insurer, with $2.2 trillion of life insurance in 
force. We are also the largest provider of group insurance, 
managing programs for 33,000 employers, covering 21 million 
participants. Included in this total are the 2.6 million 
participants of the Federal Employees Group life Insurance 
Program. Approximately 9 million households, or one in every 11 
U.S. households, are individual customers of MetLife.
    MetLife is headquartered in New York City, and like those 
of who you live or work in Washington, DC., we feel keenly the 
shock and the sadness that reverberated throughout the country 
on September 11.
    During this time of crisis, our employees rose to the 
occasion; and our critical business went on without 
interruption. We quickly took steps to make it easier for 
families of victims with MetLife policies to access the needed 
funds for their families. We waived the traditional requirement 
for a death certificate, relying on an airplane passenger 
manifest or communication from the employer. Over $53 million 
has already been approved for payment to beneficiaries, with 
the first payment being authorized 3 days after this tragic 
event.
    A significant number of MetLife policyholders in the World 
Trade Center were insured through group life insurance 
programs. We are working closely with employers affected by the 
disaster to process life insurance claims quickly. This 
includes the FEGLI program, which covers some of the 
individuals at the Pentagon.
    Even before we were contacted by beneficiaries, we began to 
determine from employers if the individual was at work on 
September 11. Additionally, our institutional business area, 
which handles group life claims, is sharing employer 
certificates of eligibility with our individual business claim 
team as well as other insurance companies so that we can move 
as an industry rapidly to get these claims paid to the 
beneficiaries and the families.
    We established 1-800-MET-LIFE as a general number for all 
affected individuals to call to provide a central gateway on 
handling all claims related to this tragedy. This will be 
especially helpful when an individual has both group and 
individual coverage within MetLife.
    As the Nation moves to assess the impact of the attack and 
plans its recovery, it is understandable that one of the 
concerns that has risen is the immediate and long-term 
financial well-being of the insurance industry. We currently 
estimate MetLife's after-tax losses related to this disaster at 
$250 to $300 million.
    While MetLife's exposure is substantial, we are more than 
capable of sustaining the losses. We are a strong company, with 
approximately $255 billion in total assets. We also count as a 
source of our strength our domestic regulator, the New York 
State Insurance Department, who you have just heard this 
morning, which is the finest, I believe, Insurance Department 
in the country; and their oversight of insurers doing business 
in this State has created a very strong, financially sound 
environment for all of us.
    I would like to take this opportunity to commend the 
Department, under the leadership of Superintendent Greg Serio, 
for their actions during this crisis--getting back to business 
the day after the disaster, arranging for insurers to be 
present at the New York Family Assistance Center and generally 
working with the industry on ways to expedite claims payment.
    And I must say parenthetically that we struggle with 
regulators, but when you want to have something sound it is 
great to have New York making sure we are all financially sound 
in times of crisis. So, thank you again.
    The attacks of the World Trade Center and the Pentagon have 
also raised questions about the industry's preparedness to 
recover from disasters affecting our facilities. MetLife has 
the people and the process and the systems in place to ensure 
we will continue to serve our customers even if a natural man-
made disaster were to strike one or more of our offices.
    During the disaster at the World Trade Center, we 
implemented a number of elements of our disaster recovery 
plans. First, we renovated an alternative business site 
facility, equipped it with computers and telecommunication 
services, and in the case where we needed to relocate the 
people in the World Trade Center, we did it the next day.
    Our primary focus at this time is on paying claims to the 
beneficiaries of victims of this horrible attack. However, we 
have also taken to heart the words of our Government leaders, 
encouraging us to look to the future and take the necessary 
steps to heal and strengthen this Nation economically. We 
believe in the economic future of this great country and the 
people of this great country and, therefore, we announced last 
Friday that we invested $1 billion in a broad array of publicly 
traded stocks as part of a program to increase significantly 
our investment in the public equity markets. We have made this 
move because we have enormous confidence in the resilience of 
the country and its economy, and it is time to put our money 
where our beliefs are.
    Those of us in the insurance industry recognize that the 
business of processing and paying claims promptly, assisting 
customers with decisions and continuing to strengthen our 
companies financially are critical elements in helping our 
country face this crisis. The foundation of our industry is the 
promise to our policyholders that we will be there in their 
time of need. By honoring this commitment, we know that we are 
doing our share to help our Nation recover.
    I would be very happy to answer any questions later on.
    [The prepared statement of Robert H. Benmosche can be found 
on page 181 in the appendix.]
    Chairman Oxley. Thank you very much.
    Mr. O'Hare.

   STATEMENT OF DEAN R. O'HARE, CHAIRMAN AND CEO, THE CHUBB 
                          CORPORATION

    Mr. O'Hare. Thank you, Chairman Oxley, Ranking Member 
LaFalce and distinguished Members of the panel. I am Dean R. 
O'Hare, Chairman and Chief Executive Office of The Chubb 
Corporation. Chubb is one of the country's largest providers of 
property and casualty insurance.
    I am pleased to testify today, but deeply regret the 
circumstances that bring us together. We are outraged by the 
tragic events of September 11, and we express our deepest 
sympathy and offer our prayers to all the victims and their 
grieving families.
    Before I continue, allow me to commend you and Ranking 
Member LaFalce for taking quick action and holding these 
hearings.
    My message for the committee today is straightforward. 
Chubb will meet its commitments, and the industry will pay its 
claims and survive. There are serious potential problems going 
forward, however. Allow me to expand on these points.
    First, Chubb will meet its commitments while maintaining a 
strong balance sheet long term. On September 11, the losses 
will likely for Chubb be between $500 and $600 million pre-tax, 
net of reinsurance.
    We have confidence in our reinsurance. Chubb's reinsurers 
are among the strongest and most reliable in the world. 
However, we agree with the concerns that you raised in your 
letter to the NAIC. It is essential that there be close 
monitoring of individual reinsurance company payments and 
potential solvency concerns going forward.
    Second, I can assure you that Chubb's response after the 
tragedy began almost immediately. We have already settled 
claims with some customers, and we have issued significant 
advanced payments to others.
    Our response is being led at the company's highest levels 
and by our very best people. Our first priority is meeting the 
human needs of the victims of this tragedy; and we, along with 
other insurance carriers, are doing everything humanly possible 
to respond.
    Third, as I indicated, I believe strongly that the property 
and casualty industry as a whole will be able to pay its claims 
and remain solvent. These losses are spread worldwide, and the 
bottom line is the industry can certainly absorb them.
    Concerning your question about possible changes in coverage 
going forward, I believe that both insurance buyers and their 
insurers will alter their behavior significantly. 
Unfortunately, it is becoming apparent that as current 
reinsurance treaties expire they will be renewed only with a 
terrorism exclusion. Therefore, it will become impossible to 
provide our customers with terrorism coverages.
    Apart from this problem, we must also recognize that if the 
United States were to suffer a series of future attacks or 
catastrophes of the magnitude of September 11, insurance 
solvency would be called into question. The industry has a 
specific amount of capital and cannot insure risks that are 
infinite and impossible to price. Accordingly, Chubb is very 
interested in work with you to respond to the insurance needs 
of all U.S. businesses and citizens.
    We do have the ability to meet this crisis. At the same 
time, we must be realistic about the future; and the future 
holds serious problems. In fact, as indicated, we are 
experiencing problems today in providing our customers with 
coverage for terrorism risk.
    I know your staff is focused on this problem but, Mr. 
Chairman--and this is my fundamental message today--legislation 
is needed quickly, perhaps patterned after pool re in the 
United Kingdom for terrorist coverage.
    The availability of insurance is absolutely essential to 
the growth of our economy. The lives lost on September 11 can 
never be replaced, and their loved ones will forever feel the 
void, but we can and we will help rebuild lower Manhattan, the 
financial heart of our country and of the world. Together, we 
will succeed in our war on terrorism. We will ultimately create 
a more secure America, one with an even more vibrant economy, 
but we need to act quickly.
    Thank you for this opportunity to address the committee. I 
am pleased, when appropriate, to respond to your questions.
    [The prepared statement of Dean R. O'Hare can be found on 
page 190 in the appendix.]
    Chairman Oxley. Thank you, Mr. O'Hare.
    Mr. Mosher.

STATEMENT OF MATTHEW C. MOSHER, GROUP VICE PRESIDENT, PROPERTY-
              CASUALTY RATINGS, A.M. BEST COMPANY

    Mr. Mosher. Thank you, Mr. Chairman.
    I want to start by thanking you for the opportunity to 
address the committee on this very important issue.
    A.M. Best's mission statement is to perform a constructive 
and objective role in serving the industry marketplace as a 
source of reliable information and ratings dedicated to the 
encouraging of financially sound industry through the 
prevention and detection of insurer solvency. Given this 
mission, A.M. Best----
    Mr. LaFalce. Excuse me, sir. Would you please move the 
microphone closer? Thank you.
    Mr. Mosher. Given this mission, and A.M. Best broad rating 
coverage of the insurance industry, we are investigating the 
exposure of all carriers with exposure to this horrible event 
and stress testing their loss estimates along with their 
exposure to the financial markets. While the estimates of the 
cost of these losses continue to grow and financial markets 
have staggered, A.M. Best Company believes the U.S. and 
international insurance companies will be able to meet their 
commitments. However, this assertion is dependent upon the 
ultimate insured cost of these attacks.
