Thank you. I am delighted to meet with this key part of the financial services sector at the beginning of what we hope will be a less tumultuous year in the industry. I would like to reflect first today on the American economic situation. Let me then offer some thoughts on a key policy question under discussion in Washington of particular relevance to your industry: the question of federal involvement in the provision of disaster reinsurance..

I. The American Economy

It has been a difficult few months for the global economy and for the financial services industry in particular. But while important parts of our economy have been hurt by crises overseas and hurricanes at home -- the basic momentum of the recovery has not. In fact, as the President reported last week, last month took us into the longest peacetime expansion on record.

Consider:

• unemployment is at a 30 year low, and a higher share of Americans are in work than at any time in our history.
  
• inflation -- instead of rising -- is tamer than in a generation.
  
• real wages are finally making up the ground that had been lost, with the fastest growth in average hourly earnings last year in more than two decades.
  
• and the budget deficit is no more. When President Clinton took office the Congressional Budget Office was projecting a federal deficit in 1999 of $404 billion. Today, we expect a surplus of at least $75 billion -- the highest dollar surplus in our history.

Why this success? Two reasons stand out.

First, the competitive drive, creativity and flexibility of American companies. It cannot be an accident that communism, planning ministries throughout the developing world and large corporations run by command and control all ran into a brick wall in the same decade and had to be restructured. New technologies in all areas of industry have forced profound changes in the way economic and financial life is organized -- changes for which we are fortunate that our economy is superbly well adapted.

The twin forces of information technology and modern competitive finance are moving us toward a post-industrial age. And if you think about what this new global economy means -- whether it is AIG in insurance, McDonald's in fast-food, Walmart in retailing, Microsoft in software, Harvard University in education, CNN in television news -- the leading enterprises are American.

The second major reason was a prudent, pro-growth economic strategy.

First, we have pursued sound macroeconomic policies: policies that recognized that Fed-bashing was a fool's game, it does not change short-term interest rates because the Fed does not respond, but it does increase long-term interest rates because the bond market does. And policies that recognized that the economy had to be freed of the burden of the federal deficit. Thanks to the deficit reductions we have seen in this decade, more than one trillion dollars in capital that would otherwise have been invested in the sterile asset of government paper has instead been invested in America's future: in our productive businesses, in our workers, in our cities and in our homes.

Second, we have worked to make critical investments in our future and to make government a positive force in our society and our economy. This ranges from the creation in 1994 of the Early Head Start program for disadvantaged children under 3 and last year's Hope Scholarship program -- to President Clinton's proposal to invest $100 million to develop a next generation Internet.

Third, we have worked to promote an open global economy, with 240 new trade agreements lowering barriers to American goods since 1993, including the ratification of NAFTA and the completion of the Uruguay round of the GATT and ground breaking international trade liberalization agreements within the World Trade Organization in the critical sectors of telecommunications and financial services.

We pressed for a strong agreement in the World Trade Organization negotiations in financial services that ended in 1997. And we got one: covering 95 percent of the global financial services market in revenue terms, and far outmatching the previous agreement reached in 1995. With the 1997 agreement, 102 WTO members have made market-opening commitments encompassing nearly $18 trillion in global securities assets, and more than $2 trillion in worldwide insurance premiums.

In insurance alone, American companies now have more than $200 billion in foreign premiums. Across all insurance sectors, 52 countries have guaranteed broad market access terms. And another 14 countries have committed to open critical subsectors of their insurance markets of particular interest to American industry. Indeed, in insurance alone, we were able to get countries to commit to allowing cross-border provision of services -- so that American insurers will be able to sell their services to far-off clients without ever leaving their home base.

As we go forward we will be hoping to build on such market-opening successes in these and other sectors. There will be a new round of comprehensive service sector negotiations within the WTO starting next year, and you can count on us pursuing opportunities for American insurers in that context.

I am confident that the dynamic duo of competitive industry and prudent policy leave America well-placed to face future shocks and that the momentum of the recovery can be sustained, albeit perhaps at a slower pace than has been true most recently. But a healthy partnership between private entrepreneurship and public purpose is like a marriage -- it takes work. Times change, and when times change so must be the relationship.

The challenge for policy makers to keep up with change -- and manage the consequences -- has arisen with particular force of late in the financial sphere, both at the domestic and the international level. The example closest to the hearts of many in this room is whether there is now a role for the federal government in the provision of disaster reinsurance.

