SECTION: PREPARED TESTIMONY

LENGTH: 1432 words

HEADLINE: PREPARED STATEMENT OF LESLIE M. BAKER, JR. ON BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE
 
BEFORE THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
 
SUBJECT - THE AVAILABILITY OF TERRORISM INSURANCE COVERAGE

BODY:
Mr. Chairman and members of the Committee:

Thank you for the opportunity to testify on this critical matter. My name is Leslie M. Baker Jr., Chairman of the Wachovia Corporation, here on behalf of the Financial Services Roundtable, of which I am the immediate past chairman. The Financial Services Roundtable is a trade association for the nation's largest integrated financial services companies. Our 100 members are drawn from the ranks of the banking, insurance and securities companies.

I am here today to tell you that without full cooperation between our government and America's private industries in support of insurance activities there could be major disruption in the marketplace and harm to the economy. On October 10, 2001, thirty Chief Executives from Roundtable member companies signed a letter to the Congress expressing concern over the impending lack of terrorism coverage and urging Congress to act this year. It is important to note that 22 of those 30 signatories are bankers, including Wachovia. This makes the point further that this is not an issue solely about the insurance industry. Mr. Chairman, I ask your consent to have the letter entered into the record. The President of the United States, Chairman of the Federal Reserve. Secretary of the Treasury and many Members of Congress have recognized that our economy needs an. economic stimulus package. Without Congressional action to provide a federal backstop for terrorism insurance, efforts to provide an economic stimulus could be ineffective. This is an issue about the ability of the United States to recover from the terrorist attacks of September 11th and the ongoing issues of uncertainty, which now weigh upon the economy.

The possibility of further terrorist acts in the United States places uncertainty into many sectors of our economy. Without adequate insurance coverage, our nation could face economic, market and employment disruption. To assist in revitalization and to avoid an economic downturn in the United States, the Financial Services Roundtable urges this Committee to create some form of federal assistance for insurance losses due to acts of terrorism.

The Nature of the Problem

Property and casualty insurance coverage is one of those subjects that normally attract little public attention. However, it is a vital part of our economy and affects large and small companies in industries from banking to real estate, and beyond. Insurers assume risks that other parties cannot. For example, insurers shield developers from the risks associated with major construction; they protect shippers transporting goods and commodities; they cover losses associated with homes and ears; they protect employees through workers compensation programs and disability coverage; they protect businesses from legitimate claims arising from business interruption.

The property and casualty insurance industry has announced that it is paying all private sector claims associated with the September 11th attacks. These costs apparently could reach $50 billion or more. Additional acts of terrorism are unpredictable and, as the attack on the World Trade Center illustrates, the losses from such attacks can be massive. Acts of terrorism are "human acts" rather than acts of nature. As such, there is no existing actuarial analysis available to evaluate such risk. Risk that can't be priced or managed translates into the inability of primary insurers to offer policies or get reinsurance. Thus, if primary carriers can't transfer risk for acts of terrorism through the reinsurance market then they cannot sell polices that include coverage for such acts. If they are unable to sell polices that include terrorism coverage; a lender may be precluded from making loans due to increased exposure to uninsured risk. A Banker's Perspective

As I stated earlier, without insurance coverage for terrorist acts, it will be much more difficult, for bankers to extend or renew commercial loans or lines of credit for business purposes, construction or development.

To assess the viability of a particular loan, a bank must carefully assess the risk of the loan and price it commensurate with that risk, Obviously if the risk is too great, the bank cannot grant the loan at all. One way borrowers reduce risk to themselves and the bank is to acquire insurance protection against a number of risks. Purchasing appropriate insurance is standard business practice for anyone attempting to obtain financing in the United States.

If the insurance industry cannot offer adequate insurance to a borrower or a bank because it cannot properly price or reinsure the risk, the bank is faced with a serious risk assessment problem. Is it prudent to make a loan to construct a pipeline, or a power plant, or an airplane, or a ship, or a large shopping center or office building when the potential for the borrower to repay the loan is diminished by inadequate insurance coverage? For most banks, the answer will be no. indeed in many cases such a loan, most assuredly, would be considered unsound.

As part of the underwriting process a bank must gain understanding of likely sources of repayment in the normal course of events and under catastrophic circumstances. A normal part of the underwriting process is to make certain that appropriate insurance coverage is available. This risk protection is good for the customer as well. In the absence of insurance there must be adequate cash reserves in place to provide for the retirement of debt. Without insurance, however, such cash reserves would lock up capital that our customers need to grow their business and create jobs. Either way, a loan may not be approved without one of these provisions in place and this is not an acceptable outcome for an economy already dangerously slowed.

Wachovia is one of the five largest commercial real estate lenders in the United States. Our company has total commercial exposure of approximately $252 billion including real estate and small business loans. Specifically, Wachovia's exposure to commercial loans secured by real estate is $49 billion and our exposure to small business is $12 billion. It is important that we continue to serve our customers. In particular, I am concerned about the impact on small business customers who are already experiencing wide disparity in quoted premiums due to insurers' inability to price products consistent with standard actuarial analysis. In the case of large or small business, only the federal government can provide the insurance industry with the breathing room it needs to return to a stable, rational market. Without a federal backstop, businesses will have to self-insure putting their capital -- and ours -- at risk. Magnify that potential loss of capital across the domestic banking sector to gain an appreciation for the dramatic impact a loss of insurance could have on our economy. Mt. Chairman, it is impossible to determine if, when or where a terrorist might strike, but it is quite clear what the business ramifications can be. I am certain, however, that the lack of insurance coverage for terrorism will mean fewer loans and that will mean constriction of economic activity throughout the country. When a loan is not made, the jobs that would have been created to build a plant or run an office will not occur.

The Solution

Mr. Chairman, these economic problems need not arise. With appropriate support and assistance from the Federal Government, the insurance industry can be in a position to accept the risk associated with terrorist attack, and our economy can continue its march to recovery. However, something must be done immediately before reinsurance contracts expire at the end of the year.

The Financial Services Roundtable is familiar with the various proposals that have been developed. As an organization, we have deliberately not stated a preference for any particular one. There are insurance experts in the private and public sector working to develop details of a plan that can best address the problem. From my perspective, any proposal must pass a simple test: it must return certainty to the market. As such, the program must be in place for an adequate amount of time, and must give primary insurers a chance to understand changes in the marketplace and explore adequate alternatives for reinsurance. I am certain, given the close collaboration between the Congress, the Administration and the industries affected we can develop a workable solution.

Thank you Mr. Chairman. I'd be pleased to answer any questions.

END

LOAD-DATE: October 31, 2001