    It remains far too early to estimate the insured losses of 
the attacks. However, as a result of a discussion with insurers 
and reinsurers, public indications made by those companies 
potentially most affected and our own analysis, A.M. Best 
believes the losses are likely to exceed $30 billion, making 
this the costliest catastrophe in U.S. history.
    The nature and location of the tragedy dictate that the 
majority of losses will ultimately fall with the largest 
commercial carriers, their reinsurers and the London market. 
The insurance segments most affected are property, aviation, 
business interruption, workers' compensation, commercial 
liability, and life insurance.
    Over the past 2 weeks, A.M. Best has been communicating 
with insurance company managements to gain a better 
understanding of the exposures they face from these terrorist 
attacks. We have found the industry estimates to be, for the 
most part, well-researched and prudent estimates of their loss 
exposure. As part of our analysis we have stress-tested 
capitalization to support up to twice these amounts of the loss 
estimates, the additional credit risk for reinsurance 
recoverables as well as a 25 percent decline in common stock 
investments since year end. This stress capital position is 
then compared to require capital to support ongoing operations 
in the company's current rating.
    While the underwriting losses from the attack are somewhat 
concentrated with the industry's strong property casualty 
commercial carriers, the impact of weak financial markets and 
further economic slowdown will be felt across the insurance 
industry.
    Additionally, a decreased asset base and reduced interest 
rates will produce lower investment income. Given the lower 
investment income and more visible underwriting risk, A.M. Best 
expects to see increased insurance prices in order for insurers 
to achieve adequate operating returns.
    Those lines expected to be most affected are the same lines 
affected by the attack itself. Personal lines coverages such as 
personal automobile and homeowners insurance are only expected 
to be affected to the extent lower investment income and 
increased reinsurance cost due to decreased reinsurance market 
capacity must be passed on to insurers.
    Thank you, Mr. Chairman.
    [The prepared statement of Matthew C. Mosher can be found 
on page 198 in the appendix.]
    Chairman Oxley. Thank you, Mr. Mosher.
    Mr. Ferguson.

  STATEMENT OF RONALD E. FERGUSON, CHAIRMAN AND CEO, GENERAL 
                    REINSURANCE CORPORATION

    Mr. Ferguson. Good morning, Chairman Oxley, Ranking Member 
LaFalce, panel members.
    I am Ron Ferguson. I am one of the 2,400,000 people that 
work in the American Insurance industry day-in and day-out; 
life, health, property, casualty. I am proud of our industry. I 
am proud of the role we play in our society and in our economy. 
I am proud of our team, the two-million-four who are working 
hard, as is everyone else, to get this country back on its 
feet.
    Normally, we work out of the limelight and out of harm's 
way, but, as you may know, some insurance companies did lose 
personnel in the terrible attacks on September 11.
    We also salute those who do work and walk in harm's way as 
emergency service personnel and military personnel, and we are 
awed by their heroism and their patriotism.
    As we reflect on the events of September 11, we all have a 
heavy heart. As I thought about coming here this morning, the 
picture in my mind was that I was coming here with my heart in 
my hand, but we are not coming here with our hat in our hand.
    I echo the comments of the previous panel members at this 
table that the insurance industry, the life and property 
casualty insurance industry can pay all of its claims from this 
disaster. But as some of the panelists have mentioned and some 
of the Members of the committee have mentioned, we do at the 
appropriate time--and I realize it is not today--we do at the 
appropriate time have to ask: And then what? What do we do to 
make sure that we have a vital, strong insurance industry in 
the future to serve our society and our economy?
    I thought my brief remarks here, the one thing I could try 
to do would be to put this disaster in an economic perspective. 
Clearly, there is no way to put the loss of life into any 
perspective, and I won't even try. But on the economic side, as 
Mr. Mosher and others have indicated, we can start to dimension 
this for you.
    If you will bear with me as I throw out a few numbers--I am 
an actuary by training; I can't help it. I would like to get 
you to focus on the size of this disaster in economic terms in 
the capital base that it ultimately rests upon.
    Now, credible and knowledgeable analysts, including the one 
right here to my right, have estimated that the economic loss, 
including life and health insurance, is likely to run between 
$30 and $40 billion. That is including life insurance, and that 
would be pre-tax. My own personal opinion, which should be 
accorded no special weight, is that it is going to be at the 
high end of that range.
    Of interest to me, and I would imagine to you, is the fact 
that only about half that amount has been declared. That is to 
say, if you add up all of the press releases and comments, you 
get about $18 billion pre-tax that has been acknowledged or 
declared by companies here as well as around the world. So we 
still have many precincts to be heard from.But, again, the best 
estimate would be somewhere between $30 and $40 billion pre-
tax, including life insurance.
    Now, as Mr. Mosher pointed out, the great bulk of that loss 
is going to fall on what we call the commercial lines insurers, 
not the private passenger insurance companies, not the 
companies that specialize in homeowners and so on. So it is 
instructive, I think, to kind of look at the business from the 
top down.
    You will hear analysts and commentators compare this loss 
of $30 to $40 billion to the premium volume for the industry, 
and that is a useful and interesting way to get a perspective. 
You will also hear analysts and commentators compare the size 
of the loss to the asset base of the entire industry or the 
property casualty industry. And, again, that is an interesting 
and useful measure as we try to grapple with this and get some 
perspective on it. But I have to quickly say we have to keep in 
mind not a single premium dollar was actually collected for 
terrorist coverage. Not a single asset was ever earmarked to 
pay claims for terrorist-type losses.
    It follows, then, that the industry, and I agree totally 
with the other panelists, the industry will respond. The 
industry has broad financial shoulders. The insured losses from 
this event will be paid. But the point I want to take you to is 
that this rests on a capital base. It wasn't provided for in 
the current premiums. It isn't earmarked in the asset account. 
It comes out of the capital account. The total capital of the 
U.S. insurance industry, life, health, property, casualty, at 
June 30 was about $500 billion, by my estimates.
    Let's quickly focus on the property casualty business, 
where 90 percent of this loss is going to come to rest; and as 
one Member of your committee correctly noted a few minutes ago, 
the policyholders' surplus or capital account of the property 
casualty industry was about $300 billion at June 30.
    Now, I would like to take you a step further, and that is 
if we look at that $300 billion capital account from which 
these losses will effectively be paid, we then have to realize 
that there are many insurance companies that aren't involved, 
that write personal automobile, homeowners. State Farm is a 
great example. Once you start taking those companies out of the 
capital base--and I talked about this in my written testimony, 
so I will highlight it here in the interest of time--you can 
arguably get down to a capital base in the United States of 
about $120 billion where this loss will rest. That will be the 
fulcrum for this loss.
    I am using rough estimates, and people could and no doubt 
will argue with my numbers. I myself could argue it is higher. 
I could argue it is lower. But let us take this as a 
hypothesis. The point I am coming to here is that with $120 
billion of capital in the U.S. supporting this business, it is 
clear that--two things: number one, the losses will be paid. 
The $30 billion to $40 billion can be funded out of that 
capital base. But it brings into sharp relief the question that 
Commissioner Sebelius put on the table and Dean O'Hare put on 
the table, what do we do next? How do we safeguard our industry 
and its important role in our future?
    Again, I realize it is a topic for another day, but I 
simply could not resist the opportunity to make sure we 
understand that part of the story. So the losses will be paid, 
the industry can handle it, but the big question is: And then 
what? Thank you.
    [The prepared statement of Ronald E. Ferguson can be found 
on page 207 in the appendix.]
    Chairman Oxley. Thank you, Mr. Ferguson, and to all of our 
panel.
    Let me just compliment the insurance industry in general 
for an extraordinary and perhaps unprecedented response in this 
situation. I know that many of you were at the White House last 
week, and the message that you brought to the President and to 
the American people in your news conference afterward was one 
of positive reinforcement that the insurance industry is 
prepared to pay these claims, that you are financially sound. 
The regulators have confirmed that today, and you have 
performed magnificently.
    I had a conversation the Wednesday after the tragedy with 
Mr. Sternberg. He was very vociferous in saying these claims 
would be paid and that they would be paid in a timely manner. 
There was no backtracking. There was no wringing of hands. That 
is the way the entire industry, both on the life side and the 
PC side, have responded.
    I wanted you to know on behalf of this committee how proud 
we are of your industry and what a job that you have really 
done, and this was again further emphasized by the testimony we 
have had from the regulators.
    And I suspect that, Mr. Ferguson, the question you asked is 
very timely today. Because if we truly are in a position where 
these claims are going to be paid then we need to look to the 
future and we need to look, starting right now.
    So, basically, my question will be to the panel members the 
question you asked, Mr. Ferguson, where do we go from here? I 
am satisfied that the industry is in position as rock solid, as 
I said about the banking system when we held our news 
conference with Mr. LaFalce last week; and I am confident that 
the securities industry and the insurance industry fall into 
that same category. So now the question is, where do we go from 
here? That is the ultimate question, and I need to know and I 
think this committee needs to know what advice you would give 
us.
    How does the re pool work in Great Britain? How much 
Government involvement will our taxpayers and the public be 
comfortable with? How effective is the system in Great Britain? 
Are there similar ones in other countries? Those kinds of 
things--I am going to kind of make it a free-for-all, which I 
don't like to do normally in a committee of this size, but I 
think it is a great way to focus in on the job that we have in 
front of us, all of you as regulators and members of your 
industry as well as on our side of the dias.
