FROM THE OFFICE OF PUBLIC AFFAIRS

Good afternoon and thank you for this opportunity to speak before you today. Over the past several weeks I have had the opportunity to work closely with a number of you on an economic issue of great importance to our country.

Let me begin by thanking the NAIC for the cooperative spirit with which you, as an organization, have assisted the Administration in dealing with the impact on the insurance industry of the September 11 terrorist attacks.

I have had the privilege of speaking to a number of you, in person or by conference call. I would especially like to acknowledge Kathleen Sebelius -- a fellow Kansan -- Terri Vaughan, Greg Serio, Cathy Wetherford, and David Wetmore for their ongoing assistance and availability. I know that I have also met with, or spoken to, other commissioners and NAIC staff, and I am grateful to you all.

The problem before us is real. It is not a problem of solvency -- despite enduring enormous losses on September 11, the insurance industry is making good on those claims and will remain strong. The problem is one of uncertainty. Insurance companies facilitate economic activity by reducing risk. To do this, they must know the general distribution of possible outcomes associated with the risks they underwrite.

After September 11, however, insurance companies have no sense of the risk distribution associated with possible future acts of terrorism. For the moment, the uncertainty associated with terrorism risk leaves the industry unable to assess and price risk. As a result, it is not the industry that is at risk, it is the economy. Insurance companies will - and some already have - reacted to this situation by either refusing to extend coverage for acts of terrorism or seeking exorbitant premiums for such coverage. At a time when we are working hard to stimulate our economy to get it moving again, left unresolved this situation would be a harmful drag on those efforts.

As we began considering this problem at the Treasury, we quickly decided on several things.

First, any action we took should be limited in duration. What is uncertain today may be better understood a year, or two years, or three years from now. Thus, our efforts are more akin to bridging the period from now to when the industry regains its ability to establish a basis for pricing this risk.

Second, we did not want to engage issues of federal insurance charters or dual federal-state regulation of insurance. There may be a day to talk about such things, but this is not that time and these are not the circumstances in which that discussion should happen. Indeed, one objective we have focused on in considering this situation is to rely upon the existing state regulatory infrastructure as much as possible in crafting a solution.

Our immediate goal is to work with Congress to enact a bill in the next two weeks that deals with the immediate market disruption.

Let me outline for you now the approach we have been discussing with Congress. This approach remains a work in progress but resolution of its unresolved issues must happen soon.

Under the approach we have developed, individuals, businesses, and other entities would continue to obtain property and casualty insurance from insurance providers as they did before September 11. The terms of the terrorism risk coverage would be unchanged and would be the same as that for other risks.

Any loss claims resulting from a future terrorist act would be submitted by the policyholder to the insurance company. The insurance company would process the claim and pay the policyholder. The insurance company would then submit a claim to the Treasury, which would compensate the insurer for that portion of the claim for which the federal government is responsible according to the loss sharing arrangement established by this approach.

The Treasury would establish a general process by which insurance companies submit claims. The Treasury would also institute a process for reviewing and auditing claims and for ensuring that the private/public loss sharing arrangement is apportioned among all insurance companies in a consistent manner.

All of you -- the state insurance regulators -- would also play an important role in monitoring the claims process and ensuring the overall integrity of the insurance system. Indeed, we hope we can rely on the help and support of state insurance regulators in implementing this approach. As I noted at the outset, we do not want the solution to this immediate problem to involve creation of an intrusive system of federal insurance regulation. We would much prefer to rely upon your good offices and our mutual desire to ensure that policyholders are protected and the system's integrity is preserved.

Since substantial federal taxpayer dollars could be at stake, we will vigorously seek to ensure both the efficiency and validity of the claims process. To do that, we will need your assistance.

Let me now explain the loss sharing arrangement we have suggested.

Through the end of 2002, the government would absorb 80 percent of the first $20 billion of insured losses resulting from terrorism and 90 percent of insured losses above $20 billion. Thus, the private sector would pay 20 percent of the first $20 billion in losses and 10 percent of losses above that amount.

The role of the federal government would recede over time, forcing the private sector to develop its capacity each year.

In 2003, the private sector would be responsible for 100 percent of the first $10 billion of insured losses, 50 percent of the insured losses between $10 and $20 billion, and 10 percent of the insured losses above $20 billion. The government would be responsible for the remainder.

In 2004, the private sector would be responsible for 100 percent of the first $20 billion of insured losses, 50 percent of the insured losses between $20 and $40 billion, and 10 percent of the insured losses above $40 billion. The government would be responsible for the remainder.

To preserve flexibility in an extraordinary attack, combined private/public liability for losses under the program would be capped at $100 billion in any year. It would be left to Congress to determine payments above $100 billion.

The federal government's involvement would sunset after three years. It is our hope, indeed our expectation, that the market failure we face today will have been corrected by then so that the private sector will be able to effectively price and manage terrorism risk going forward. Of course, should that prove not to be the case, Congress and the President can reevaluate the program in place and decide at that time on any temporary extension of the program or establishment of some other approach.

This approach would also provide certain tort reforms, including consolidation of claims into a single forum and a prohibition on punitive damages.

Finally, this approach requires a clear definition of an "act of terrorism." We suggest that the Secretary of the Treasury be given authority, in conjunction with other members of the Cabinet, to certify that a terrorist act had taken place for purposes of activating the shared loss compensation arrangement.

Before taking questions, let me close by flagging three issues that have been raised with us by members of Congress and the insurance industry which directly relate to how our approach would intersect with state insurance regulation.

First, in the discussions we have had with the various participants on this topic, the issue of whether federal laws should require coverage for terrorism risk has not yet reached consensus. Virtually all policies today include coverage for acts of terrorism. In offering a program such as the one I just outlined, we would hope that terrorism risk coverage would continue to be standard in insurance policies.

Second, the insurance industry has expressed concerns about how state regulation of insurance premiums may affect their ability to price the risk they would retain under this approach. We understand that, in most states, the industry may change rates without prior approval but that in all states the state insurance regulator retains a right to review and reject rate increases. We would hope that, in those states where prior approval is needed that state regulators would act expeditiously on appropriate rate increase requests.

Finally, it has been suggested to us - with some merit, I believe -- that to achieve our goal of assuring uniform insurance coverage for terrorism risk throughout the country, our approach must provide for a national definition of terrorism.

In closing, let me again thank the NAIC for its efforts. We appreciate your support in our efforts to craft a limited,short-term plan to address the current market failure in the pricing of terrorism risk insurance. Our approach is only a starting point, and we look forward to working with Congress to craft a consensus proposal which can be signed into law within the next several weeks. As that effort unfolds, we hope we can continue to rely on the NAIC's input and advice.

Again, thank you. We at the Treasury Department look forward to building upon the relationship we have forged in recent weeks.