tion which would allow such coverage to be obtained through private underwriting or through a hybrid of public/private sector cooperation.

It seems appropriate to reverse my normal method of analyzing such problems by initially setting forth a series of conclusions:

(1) I do not believe, by any means, that the array of potential solutions to the investment security problem have been exhausted in Congressional deliberations to this point;

(2) I am not convinced that the private sector alone has the capacity or the experience to insure against the full exposure of investments to the risks of a treaty, but I am, at the same time, certain that the possibilities of exclusive private sector coverage have been inadequately pursued;

(3) I am convinced that a hybrid partnership could be formed between a United States government entity and private sector underwriters (and, desirably, with other insurance programs of other governments similar to those administered by OPIC) which will allow for the protection of the investments of the ocean mining industry;

(4) The hybrid investment security program could reduce contingent government liability by hundreds of millions of dollars and have the attendant advantage of reducing restraints on our Law of the Sea delegation as it moves forward with its negotiations;

(5) I am certain that, if Congress transfers the S. 2053, sec. 202 guaranty from a position of first-option to a fallback of last-resort, the private insurance underwrit. ing community will be able to create a means of privately absorbing substantial portions of the political risk attendant to ocean mining investments;

(6) The full guaranty approach of S. 2053 creates incentives to incur unnecessary and major cost to the government;

(7) The full guaranty approach of S. 2053 creates disincentives to a transfer of risk from the government to the private sector; and

(8) I believe that the focus of Congressional efforts to devise a solution to this highly complex problem should evolve into a hybrid approach to the primary question of how to assist in enabling the private market to "finance" industry's risk, rather than adhering to the structural limits of focusing on an exclusively "insurance" or exclusively "guaranty" approach.

I would now like to move from my conclusions to the types of considerations which have led me to express them.

A. DEFINING AND ASSESSING THE RISK OF A TREATY As prior witnesses have most properly suggested, among the first concerns of an insurance underwriter or broker are (1) whether there is a risk which can be defined, and (2) whether the scope of that risk may be properly assessed in a manner which allows for the provision of insurance based (a) on a premium or (b) on a premium combined with a retroactive assessment.

Additional problems which inhibit the assessment of the treaty risk emanate from a difficulty in distinguishing (a) whether the "risk” will fall upon the industry or individual consortia at the moment of ratification by the United States; (b) whether that risk may be further subdivided into risks deriving from (i) provisional participation by the United States government and (ii) a long-term formal ratification; (c) whether there is any risk at all (whether provisional or long-term) which may ensue from ratification of the treaty; (d) whether the risk may actually be spread out over an uncertain period of time during which other principal parties may be undertaking the process of ratification; or (e) whether, in fact, the risk is fully delayed to the point at which the proposed Enterprise first issues and implements its regulations in a loss-inducing manner. My examination of CNT, United Nations procedures and American treaty adoption procedures suggests that the spectrum of risk occurrence and impact is decidedly broader than has been envisaged in prior consideration of this issue.

The maze of issues introduced above must, for purposes of analysis, fit within the umbrage of what we may generically refer to as a "treaty risk. Focusing on that risk, the Committees should inquire as to whether the insurance industry can make any assessment of the treaty risk which might be similar to the type of risk assessment which would be applied to land-based (territorial) political risk insurance coverage. In the latter case, a limited number of experienced private brokers

*Some parties have gone so far as to suggest that the risk posed by the treaty cannot be defined because of the absence of any predictable procedure which might be followed in the enactment or implementation of what is presently known as the Composite Negotiating Text ("CNT").

and underwriters share the belief that they may make a determination as to the likelihood of such "traditional" political risks as war, expropriation and inconvertibility of currency based on experience with a number of countries over a number of years. A number of factors are taken into account in reaching such an assessment, one of which is the capacity of the underwriter or the company to obtain some salvage or subrogation rights. Another aspect involves a subjective analysis of a given country and a review of that country's record in honoring its contractual obligations subsequent to expropriative acts.