    So, Mr. Serio, let me begin with you and kind of take us 
through perhaps what we should look for in the not-too-distant 
future.
    Mr. Serio. There are a couple of issues that we have been 
focusing on in terms of what is the next stage, particularly 
for the New York market. Capacity questions, questions about 
rates, where will they be going?
    I will disagree with one thing said here. Maybe, relatively 
speaking, there is less of an impact upon the personal lines 
rather than the commercial lines, but as Congresswoman Maloney 
knows, there are a lot of people who live on Manhattan, Long 
Island, Westchester, New Jersey, and Connecticut who will have 
homeowners' and automobile claims. A lot of automobiles that 
are going to be claimed and totaled, a lot of homeowners' 
claims. So we don't want to lose sight of that. Because there 
has been a general hardening of the market over the last year 
to begin with, maybe even longer, and that certainly 
exacerbates what we could not have anticipated prior to that.
    So we have, from the regulatory side, have to think about 
how to put that into the mix from the overall market, a market 
that was hardening, capacity shortages and certainly increasing 
prices; and we have to monitor the situation so we can estimate 
and predict where some of those rates are going to go to 
determine what is going to be the difference and the balance 
between affordability and availability.
    I will put one more thing out on the table. There is a lot 
of discussion about a terrorism pool or whether terrorism is an 
insurable or an uninsurable risk and whether some public entity 
has to come in and cover that, as we have done with other 
things that we have considered to be uninsurable. But I think 
from the insurance side I think the analysis really has to go 
back to a purely insurance analysis, and that is the question 
of risk management practices on the part of the aviation 
industry, airport facilities, and the conjunction and the 
interplay between the insurance industry and some of the others 
in assuring that there are good risk management practices in 
place.
    That hasn't been in the discussion. The aviation 
discussions have taken place in a different committee. 
Insurance discussions have taken place before this committee.
    But I think there is a need to bring some traditional risk 
management discussions back into the dialogue here in 
Washington, and we perhaps could help in that dialogue, because 
risk management, in making sure that the insurers are working 
with their insureds who run aviation facilities and airlines, 
to make certain that we are not simply going to create a fund 
that is going to allow for lapses in risk management practices, 
but that risk management will be built into whatever is built 
here in Washington and agreed to here and whatever the 
practices are going forward.
    There have been a lot of concerns about the sudden spike in 
insurance for airport facilities and for airlines. There is a 
direct correlation between that and the presence of risk and 
that risk that can be controlled by those groups and those that 
can't be, and I think that is where we will divide--whatever 
fund we put together will be based on the risk management that 
we can expect from the airlines and the aviation community and 
those that we can't.
    Chairman Oxley. Thank you.
    Ms. Sebelius.
    Ms. Sebelius. Thank you, Mr. Chairman.
    The national regulators are at the point of really looking 
in great depth at the pool re proposal, kind of analyzing that; 
and initially while that may serve as somewhat of a model to 
use, it is of such a different scope and kind of a different 
focus that it is difficult to use that as a platform. Capital 
in the English plan is relatively limited, compared to what we 
would need to look at; and I think there is an ongoing fear of 
what creating a Government mechanism does to the existing 
private market. I think the worst of all worlds would be to 
erode the private market or have an uncompetitive system where 
the Government has advantages or a monopolistic opportunity in 
this new mechanism that would discourage private market 
capacity.
    So we really stand ready to help analyze any kind of 
mechanism that--I think it has been under discussion for a 
number of years. Following Hurricane Andrew, there was a series 
of discussions about what about the next hurricane? What if you 
had a hurricane that came all the way down the East Coast and 
wiped out a whole series of cities? How can the private 
industry sustain that and do we need some sort of a reinsurance 
pool or voluntary reinsurance pool? So there is a lot of 
background evidence that has been gathered in this country and 
abroad.
    As regulators, we stand ready to help with technical 
expertise and provide any oversight we can. There certainly are 
issues with risk management which I think are critical. There 
are issues with rating bands. Already I think it can be 
identified that the financial risk potential of terrorist 
attacks occurs in somewhat limited markets. I mean, Kansas may 
not rise high on the scale of an area that may be attacked, so 
how you spread that risk outside of those limited capital areas 
I think is one concern. What kind of coverage caps are 
appropriate, how to encourage the private market to move back 
into this area and what sort of incentives can be there for 
people who both engage in risk management practice and private 
market players who are going to provide those insurance are key 
questions.
    So while on one hand I think there is a need to put the 
issues on the table quickly and begin to study them, I don't 
think this is an uncomplicated issue. I guess our plea would be 
to very carefully consider what the unintended consequences of 
setting up a mechanism are; and we stand ready, willing and 
able to help in any way we can to walk through this next step 
of the process.
    Chairman Oxley. We will be looking for your help on that 
area.
    The two Life representatives, is it redundant or irrelevant 
in terms of the pooling arrangement, Mr. Sternberg?
    Mr. Sternberg. Well, from a property and casualty 
standpoint, we need to consider that seriously. We have drawn 
no conclusions at this time.
    Chairman Oxley. Very good.
    Mr. Benmosche. I think the only concern we have is the 
issue of pricing for insurance. We look historically at World 
War I, World War II and so on. That is basic coverage we have 
provided as an industry. And keep in mind, we have a 20 percent 
market share of group life. So we are fairly large here. The 
issue becomes where people purchase supplemental insurance or 
accidental death and those kinds of costs and premiums that are 
charged have certain life expectation, and that is where the 
exclusions come into play. So what we have to think about is, 
going forward, whether we can price for some of these things. 
This go-around we were able to meet the needs, but going 
forward, if you have a really large disaster, then the company 
could not afford to pay additional benefits because there were 
no premiums charged for it. And we have to be careful we don't 
sink the company in providing coverage for things that we 
weren't prepared to deal with. So I think it is only a small 
aspect of the business that we are concerned about.
    Chairman Oxley. Mr. O'Hare.
    Mr. O'Hare. I would agree with much of what Commissioner 
Serio said, especially in terms of risk management. It does 
seem to me, however, that this Nation right now is at a point 
where it is addressing issues in terms of airport security and 
things of that nature, that frankly are far from being 
resolved. Addressing these issues is at the very beginning of 
the process, and until that process is completed and until we 
have the kind of security mechanism in place so we don't have 
to be concerned about terrorism--and I am picking airport 
security, but there are hundreds, maybe thousands of other 
areas that we as a Nation need to address in the war on 
terrorism--that is certainly a national priority today. Until 
that occurs, unfortunately, simply as a reality, a commercial 
insurer like Chubb, who puts together enormous coverages for 
organizations, much of which is in the financial community, 
needs to go beyond itself in providing these coverages. We need 
to be able to obtain reinsurance. And if that reinsurance 
excludes terrorism, which as of today you cannot buy--if I 
wanted to go and insure a major investment banking organization 
with an office in downtown Manhattan, there would be absolutely 
no place where I could go and buy reinsurance that would cover 
terrorism. So if the issue of some kind of reinsurer of last 
resort is not addressed, the effect is very simple, and that 
effect is you will not have coverages that include terrorism. 
And if we have another instance like this, companies will not 
be saying they are going to pay claims. They are not going to 
pay claims because it wasn't covered.
    So we do need an insurer of last resort. I think that has 
to be something that both the private sector and Government 
work together to create. I have no desire to have the 
Government in my business, you can rest assured of that. But I 
think as a Nation, we need to continue to provide terrorist 
coverage in order to make this economy work. And if we are not 
prepared to work together to find a way to do this, then what 
we are really saying is we are not prepared to have this 
economy function as it has in the past.
    Chairman Oxley. Thank you.
    Mr. Mosher.
    Mr. Mosher. I think one thing is to point back to Hurricane 
Andrew and the risk management issue and look at the response 
that came from the industry in terms of the better management 
they had in terms of dealing with catastrophe risk and 
exposures they have from that point until now. Obviously this 
is something that was unforeseen, but I would expect to see a 
strong response in that regard. The other thing I would echo is 
Mr. O'Hare's comments in terms of the flexibility that a 
reinsurer may have in terms of their policy and being able to 
exclude immediately as opposed to the primary carriers and 
their lack of ability to change perhaps the forms and policies 
that they have. And I think that is an important issue in terms 
of trying to determine how do you deal with this going forward.
    Chairman Oxley. Mr. Ferguson.
    Mr. Ferguson. Big topic.
    Chairman Oxley. You started it.
    Mr. Ferguson. Guilty. I think in your question you 
articulated some of the principles that we really have to focus 
on, and the Commissioner did, too, and that is what is the 
right role of the private sector versus--using Dean O'Hare's 
words--the reinsurer of last resort. And getting that right, 
which I think was part of your question, is the difficult task 
before us. We have ideas on this. I think pool re--and I 
understand Commissioner Sebelius' reservations about it and 
those should be taken into account. I think we can engineer 
around those.
    Chairman Oxley. Could you explain to us how pool re works; 
what the mechanics of pool re are.
