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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.
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    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.
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    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.
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    That completes the Chair's opening statement.

    I now yield to the gentleman from New York, the Ranking Member, Mr. LaFalce.

    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.

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    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.
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    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.
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    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.
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    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.

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    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.
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    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.

    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.
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    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.
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    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.

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    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.


    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.
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    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.
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    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.
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    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.

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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.

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    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.

    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.

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    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.
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    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.
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    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?
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    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?
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    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.
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    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.
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    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.
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    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.

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    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.
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    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.
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    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.

    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.
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    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.
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    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.
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    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?
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    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.
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    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.
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    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.
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    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.

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    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.

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    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.

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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.


    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.
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    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.
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    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.
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    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.

    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.


    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.

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    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.
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    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.
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    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.

    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.

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    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.
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    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.
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    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.
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    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;
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    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.
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    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.
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    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.

    Chairman OXLEY. Thank you very much.

    Mr. Benmosche.


    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.
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    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.
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    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.
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    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.
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    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.

    Chairman OXLEY. Thank you very much.

    Mr. O'Hare.


    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.
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    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.

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    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.
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    Thank you for this opportunity to address the committee. I am pleased, when appropriate, to respond to your questions.

    Chairman OXLEY. Thank you, Mr. O'Hare.

    Mr. Mosher.


    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.
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    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.
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    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.

    Chairman OXLEY. Thank you, Mr. Mosher.

    Mr. Ferguson.


    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.

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    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.
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    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?

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    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.

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    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.
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    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?
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    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.
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    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.

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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.
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    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.

    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.
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    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?
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    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.
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    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.
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    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.
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    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.''
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    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.
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    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.

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    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.
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    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?
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    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.

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    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.
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    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.

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    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.]
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