Although some persons have attempted to reduce the assessment of these types of risk to an acturial base, our review of industry practice suggests that a "crystal ball" approach may well be the prevailing standard. It is only in the area of life insurance that pure actuarially-based decisions can be made, and industry practice in evaluating traditional casualty and property risks is quite variable and lacking in full mathematical support. Under either standard, however, insurers lacking experience in the political risk field would contend that the treaty risk eludes analysis because of the apparent absence of even a semblance of an "actuarial" context.

This inevitably leads us to the principal question of whether the absence of traditional indicia of insurance decision-making factors renders the treaty risk categorically "uninsurable." Although I would agree that the treaty risk eludes traditional insurance analysis, I suggest unequivocally that such elusiveness should not terminate the Committees' inquiry.

In fact, the more relevant issue is whether the treaty risk may be analyzed in terms of untraditional but nevertheless insurable forms of political risk.

An interesting if moderately distinguishable example was revealed by our study of the enactment of the Price Anderson Act, which was designed to provide coverage for the potentially unlimited liability which was faced by the nuclear utility industry many years ago. At that time, because of what was perceived as a "compelling interest by the Congress in allowing that industry to move forward, the PriceAnderson Act was passed with a limitation on liability of $500,000,000.:

The most relevant aspects of that particular insurance problem are that (1) it was universally agreed that private sector coverage would be "unavailable" because of the uniqueness of the risk, (2) there was no actuarial base to allow the insurance industry to make a traditional assessment of the risk, and (3) although the probability of an accident was considered to be very small, there was agreement that, on the occasion of the first catastrophic event, liability limits would be exhausted and the capacity to further insure would be reduced if not destroyed. Extensive testimony and findings of a number of studies suggested that "there would be virtually no spread of risk and initial premium volume would be very small” for any company attempting to underwrite the risk. By way of further analogy to the ocean mining industry, there were limited numbers of participants in the nuclear industry, so it was equally unrealistic in that fact situation to expect the industry to pool together on its own for a reciprocal sharing of risk.

In summary, the nuclear risk and the extent of potential liability was intially interpreted as being completely "unprecedented" and "uninsurable" by the insurance industry. However, a subsequent detailed analysis of the problem undertaken through a cooperative arrangement among the insurance industry, academic groups and the Congress itself, resulted in studies which revealed that "although insurance could not be provided to cover the entire risk, the industry would be able, through a special pooling arrangement, to write policies substantially in excess of the coverage then provided on conventional industrial risks."

B. COMPLEXITY DOES NOT FORECLOSE INSURABILITY I believe that a number of myths have arisen with respect to the alleged uninsurability of the treaty risk. Concerns have focused upon (1) the difficulty

of having a specific mining site which would be similar to prevailing systems for land-based natural resource extraction, (2) the difficulty of predicting the actions of an international body with potentially conflicting purposes and motivations, (3) the difficulty and the policy ambiguity of having the United States government insure its nationals against the consequences of its own deliberated political judgments and (4) the uncertainties arising from the conflict between the traditional international principle that resources of the ocean are res nullius (belonging to no one and able to be claimed by anyone) and the emerging concept, endorsed by this country's delegation and the U.N. General Assembly, that at some point in the future the resources of the ocean will, as a matter of law, be the "common heritage of mankind.”

* The example as used here is not altered by the recent federal district court decision that Price Anderson liability limits are unconstitutional.

I agree that the application of traditional insurance principles, and an emphasize upon the factors itemized above, may lead some to the conclusion that the private sector is justifiably timid in undertaking to cover the risks posed. I would like to emphasize, however, that these factors do not compel a conclusion that a program cannot be devised to establish a viable structure for the provision of investment security with private sector risk-bearing as a feature. Nor do these factors make the case for the necessity of an investment guaranty such as found in the proposed sec. 202 of S. 2053. C. INVESTMENT SECURITY DOES NOT REQUIRE EITHER TRADITIONAL INSURANCE OR

TRAIDITIONAL GUARANTIES My review of the substantial amount of literature which has accumulated through five years of Congressional hearings suggests that a number of semantic choices have served to inhibit the texture and breadth of discussion on the possibilities of securing mining investments.