    Mr. Ferguson. As I understand it--and I am right now in the 
process of getting more details on it myself--it was fashioned 
in 1993 to cover terrorism losses arising out of the IRA 
bombings that were occurring in London, and it is basically not 
unlike what Mr. O'Hare said. You go to the pool, you buy 
coverage for terrorism--as an insurance company, you would go 
to the pool if you couldn't find it elsewhere. You buy coverage 
for terrorism. It is at, as I understand it--it is offered at 
what is thought to be an actuarially correct price, but let us 
be honest. No one knows what that is. But it is not intended to 
be subsidized. It is intended to be a right price over a long 
sweep of time. But here is the punch line. If at the end of the 
day pool re runs out of money--which hasn't happened, by the 
way--the U.K. Government would step up to be the reinsurer of 
last resort. It is about that simple.
    Chairman Oxley. It would be the reinsurance pool we are 
talking about now that would have to be depleted.
    Mr. Ferguson. Yeah. Again, it gets back to the right 
balance between the private sector and Government. As Mr. 
O'Hare said, we have got a strong, vibrant private sector 
insurance industry here and we want to allow that to try to 
adapt to the new environment. If there are companies that want 
to write terrorist coverage, they should be allowed to do that 
and not have to go to the pool. I think the idea is to make it 
voluntary, but to be there as the reinsurer of last resort.
    Another thing I started to think about is whether such an 
arrangement, whatever form it takes, pool re or I am thinking 
about another little concept I am calling the Homeland Security 
Mutual Insurance Company--I am trying to think this through--is 
what do we do about the fact that as of September 11, the line 
between war and terrorism, at least in my mind, got hopelessly 
blurred. And to me that suggests that if we are going to come 
up with an alternative backstop, it may have to cover war and 
terrorism, because I don't know where you draw that line 
anymore. Ten years ago, I think we all would have thought we 
knew how to draw that line. This morning, I am not so sure that 
we do.
    Anyway, the point is I have got some ideas on this. Mr. 
O'Hare has some ideas. There are trade associations working on 
it, as Commissioner Sebelius said. The question in my mind, 
Chairman, is where do we take our ideas? Who should we best 
work with? I have conversations with Treasury and conversations 
with Commerce, and it is a little hard to know exactly where we 
ought to take the ideas and where we can really try to work 
through some of the things that have been discussed here in the 
last 15 minutes.
    Chairman Oxley. Thank you, Mr. Ferguson. And I have far 
exceeded my time, but I do appreciate the first cut at this 
very difficult issue. I think it has been helpful for the 
committee. Gentleman from New York.
    Mr. LaFalce. Thank you, Mr. Chairman, and I am going to 
follow your lead and ask for a free for all with some of the 
questions and comments that I have. But before I get into that 
I, too, want to commend everyone not only for their testimony, 
but for the tremendous response. I can't think of anybody in 
the United States who hasn't responded magnificently, from the 
President and Secretary of State, Secretary of Defense to the 
U.S. Congress, Republicans, Democrats alike, the regulators, 
insurance industry and this is America at its best. I also was 
proud when New York State Insurance Department was referred to 
as the best in America.
    Of course, Mrs. Sebelius, I can't imagine anybody being a 
better spokesperson for the insurance regulators of America 
than you. And now having given all that praise, it is one thing 
to be forthcoming and say we are going to cover all acts of 
terrorism. These are not war exclusions whatsoever. And I would 
imagine the easiest form of insurance to cover immediately is 
life insurance. That is something that is quite measurable, 
definable. I would think that business interruption insurance 
presents some more difficulties. And whether or not there is a 
forthcoming response with respect to that, in large part I 
believe remains to be seen. So everybody from the President to 
the entire executive branch and the Congress, we have to 
sustain this forthcomingness, and that could be more difficult.
    I am thinking--maybe it is my days as an attorney for the 
insurance industry--well, what exactly does interruption mean; 
how do we define interruption? And once we define interruption, 
can you say that businesses in Kansas were interrupted because 
of the terrorism in New York City and then how do you measure 
the damages? I mean, the businesses are going to come in and 
they are going to say they were damaged to the tune of $1 
million. And we know it was only about $100,000. And what about 
this coinsurance? Are coinsurance provisions going to leap up 
in all future policies that are written and how are they going 
to be applied with respect to those that already exist? Some 
securities analysts have said that business interruption might 
be somewhere between $5 and roughly $9 billion. I wouldn't be 
surprised if it is more than that, and I wouldn't be surprised 
if the upper limits that have been articulated, $40 billion, 
turn out to be considerably higher than that.
    The response of the industry is going to be very 
interesting, and we have seen a great response so far, but this 
is the first inning of a 9-inning game and we need great 
responses over the whole ballgame. And also your response will 
help shape the future of the economy, too, because your 
insurance is one of the automatic stabilizers that we need. 
Your insurance will provide the economic stimulus we need, in 
part, to rejuvenate our economy.
    Also, I am concerned as to what--especially you publicly 
traded companies--what perspectives you have about the short 
selling that might have taken place September 10 and then also 
the short selling that took place once the markets were 
reopened and any comments you might have on those, too. Jump 
ball.
    Mr. Benmosche. For the life company, I can only share with 
you that for us--you are right. The commercial insurance 
aspects of this are going to be huge, and that is one part that 
MetLife doesn't have a business--we do not have in MetLife a 
commercial and P and C business. One of the biggest questions 
here is to what commercial insurance will be available around 
this entire subject, so it is the other panelists that are 
going to have to deal with this.
    Mr. Serio. Let me start with the question of business 
interruption coverage. And I think in their zeal not to 
disappoint, the industry is actually putting us into the middle 
of a bit of a conundrum and they are actually expanding 
coverages beyond those that are provided for in their 
contracts. That creates an interesting dilemma for the 
regulators, because everybody wants to see companies do those 
sorts of things, expand coverages, which simply did not 
anticipate an event such as this, whether it is business 
interruption, is it just lack of access to their properties, is 
it physical damage and you can't get to repair your physical 
damage, where your markets or customers cannot get to your 
location, living expenses for homeowner's coverages, likewise, 
similar coverage. There has been an outpouring of interest on 
the part of the industry to expand some of those coverages that 
have had somewhat limited timeframes built into them up to this 
point.
    Mr. LaFalce. Let me just ask you what you mean by expand. 
You mean expand the interpretation of the existing contracts or 
expand the coverage for future contracts?
    Mr. Serio. Actually, in the existing contracts in 
responding to this incident, numerous companies have told us 
they are going to expand coverages either in the terms of 
timeframes for living expenses or for the so-called civil 
authority coverage, which allow for coverages when a business 
cannot get into their business, even though they have no 
physical damage. Let me explain that. In Lower Manhattan, after 
the incident of September 11, large segments of Lower Manhattan 
were basically closed off for security and also for emergency 
response purposes. South of 14th Street was basically 
inaccessible to businesses and homeowners. Since the 11th, that 
perimeter has come down to where they now have a smaller 
affected area. But for all of those people who have been 
affected, there are timeframes either in business interruption 
coverages or homeowner's living expense coverages that are 
triggered by a civil authority action, the action of a police 
or fire department or local government to make it inaccessible 
to their businesses or their homes.
    Mr. Bachus. [Presiding.] Ms. Sebelius.
    Ms. Sebelius. Well, Ranking Member LaFalce, I think it is a 
very good question on the business insurance and business 
interruption front. Let me say at the outset, that that is one 
of the issues that State insurance department regulators deal 
with every day, not necessarily this kind of coverage, but the 
dispute between companies and policy holders and what is the 
appropriate value, how you mediate the claim, how you get it 
processed in a timely fashion.
    Mr. LaFalce. The only doubt that a business in Kansas whose 
business was interrupted on account of the terrorist attack on 
New York City would be eligible for coverage.
    Ms. Sebelius. Business interruption coverage is typically a 
separate coverage. It is not automatically loaded onto general 
property coverage. It has some time limits and has some pretty 
specific definitions. There are measurement precedents of what 
you look at before and after, almost like a job discrimination 
case where loss of wage has a way to be determined in terms of 
what you are doing afterwards. So there are some precedents of 
how you look at it.
    I have doubt that there will be some disputes and maybe 
some claims that are denied that departments need to be 
involved in and monitored, and there may be attempts of fraud 
on the consumer end who will say my business was interrupted 
when they are really having a slump season.
    So those are the kinds of issues that regulators have to 
stay on top of and monitor closely. That is what State 
regulators do on a day-in, day-out basis, and I think we are 
ready to go to work on these kinds of coverages.
    Mr. LaFalce. Would the business interruption insurance 
cover the fact that the interruption was caused not by the 
terrorist attack, but by the FAA decision to shut down the 
airlines?
    Ms. Sebelius. I assume--typically indemnifies a business 
for loss of income for a period that is necessary to restore 
property damaged by an insured peril. That is typically the 
contract language. So whether or not an FAA decision would be 
an insured peril or not----
    Mr. LaFalce. You see, that is my whole point. We have only 
gone through the first inning and all these issues are 
extremely important in deciding how forthcoming the industry 
really is to this unique circumstance.
    Ms. Sebelius. What Director Serio was referring to is, the 
regulatory conundrum is to essentially be in a situation where 
we would be forcing, urging, requiring companies to pay 
benefits while they may be important to restoring somebody's 
business or property, but benefits that clearly are not defined 
in the policy and were not contemplated in the pricing of the 
policy and were not reserved for in the pricing of the policy. 
Those are going to have to be looked at very closely, because 
the regulatory push to do that may render the company insolvent 
and be public policy damage to all consumers in the future. So 
the balance of what is required, what it means, what the 
precedents are, and I think we are going to work on these 
issues so we have some uniform definitions across the country 
so everybody is looking at them in the same way.