II. A Federal Role in Disaster Reinsurance

It seems clear that the appropriateness of a federal role in natural disaster reinsurance will be discussed in this Congress as it was in the previous one. We in the Administration have taken an active role in these discussions. The greater frequency and severity of natural disasters since Hurricane Hugo in 1989 has put the issue high on the public agenda -- and rightly so.

Disasters are a grave concern for all. Under the leadership of Federal Emergency Management Agency Director Witt, the Administration is presently engaged in a broad range of mitigation initiatives. As Director Witt has said, "the fact is we have the opportunity to cut losses, the know- how to reduce risk and the responsibility to save lives. But it means we must change the way we think and plan and budget. It means that instead of responding to disasters we must prevent them -- instead of waiting to react we prepare now for the next flood, hurricane, fire or earthquake."

These considerations motivate the Project Impact initiative, which will build disaster resistant communities, saving lives and protecting families and communities against disaster losses. Pre-disaster mitigation is very important, perhaps even more important than what I will talk about here. Insurance cannot undo the human costs of disasters. Yet it can provide the foundation for a sound recovery in financial terms, and we want to ensure the insurance foundation is as sound as possible.

1. Recent Developments In the Market

The characteristics of natural disasters -- low frequency of occurrence, high losses when they occur, and a considerable degree of uncertainty associated with loss estimates -- make them especially challenging for insurers. As a result, it is perhaps not surprising that, even in Anormal@ times, prices in the market for disaster risk can be high relative to estimates of expected losses. For example, insurance premiums at the highest layers of risk can typically run in the neighborhood of 3-5 times expected loss.

In the wake of large events, prices typically spike higher still -- and remain high -- pending the replenishment of capital in the reinsurance industry, and the consequent restoration of underwriting capacity.

Ultimately, we believe that the most efficient means for underwriting these risks may involve the capital market as an important complement to the traditional reinsurance industry. Indeed, in 1997, just over $1 billion of catastrophic natural disaster risk was securitized in American markets, and issuance continued at roughly the same rate in the first half of last year, the latest period for which we have data. These are significant developments, given that this market simply did not exist even a few years ago.

The exciting thing about the so-called Acat bond@ market is its tremendous capacity for absorbing losses. Consider: in today's global capital market, $50 billion can be won or lost in a day without so much as a raised eyebrow. The same amount lost in the reinsurance sector would wipe out about a fifth of industry's capital.

But, as most here will probably testify, the market for securitized catastrophic risk is in its early days yet. This market still only represents, at most, a few percent of the domestic catastrophic insurance market as a whole. So important gaps and problems remain a feature of today's markets. Notably: reinsurance and cat market prices are still high, purchases of high-level protection are limited, and purchases of high-level protection are still limited.

On balance, we believe that these considerations constitute a strong case for prudent participation of the federal government in the market for disaster reinsurance, in a way that reduces both the private costs of these events and the costs to society as a whole.

2. Principles to Guide Legislation

We believe that federal involvement in this market should be guided by the same two principles that have guided so much of the Administration's policy these past 6 years:

• first, the government should share risk, not subsidize it.
  
• second, government policies should support the private market, not supplant it.

In essence, the first principle says that the program should impose no net cost on the taxpayer -- that the federal government cannot be the bill-payer of last resort. We think there are some constructive things the government can do to better serve the interests of the homeowner and the insurer. But we also believe that any such actions must be judged in light of the fact that there will be two parties to every transaction in which the government might engage, with taxpayers being the other. Any actions the government takes must be consistent with the kind of hardheaded prudence that has been critical in getting our fiscal house in order.

The second principle suggests a number of constraints on any legislation: first, federal involvement should be partial, leaving room for the private market, even in the short run. It should also be limited, applying only to the kind of low-probability risks that private markets currently have difficulty handling. And above all, the government's involvement should be considered strictly transitional, phasing out as private markets develop. We can improve on today's market outcome -- but we must not do so at the cost of stifling the incentive for the market to come up with even better solutions on its own.

The crafters of HR219 -- the bill that was passed out of the House Banking Committee last year -- shared many of the same goals and the bill seems to us to be a very constructive starting point for further legislative discussions of this issue. It comes a long way toward meeting our principles. But as you know, we still believe it could be improved in a number of ways, all of which would make it function even better as reinsurance protection.

It is difficult to know where the debate will go. But we hope there is a constructive way forward that meets our principles and passes on the maximum benefits to American homeowners. We look forward to working with Congress and with you all on this important issue. Thank you.