    Mr. Bachus. Let me say this to the Ranking Member. We have 
actually gone over now 12 minutes, and if we could ask your 
indulgence to let other Members ask questions, and then if we 
have time--I think we have assured the panel we would try to be 
through by 1:00 o'clock.
    Mr. LaFalce. Could you allow the others to make a brief 
response?
    Mr. Bachus. Any of you all feel especially compelled to 
respond? All right, with that, let me go on and ask a few 
questions. I am going to try to get through mine quickly. I 
want to say this, and I think it can't be overemphasized, that 
the insurance industry has had a historic loss as a result of 
this attack, but it is gratifying and inspiring to see that you 
have come through it on a sound footing, that you are fully 
prepared for a catastrophe of this nature, which I think is 
demonstrated by your response, and in the words of Mr. 
Sternberg, I think New York Life has summed it up by saying we 
will pay our claims quickly and compassionately.
    So I want to commend all of you for this. I think it 
inspires new confidence that the American people have in the 
insurance industry. And there were serious questions raised 
right after this whether the industry would impose an act of 
war exclusion, and it was characterized by the news media and 
many people in Government as an act of war. But you have not 
seen fit to do that, and I commend you for that.
    I also want to commend--I think it was MetLife, the MetLife 
family--for going to--Mr. Benmosche, you read part of your 
statement and you didn't have time to read it all. In it you 
said last Friday--and I don't think you read this part--you 
said ``Last Friday, we invested $1 billion in a broad array of 
publicly-traded common stock as part of a program to increase 
significantly our investment in the public equity market.'' I 
want to commend you on that. You do things for investment 
purposes, but you were in there doing that, and I commend the 
entire MetLife family for taking that action.
    Mr. Serio, one thing, we have said that claims are going to 
be paid promptly and compassionately. One thing you did say in 
your testimony--and I think I understand this, but I just want 
to allow you to comment on that--you testified that lawsuits 
over the September 11 tragedy will take years to reach any 
resolution. Is there anything Congress can do to expedite or 
consolidate this in legislation? And I know it is a very 
complex thing and there are very many complex legal issues to 
be confronted.
    Mr. Serio. I think we were basing our observation on past 
experiences, past disasters. Some action has already been taken 
with the aviation bill that was passed and signed last week to 
consolidate some of the litigation in the Southern District of 
New York and to consolidate itself in Federal Court. It is 
actions like that that need to be evaluated with respect to 
other suits that are likely to come out of this. Virtually all 
the parties that are involved with this, property owners, 
obviously the airlines and others, have to evaluate the 
litigation risk and allow us as regulators and you as 
policymakers to decide, based upon that risk, that it could 
take years for litigation to be completed. I think what we want 
to do is make sure that it doesn't take 10 years, as it has 
been in some other cases, for people to be compensated for 
their loss. Other than the first party benefits, I think Mr. 
Sternberg and Mr. Benmosche and others were talking about, were 
those third party liability benefits, and that compensation 
should not take that long to be received by victims and their 
families.
    Mr. Bachus. Ms. Sebelius, in your written testimony, you 
said approximately 40 percent of reinsurance covering American 
insurers is placed with foreign reinsurers. Is that high number 
a consequence of our tax policies? And if so, would reinsurance 
be easier to regulate if policies were to change?
    Ms. Sebelius. Representative Bachus, I am not sure I can 
specifically comment on the capacity and what the impact of the 
tax policies have been on companies. Some of my colleagues to 
the left may be able to do that more adequately in terms of 
where the reinsurance market is. I don't feel that American 
regulators feel we have difficulty regulating the reinsurance 
market. We do have subsidiaries of most of those major 
companies here in the United States. We have regulatory 
oversight. We have just put in some additional data calls for 
some of the areas that we need additional information about, 
but the reinsurance community is very much, I think, in the 
regulatory scheme and has been very cooperative and forthcoming 
in terms of where their losses are, what their capacity is, and 
I think regulators at this point are confident that they can 
move forward on that. But why exactly many of them are located 
in Europe might be a question for down the table.
    Mr. Bachus. I noted that on page 25 of your testimony you 
outlined some things that Congress may do in regard to 
reinsurance or creating pools. And also, I think this 
committee, many of the Members are aware that in Britain they 
have created at least a layer of reinsurance where the 
Government steps in above that layer. One other legislation 
that has actually been introduced in this Congress--and I would 
ask you about this--I hadn't heard a comment on that--is it 
allows insurers to get to set aside premiums for catastrophic 
events in a special tax free fund. I don't know if you all are 
aware of that or if you have any comments on that--in other 
words, some tax-free account.
    Mr. O'Hare.
    Mr. O'Hare. This is something that actually, the industry 
in the early 1970s put forward, and I think it existed for 
maybe 2 or 3 years. And the accounting profession viewed the 
catastrophe reserve, as we refer to it, as a mechanism whereby 
companies would manage earnings even though the specifics, you 
know, were outlined precisely as to how these contingency funds 
would be built up. So certainly from my point of view, I view 
this as a way that the industry could buildup reserves for 
situations like this and therefore putting the industry in a 
better position to live up to its promises, if and when the 
time came. I am very much in favor, but it would take SEC and 
the accounting profession to go along with it.
    Mr. Bachus. Mr. Ferguson, you were starting to comment. And 
I am going to follow my own admonition about cutting back.
    Mr. Ferguson. The idea of using tax policy, whether it was 
the first question or the second question, are certainly things 
that could be considered. And whether or not that is the right 
use of tax policy I guess is a philosophical debate for another 
day.
    The only point I want to make here, however, is that both 
of those things at the margin would have some impact on 
capacity and the financial strength of the industry. But 
frankly, they pale in significance compared to the issue we are 
really facing with the kind of event with the World Trade 
Center. So I wouldn't say they are bad, but at the margin they 
really don't solve the problem.
    Mr. Bachus. And if any of you care to give us some specific 
solutions you think would----
    Mr. Ferguson. Love to.
    Mr. Bachus. You know, I have serious philosophical problems 
with Government bailouts of private enterprise. At the same 
time, as we demonstrated last week, when we have a catastrophic 
event that affected the airline industry like it did, you know, 
we were compelled to respond. And perhaps there is something in 
the arena of reinsurance of these things that is appropriate.
    Mr. O'Hare. I don't think the industry--certainly I am not 
asking for a bailout.
    Mr. Bachus. And I should not have used that word in 
relation to a sound industry. The airline industry was not in 
sound financial shape. So that is really comparing apples and 
oranges.
    Mr. O'Hare. The airline bill was a bailout. What we are 
talking about here is looking forward and providing a reinsurer 
of last resort. And I would point out to you that in the United 
Kingdom, the reinsurance pool, to the best of my knowledge, was 
never, ever used.
    Mr. Ferguson. But it is in a profit position.
    Mr. Bachus. I guess what I should have said is to prevent a 
bailout.
    Mr. O'Hare. That would be a good categorization.
    Mr. Bachus. And I apologize for that. You have proved both 
in insurance and reinsurance that you are very sound.
    Mr. Kanjorski.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    First question, has anyone on the panel asked to consult 
with the leadership of Congress prior to our bailout bill or 
airline subsidy program last week?
    Mr. O'Hare. Yes.
    Mr. Kanjorski. That is very good. First of all, let me 
congratulate you, Mr. O'Hare and your company. You were the 
first one to come forward and clarify that you would not 
exercise act of war provisions. I thought that was one of the 
most patriotic commercial activities taken during the entire 
tragedy. Speaking from the Democratic side, what disturbed me 
was an overwhelming cavalier attempt by the Congress to 
compensate the airline industry. I understand the problem with 
the airline industry. If you follow the logic that the industry 
was negligent, that they were required to provide security, and 
they failed to provide it, then as a result, their plane was 
seized, and people and passengers on that plane were killed, 
and as a result, 7,000 people on the ground were killed, it is 
perfectly consistent in tort law to potentially hold the 
airlines liable for all those deaths and then compensate those 
parties at the rate of lost compensation and pain and 
suffering. This liability would have clearly wiped out all of 
the insurance companies. They would not have been able to meet 
that burden. We wanted to do something to subsidize them to 
make the airlines operate. I was particularly worried to 
support the particular plan passed by Congress because, as I 
understand it, the insurance industry is one of the major 
holders of paper on airplanes. Thus, if we have 2,000 airplanes 
sitting on the ground, and the industry's value is in the range 
of $200 billion in securities and leases, the airline industry 
is not very valuable and, therefore, would have a difficult 
time. That situation would have not only risked the insurance 
companies, but also would have had a ripple effect to putting 
the airlines out of business, an underpinning of the insurance 
industry, which would have further weakened the financial 
structure. The thing I am most worried about, however, is that 
we hurried to develop this compensation program, consequently, 
I am not sure how many people paid attention to what we did. We 
created a clear strict liability for 7,000 people to recover 
all their compensatory loss and pain and suffering. I have run 
through the mathematics and, at a minimum, I would say that we 
have subjected the Federal Treasury to at least $33 to $35 
billion in outright payments. Now that will make some of the 
families whole if you could ever make anyone whole as a result 
of a death. I am not suggesting that. That would probably, on 
average, give about $4 million, of which I consider about $1 
million dollars compensatory payment and $3 million for pain 
and suffering that the master is entitled to a portion.
    My problem is what happens with the next occurrence. 
Obviously, the United States Government cannot constantly award 
a tort recovery to all people subject to terrorist acts. I do 
understand it was a peculiarity because of tort law in 
airlines, but if an energy company, however, is attacked and 
blown up and there is a radiation leak, there could be hundreds 
of thousands of people affected. I do not think we are well 
prepared to think out the need of compensation for all people, 
or a capping of what amounts will be paid to what individuals.
    For instance, one question I have in mind is that there 
must have been in the World Trade Center towers extraordinary 
income earners. These people in the bond business may have been 
making $100 million to $300 million a year in income. Why 
should the Federal Government take that into the calculation 
and compensate these families $1 billion or $3 billion when, in 
fact, at the next terrorist occasion, we will not have the 
wherewithal, or the ability to afford compensation for the next 
sufferers? Is the insurance industry capable of coming forth in 
a relatively short period of time to look at the reasonableness 
of assisting at least the Government in establishing some 
compensation program for victims of terrorist attacks and their 
families to make sure we do not bankrupt the Government by 
taking this action?
    For instance, one of the provisions we had in the bill is 
that the master is to discharge life insurance payments from 
the total amount. That provision is sort of counterproductive 
because it encourages people not to buy life insurance. They 
can wait until they suffer a disaster in a terrorist event and 
then get the compensation from the Government. There seems to 
be countervailing good practices here, getting out of the free 
market system that holds individuals responsible or pushing the 
burden of total payment for injury on the Government.
    Mr. O'Hare. I think I would comment as follows: Number one, 
I think the bailout--the airline bailout was really a measure 
designed to keep the planes in the world continuing to operate. 
I think if air travel came to a halt, this would not have a 
very good impact on the economy. So what needed to be done was 
needed to be done, and it was, in fact, done. I applaud the 
Administration for that, and Congress for doing that.
    As far as putting maximums on liabilities for the airline 
industry, that had no impact on the insurance industry, 
because, in essence, what the bill says is that if it was--it 
is up to the limits of your insurance coverage. So the 
insurance industry does not benefit one way or the other from 
that.
    Mr. Kanjorski. I am not suggesting that insurance companies 
benefit. I am suggesting that what we did has subjected the 
Treasury to an entitlement program that is unlimited in a way. 
We do not know what the master's assessment of these damages 
will be and we have contracted now--or at least passed a law 
that the Treasury will be open to that amount. Treasury 
however, may not be so open to a similar program in a future 
terrorist event. And that is why I am suggesting that we have 
to find something that is relatively fair here.
    One thought I had, is that we are sending these young men 
into harm's way, and therefore, we have a very limited policy 
on their death. It is sort of unfair that, because you were a 
bond trader in the Towers, your State may receive $1 billion 
dollars in compensation. Yet a young man or young woman may go 
off and lose his or her life in the protection of the country 
and they have a limited coverage of whatever that is now. When 
I was in the service, it was $20,000. I imagine the coverage is 
$100,000 today, but it is very limited for that sole purpose.
    What I am saying is we as a Government have not looked at 
the impact of terrorism on the Treasury in the realm of 
fairness and equity in anticipation of possible future 
terrorist events.
    Finally, I will leave you with the following statement, 
because I am disturbed with what kind of an effect terrorists 
will have on terrorist insurance in the commercial field. I do 
not know how we are going to finance large real estate 
developments in major cities if one cannot get terrorist 
insurance, particularly after this event, without having the 
ripple effect further go down to the mortgage market right into 
the financial institutions. And, as someone said on the panel, 
the industry is not writing terrorist insurance. I imagine 
bankers are not going to be far behind you and not write 
mortgages to finance future targets.
    Mr. Bachus. I thank the gentleman. Two or three Members 
have advised me they have to catch airplanes very soon. If I 
could ask the indulgence of the panel, we have five more 
Members that want to ask questions and they are all very active 
Members of the committee. They have sat through the testimony 
and are very interested in asking questions. And any of you 
that can stay, we very much appreciate that. It is five 
Members, and we will try to limit it to 5 minutes.
    With that, Mr. Weldon.
    Mr. Weldon. I thank the Chairman and I certainly want to 
join the others in thanking you for stepping forward in the 
ways that you have to help our Nation wrestle with this 
challenge, and I also want to thank all of you for coming and 
testifying. We are very concerned as a committee and as a body 
about the issues that you are discussing with us today.
    I am particularly interested in the issue of reinsurance, 
and I really appreciate all the comments that I have heard. And 
my question for you is we had a bill in the Congress last year 
that was introduced by two Members who are no longer on the 
committee, Mr. Lazio and Mr. McCollum. Are any of you familiar 
with that legislation, the way it dealt with reinsurance? And 
if so, can you give me your feedback on maybe what you think 
may have been some of the problems with that bill and what we 
could do as a Congress to perhaps draw up a better piece of 
legislation?
    And maybe I will start with you, Mr. Ferguson. You are in 
this arena, correct?
    Mr. Ferguson. I presume you are talking about H.R. 21 or 
some version of that?
    Mr. Weldon. Yes.
    Mr. Ferguson. I think the issue here is what is the right 
role for the private sector versus the Government, which I 
guess in H.R. 21, if I understand it properly--and I realize it 
may have changed since I looked at it many months ago----
    Mr. Weldon. There is no H.R. 21 now.
    Mr. Ferguson. Well, back then, my understanding was that 
the Government would come in at $2 billion. And my 
straightforward answer to your question would be that simply is 
too low a threshold. It is--my opinion--wrong mix of private 
response and Government response. I think the private sector 
ought to be able to handle a much larger number than that.
    Mr. Weldon. Is there enough capacity right now though in 
the private reinsurance market? Do you believe that exists?
    Mr. Ferguson. Yes, I do. Yes, I do.
    Mr. Weldon. Would all of you in the insurance business 
agree with that statement that there is enough capacity in the 
private reinsurance?
    Mr. O'Hare. I think there is enough capacity, but I am not 
going to say there is enough capacity to provide terrorism. I 
don't think anybody on this panel would agree there is 
unlimited----
    Mr. Ferguson. I thought we were talking about--your point 
is taken, Mr. O'Hare. I thought your focus was on natural 
disasters, hurricanes, and that is what I was responding to.
    Mr. Weldon. But I wanted to cover both issues. Number one, 
your thoughts on the bill as it existed previously, what were 
the weaknesses, but as well, is there enough capacity for 
reinsurance today, private reinsurance in the market for 
natural disasters?
    Mr. Ferguson. I think so.
    Mr. O'Hare. And I would agree with Mr. Ferguson that there 
is sufficient capacity for natural disasters, but I limit my 
statement to natural disasters. I certainly think we are in a 
crisis situation in terms of being able to buy reinsurance for 
terrorism.
    Mr. Weldon. Anybody want to add?
    Mr. Mosher. I think the terrorism issue, it is not a 
capacity issue. It is an issue of not knowing how to price it. 
There is no way to know what the true cost is. So that is why a 
reinsurer isn't willing to write it. They don't know what their 
true exposure is as opposed to a natural disaster where $2 
billion probably is too low, because they do have good models 
and they have a good idea how to price that. There is a 
willingness there. So it is really an issue of ability to 
price, not a capacity in terms of what they will and won't 
write.
    Mr. Weldon. Thank you. I yield back.
    Mr. Bachus. I appreciate that.
    Mrs. Maloney.
    Mrs. Maloney. Thank you, Mr. Chairman.
    In the interest of time, I am going to yield my time to Mr. 
Bentsen so that some of my colleagues who have not been able to 
ask questions may ask questions, but not before one brief New 
York question.
    First of all, I thank all of the panelists. You have given 
us a great deal of information and a great deal to think about, 
and at a time when the entire country is watching this 
industry, I have been heartened thus far by the very positive 
and very fast humane response that all of you have given.
    Without objection, I would like to place into the record a 
New York Times article from September 20 that offers a very 
favorable description of the activities that the industry is 
taking.
    [The information can be found on page 82 in the appendix.]
    Mrs. Maloney. Very briefly, I would like to ask Mr. 
Sternberg and Mr. Benmosche, I understand that MetLife will pay 
the largest amount of life insurance claims resulting from this 
tragic incident. New York Life will also pay a major amount of 
claims. They have already started paying claims. And I would 
like to ask, is this because you are New York domiciled 
companies?
    Mr. Sternberg. Our exposure is generally dependent on the 
size of our overall national insurance practice. It happens 
that we have somewhat more insurance in the New York 
Metropolitan Area. But I would say that, for the most part, our 
percentage of claims exposure is a function of the size of our 
book or business, which is quite large and also aimed to the 
high end of the market. And we have many people in the 
financial sectors that we insure. We also happen to be the 
insurer of the American Bar Association. And as you know, there 
were many lawyers in the World Trade Center. These factors 
contribute to our claims exposure.
    Mr. Benmosche. From MetLife's perspective as well, we do 
business with 87 of the Fortune 100. Fifty-three companies in 
the World Trade Center were, in fact, clients. We deal with 
33,000 employers. They employ, as I said, 21 million people. 
This is, basically, if you have 20 percent market share, this 
is what you would expect to happen. And same thing for MetLife 
as New York Life, we are New York-based companies. Being able 
to compete in New York is hard. You have to deal with New York 
regulation, which is very restrictive, to make sure we stay 
financially sound. So part of it is you will see us have a 
little bit more business in New York State than other companies 
might have.
    Mrs. Maloney. Thank you. I yield to Mr. Bentsen.
    Mr. Bachus. There is 2 minutes and 23 seconds. And by 
unanimous consent, I would like you to add your 5 minutes to 
that and just take the full time.
    Mr. Bentsen. Thank you, Mr. Chairman. I thank Mrs. Maloney 
also for yielding to me.
    Looking at everyone's testimony--and I am not going to 
quote the sentences, but I marked them in just about all the 
testimony, it would indicate to me that you are saying there 
needs--and in the previous discussion with Mr. Weldon, there 
was the question of understanding the risk premium for 
terrorist insurance and the reinsurance market and whether or 
not Congress is going to help in making sure that there is 
sufficient capacity there. And I think Mr. Ferguson with 
General Re talked about that, while there is sufficient capital 
in the industry and the reinsurance industry, that capital was 
originally spread evenly over the market, and obviously now is 
being disproportionately allocated to this area, and going 
forward, that could be problematic.
    As you may know, in the past this committee has considered 
legislation that has been brought forth primarily by the 
property and casualty companies to create some sort of 
Government backstop in the reinsurance market for natural 
disasters. Am I incorrect in interpreting the statements in 
your testimony that while there has been division among the 
industry over the previous attempts, that there is a consensus 
building now for the need for some form of Government backstop, 
Government reinsurance market, if not related solely to 
terrorism, at least in large part, or maybe perhaps combined 
with natural disasters?
    Mr. Benmosche. Just before they answer that question, I 
have to apologize to all of you, but I have to get back. It was 
a pleasure to be here and I hate to leave in the middle of your 
question.
    Mr. O'Hare. Can I comment? My view is that what we are 
talking about, and there is, I believe, a total consensus 
within the industry, is a reinsurance pool of last resort 
dealing solely with terrorist exposures. Irrespective of that, 
I think a national disaster, H.R. 21 type of arrangement with a 
much larger than $2 billion base is something that, I think, 
would be an extremely positive event. So as far as the specific 
details of H.R. 21 are concerned, it is a little foggy in my 
memory. I think we were in favor of it. I know we would be a 
lot more in favor of it if the threshold was higher, but that 
is not the real issue.
    The real issue here--and I want, you know, to keep going 
over this--the real issue is we have a crisis brewing as we 
speak, because as we speak we are in the process of negotiating 
our renewals for next year. Our present reinsurance coverage, 
which fortunately in our case takes us through for the most 
part the middle of next year, but most companies are addressing 
these issues as of January 1. If they do not have terrorist 
coverage, then the policies they issue will have to exclude 
terrorism.
    Mr. Bentsen. And I do want to hear Mr. Ferguson because my 
time is going to run out. But it raises the other question I 
wanted to get to. And I understand what you are saying. And it 
makes me think that perhaps we may be seeing you sooner rather 
than later with respect to this issue, not unlike the airlines. 
And I am not being critical of this. The market may disappear 
on you and the reinsurance market may disappear on you.
    If I can go to the other question. The P and C companies 
are going to have to liquidate assets in order to start paying 
claims at some point in time. That is a normal function. And 
they are well capitalized, although this is somewhat larger 
liquidation than usual. This is coming on the heels in my home 
city of Houston that had a somewhat substantial event back in 
June. We thought it was substantial at the time, about a $5 
billion event, maybe pales in comparison now, with the 
flooding. And Mrs. Kelly brought this up about the muni bond 
market where the P and C companies tend to be the bigger 
players. But as you begin to liquidate assets, and as I read in 
the testimony, at some point premiums will have to come up 
because there was already a reduced profitability situation.
    Aren't we entering into somewhat of a vicious cycle? I 
mean, you are going to have to do what you are going to have to 
do. But the gentleman brought up the issue that you have lines 
of credit with your banks--both lines--and the ability to roll 
your commercial paper. Do you believe that there is still 
sufficient liquidity on that side of the capital markets or 
have you seen that tighten up at all? Because that would seem 
to me to both benefit your industry from the ability of having 
to sell cheap in order to raise capital quick, but also the 
broader markets of dumping product on the market and further 
affecting it.
    Mr. O'Hare. Number one, I think the capital markets are 
tremendously liquid. Chubb, right after the event, tested the 
capital markets just to see if we could sell commercial paper 
and the liquidity amazed us. So I don't think there is a 
problem. As far as being concerned about the industry dumping 
securities in order to pay claims, I think that really is an 
individual company-by-company situation. In the case of Chubb, 
I fully expect that we will pay these claims out of our cash 
flow. Our cash flow for the year 2001 will be about $800 
million. We have said we expect our losses to be in the 
neighborhood of $600 million. So I am not assuming that we are 
going to have to dump securities on the market in order to pay 
claims.
    I will say, though, that the $800 million that we would 
have had to put into the market, a good portion of that would 
have gone into municipal bonds, because they are just more 
income-effective to an organization like ours. Obviously, there 
is going to be less money going into that marketplace. And 
since we, the property and casualty industry, are such a big 
piece of the municipal bond market, I have to assume that we 
will affect demand.
    Mr. Ferguson. I don't have too much to add to that. I think 
it is company by company. Most of the large sophisticated 
companies have liquidity plans. In our case, we are very much 
like Mr. O'Hare's situation. We have about a billion-and-a-half 
in cash. By that, I mean short-term highly marketable 
Treasuries. So we wouldn't be liquidating other investments. 
But that is going to vary by company.
    Mr. Bentsen. Is the reinsurance market going to rethink its 
position with respect to a Federal backstop in the wake of 
this?
    Mr. Ferguson. Well, back to your first question, I would 
urge that we not mix together natural disasters and situations 
like this, the terrorism and the war. I think they have 
different philosophical and intellectual underpinnings to them. 
And I hope you won't take this the wrong way, but I have to say 
it in response to your question. The reason I can get 
comfortable with the idea that there ought to be a Federal 
backstop for war and terrorism is that, after all, is that not 
the basic duty of a country to defend its citizens? And without 
criticizing anybody--and I hate to even say it, because I know 
it could be misconstrued, but that is really the underpinning 
of the idea that it might be legitimate and necessary to have--
to use Mr. O'Hare's phrase--a ``reinsurer of last resort'' for 
terrorism and war. When you get into natural catastrophes, I 
think it is a whole different issue and there the private 
sector should be up front.
    Mr. Bentsen. My time is up, but I would say that debate 
would go that many would believe that it is a basic function of 
Government also to come to the aid of its citizens in terms of 
a natural disaster.
    Mr. Ferguson. But the onus should be on the private sector 
to come up with that response, I think.
    Mr. O'Hare. Natural disasters, the actuaries would tell 
you, are something that are will fit into an actuarial formula. 
Terrorism is another question.
    Mr. Bachus. Thank you.
    Gentleman from Connecticut.
    Mr. Shays. Thank you, Mr. Chairman. Mr. Chairman, I would 
like to state that I was at an Intelligence Subcommittee 
hearing on terrorism and I was faced with this awkward choice, 
which sometimes happens, two extraordinary hearings. This has 
extraordinary implications for the country. Obviously living 
right next door to New York City, we are seeing this up close 
and personal.
    A great advertisement for life insurance is that sadly some 
of my constituents who were killed, murdered, have no life 
insurance of any consequence, and yet they had very high 
incomes. And it is real tragic what we are seeing happen to a 
number of people. They simply didn't listen to you, and you all 
said ``you need life insurance.''
    And it is also important to me obviously, because 
Connecticut is an insurance State. And in our area, I think it 
is the reinsurance capital--at least one of them--of the world. 
So I apologize for not being here. I want to state a few 
things, and I don't need long answers, just to see if my sense 
is right.
    Technically, legally, life would have to have been paid, 
but casualty would not have to have been paid for a terrorist 
act. People with life insurance policies covered for a 
terrorist act? I am talking legally. You all are going to cover 
it. That is not the issue.
    Mr. Ferguson. Could I start on that? It is my 
understanding, Congressman Shays, that very few property-
casualty insurance policies have a terrorism exclusion, number 
one.
    Number two, many property-casualty insurance policies do 
have a war exclusion, and that goes back decades and decades 
and decades.
    Number three, on the life insurance side, it is my 
understanding--although I am getting out of my area of 
expertise here a little bit--that very few life insurance 
policies any more have either a war exclusion or a terrorist 
exclusion. So the real issue kind of turned on did the war 
exclusion apply on the property policies, and many of them do 
have that exclusion. And by and large the industry has said no.
    Mr. Shays. I make the assumption that one of the challenges 
is that, one, the right thing to do is to cover it. But even 
from a business standpoint, I would suspect that some companies 
would be boycotted if they sought to not participate. I don't 
say that as a negative to any of you, but I mean, that would 
have been a reality even from a business standpoint. But what 
all of you are saying--Chubb a little more aggressively than 
the rest of you--either you would not have the resources to 
cover another attack like this or you would simply put people 
on notice right now that it wouldn't be covered. And I would 
like to know which is it. Do the rest of you jump in with Chubb 
in their candidness and say ``we can't cover it'' or ``we won't 
cover it.'' First I want to know if it is can't or won't, and 
then I want to know what the others think.
    Mr. O'Hare. When you put together coverage for a commercial 
client--you may be talking hundreds of billions of dollars for 
that particular client--you don't take on this coverage by 
yourself. You go to the reinsurance market and you lay off a 
portion of the risk. If, in fact, the reinsurance market, which 
is the case as we speak, is unwilling to give you coverage for 
terrorism, then the product that you sell cannot cover it, 
because there is no way on earth that a single company could 
offer hundreds of millions of dollars on its own. So the fact 
of the matter is, as much as we would love to, we can't, 
because in order to put together complex coverages----
    Mr. Shays. I understand that when you renegotiate it. But a 
lot of these----
    Mr. O'Hare. Where we are today with the coverages that 
exist, which do provide for terrorism coverage, I will tell you 
right now, as long as we have a penny's worth of net worth, if 
they were to be 10 or 20 more such events, we would keep paying 
until we were bankrupt.
    Mr. Shays. That is fair. In other words, you are basically 
saying you would go bankrupt in the bottom line?
    Mr. O'Hare. I am saying if, in fact, you have 20 or 30 such 
World Trade Centers. Chubb has, for example, $7 billion worth 
of net worth. We are going to spend, after taxes, $350 million 
on this event. So we could have 20 of them.
    Mr. Shays. I realize this is a sensitive issue, because 
everybody listens to how you respond and it impacts your 
stocks. And I am not trying to sensationalize this. What I am 
hearing you say is that it wouldn't be one more attack, but a 
few more could do you in, in essence?
    Mr. O'Hare. I am saying that it would have to be a few more 
this year.
    Mr. Ferguson. But that would, obviously, vary company by 
company, and there are other companies that could not make 
literally----
    Mr. Shays. I mean, I have the general sense that we are 
going to try to resolve this. I mean, we are all anxious and 
all dealing with pretty horrific circumstances. But my sense is 
that this Congress is going to have to find a way to deal with 
a problem that you are notifying that seems intuitively very 
easy to understand. So I am not questioning that. And your 
challenge is how strongly do you state the case without making 
it a sensational issue and causing other problems. But the 
bottom line is, you are very clear. You are doing something 
that technically, legally, you don't have to do right now. You 
are covering a terrorist attack.
    Mr. O'Hare. One second. The policies that Chubb has issued 
do, in fact, cover terrorist attacks. What they don't cover is 
if the country had a declared war, and there was a fear in the 
public, I think principally created by the press, that 
indicated that some insurance companies were going to rely on 
the war exclusion, which does, in fact, exist in most policies. 
I was the first one to come out and say as respects to the 
property and casualty industry that the World Trade event was 
not a war in the traditional sense and we are going to pay our 
claims.
    Mr. Shays. Mr. Chairman, do you want me to come back 
afterwards? Would you like to go and I will come back? I am 
almost finished, but I think I will yield.
    Mr. Bachus. We have gone over, so I will recognize the 
gentleman from Kentucky. And let me say this, I do want to 
commend Mr. O'Hare. Your company was a leader in stepping 
forward and saying that you were going to fulfill your 
commitment to the American people, and we are very grateful.
    Mr. Lucas.
    Mr. Lucas. Yes. Since I am the last barrier between getting 
out of here, I would like to say that I have stayed here as a 
public policymaker to understand and have empathy for your 
problem so I can more intelligently help you deal with this, 
because I think we have got some work to do here and I 
understand that. I appreciate all the informative information. 
It was very succinct and we had a lot of horsepower here at the 
table, and I appreciate that and we are here to help you. 
Thanks.
    Mr. Bachus. I thank the gentleman. I am going to permit Mr. 
Shays to have 3 more minutes with your indulgence, and then we 
will adjourn the meeting. I do want to make some remarks very 
briefly, thanking some folks.
    Mr. Shays. I thank the gentleman. I don't want to leave it 
right there. I want to be clear you are saying that an act of 
terrorism is covered and an act of war is not and we get into 
the definition of what is a war and all of the ambiguity with 
that. But are you saying in rewriting your policies, you will 
have to say we now view an act of terrorism as an act of war 
and make it clear to your subscribers that that is the case?
    Mr. O'Hare. No, I am not saying we would view an act of 
terrorism as an act of war. What I am telling you is we would 
be forced to specifically exclude terrorism. The reason has 
nothing to do with Chubb.
    Mr. Shays. I understand the reason.
    Mr. O'Hare. Is we need to have reinsurance.
    Mr. Shays. The consequence is almost like an act of war is 
the bottom line here. Does anyone else want to make a point?
    Ms. Sebelius. Congressman, just from a regulatory 
standpoint I think one of the key issues, and it has been 
identified pretty clearly, though is to have as part of this 
exercise a very clear, very narrow, very limited definition of 
what it is. If the Government were to play any role in the 
reinsurer of last resort, defining what exactly is an act of 
terrorism and how broadly that is, it could have enormous 
implications. So while that may be self-evident, I think that 
may be a lot trickier.
    Mr. Shays. But it can have enormous implications if we 
don't jump in and help.
    Ms. Sebelius. Absolutely. But the definition and how 
narrowly it is drawn and what it defines is a critical piece of 
the puzzle.
    Mr. Shays. I have confidence that this is going to be 
legislation that would be debated pretty extensively and won't 
just go through like some of the legislation in the last week 
or two.
    I thank you, Mr. Chairman, and I apologize to some of the 
witnesses, because I am assuming some of this is redundant.
    Mr. O'Hare. If I may respond just to that comment, I am not 
trying to create a situation that this is a panic, but I am----
    Mr. Shays. I don't feel it is a panic.
    Mr. O'Hare. I am saying very specifically that the 
reinsurance coverage on what we would call facultative covers 
is not there today. So as we speak, it is having significant 
impact on the market. It is having significant impact on what 
any property and casualty insurer can offer to its customer. So 
as we speak today, customers are not getting what they could 
have gotten before September 11.
    Mr. Shays. Members of Congress need honesty and you can't 
be reluctant to tell us what you need to tell us. I feel like 
you feel like you are walking on thin ice here, but this is 
helpful testimony. I thank you.
    Mr. O'Hare. Thank you.
    Mr. Bachus.  We did receive testimony earlier and I think 
Mr. Pitt reassured us that the reinsurance industry is very 
strong and well capitalized, and I think maybe what we are 
saying here is on September the 11th, the world changed forever 
as we know it, and this terrorist attack was unlike anything we 
had seen in this country. It was impossible, and would have not 
been proper to have priced in for such an event, to ignore such 
an event after it has occurred is something that the insurance 
industry, as any industry, and the American people will not 
ignore in the future, and that is going to result in some 
changes in the marketplace.
    Let me close by saying this. Ms. Sebelius, I want to thank 
you and the NAIC for working very closely with this committee 
as these events unfolded and also, Mr. Ferguson, the 
Reinsurance Association has worked with the committee. We very 
much appreciate their professional work. Mr. O'Hare is 
representing the property-casualty field and also the life 
insurance field. The leaders that met with the President, the 
insurance industry, last week at the White House, that was very 
reassuring for the American people, and I think as the events 
have unfolded, the commitment and the actions of the insurance 
industry are exemplary, an extraordinary showing of compassion 
and concern for their policyholders, and I think the insurance 
industry has earned a great deal of goodwill from the American 
people. I hope that is the case.
    Mr. O'Hare. Thank you for those comments.
    Mr. Bachus.  Thank you.
    Mr. Mosher, the only question I was going to ask, and I am 
going to submit it in writing out of respect for our committee, 
is you said that the strength in the insurance industry is 
built on financial market gains as opposed to underwriting 
profitability. That is something we hadn't really discussed 
here, but if the insurance industry is to stay strong and it is 
to remain strong with these even new considerations, we have to 
look at allowing more favorable pricing by insurers. That is 
something we didn't get into today and I am going to submit 
some questions to you about that, and I appreciate your 
pointing that out. I am very happy that the insurance industry 
has invested their resources very wisely. If they hadn't, we 
would be in trouble today, because their pricing certainly has 
not been sufficient.
    The last thing I wanted to say, and this I mean as 
sincerely as anything and I say this to you, Mr. Serio, as New 
York Insurance Superintendent, the people of America have been 
watching New York and we are very proud of the State of New 
York, very proud to be in union with the State of New York. I 
would like to personally express my gratitude and the gratitude 
of the committee for the exceptional efforts by your office and 
of Governor Pataki to respond to this tragedy. We have all 
talked about Mayor Giuliani. We know what he has done, but 
George Pataki has been a pillar of strength.
    We also want to express great sorrow at the loss of former 
New York Superintendent Neal Levin. Having you here today 
reminds us again how well we worked with him, how much we 
admired him and how he will be sorely missed. And I would like 
to express our prayers and sympathy with his family.
    Mr. Serio. Thank you.
    Mr. Bachus. I think that brings the loss home to us all. 
With that--and this is something I have to do for procedure, 
but the Chairman not only thanks the witnesses for their 
testimony, but notes that some Members have additional 
questions for the panel that they will submit in writing and, 
without objection, the hearing record will remain open for 30 
days to submit written questions to those witnesses and to 
place their responses in the record. Without objection, that is 
so ordered.
    Again, I thank you all for your attendance. The hearing is 
now adjourned.
    [Whereupon, at 1:39 p.m., the hearing was adjourned.]
                            A P P E N D I X

 
                           September 26, 2001
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