As some of the consortia members have repeatedly indicated, they want investment security. Security does not necessarily require insurance, nor does it necessarily require a guaranty: Consequently, I recommend that your Committees shift their attention from straight "insurance concepts and straight "guaranty" concepts, and redirect emphasis to the issue of how to finance the treaty risk problem. When that is done, the Congress will be able to consider a much wider array of possibilities and focus on the capital transaction aspects of the investment security problem.

The Committees may find it valuable to look separately to (1) the needs of bankers who may write loans for these ventures; (2) the needs and potential costreducing functions of insurance comnpanies which may underwrite various aspects of the risk; (3) the possibility of utilizing other participants as sources of security for both parties; and (4) the possibility of providing other forms of collateral, subrogation rights and salvage opportunities for all parties interested in participating in the investment.

It is likely that a number of the opinions which have been offered by various sources, all of which have been negative on the insurance issue, may have been pessimistic because traditional premises were being utilized as a basis for traditional solutions to an untraditional problem.

D. DISPERSION OF RISK A number of other parties testifying before other Congressional committees have suggested that there is an "all-at-once" nature to the risk faced by the consortia. They have further suggested that the alleged concentration of risk undermines the fundamental insurance principle of risk dispersion, and that it diminishes the likelihood of attracting any private underwriting.

I disagree. As I have indicated earlier, a focus on defining the risk, aided by a more detailed assessment of the risk, suggests that the types of variables faced by the ocean mining consortia under a regime such as that posed by the CNT is not markedly different than a number of expropriation and "creeping expropriation" risks which have been faced in the past by the operations of multinational corporations in various nations. To the extent that our research suggests that the "treaty risk” may actually be defined and assessed more precisely than has been suggested by others, the question becomes one of whether there is any potential for a scheme under which risk may be dispersed, if and when the risk has been more carefully identified.

On this point, it is interesting to review the House testimony offered April 26, 1977 by Mr. Cecil Hunt, Acting General Counsel for OPIC. He observed that the growing reserves and capacity of OPIC had created an incentive for private under. writers to join, for the first time, in multilateral insurance for political risk. As he noted, one of the fundamental attractions of the governmental insurance scheme was that it created a larger pool through which a given risk could be dispersed and diluted. It is not necessary to conclude that OPIC should be the vehicle for pooling the risks of the ocean mining industry in order to be able to say the pooling principle itself should be much more vigorously pursued as it applies to this particular type of risk.

I have pointed out in my Report to NOAA, and it was also noted by Mr. Hunt, that one of the unique and hazardous phenomena of the ocean mining situation is the perception of the possibility that the risk of loss will be incurred by all insured or protected parties at the same time. It is interesting to note that this "all-at-once" phenomenon did not deter the Congress from constructing a very creative mechanism under which nuclear risks could be insured. In that particular fact situation, the contemplated hazards and liabilities were vastly greater than those presently faced by the ocean mining industry. Subsequent to the creation of a legislative incentive for private sector pooling, a risk which was initially perceived as being "uninsurable" became insurable within a short period of time. I must candidly note that such incentives are conspicuously absent from the guaranty provisions of S. 2053

To the extent that spreading of risk may be a precondition to the attraction of private insurance underwriting, I believe that any legislative proposal should incorporate the other types of features which go into the spreading of risk for uncommon insurance problems. The list would commence with:

(a) a degree of pure retention of risk by the consortia themselves (through deductibles or captive insurance arrangements),

(b) the formation of mutual insurance arrangements among the consortia to handle other layers of risk,

(c) the general layering of risk at other determined liability levels, with different mixes of government and private financing capacity and techniques being applied to absorb the risk at each level, and

(d) the utilization of the layering of risk to engineer the political risks involved, thereby reducing the likelihood of large-scale losses.

The possibility of pooling OPIC-type funds with the funds of similar insurance schemes for their own nationals has also been overlooked for purposes of exploring the possibilities of pooling and spreading.

Reference to the above options and possibilities does not instantaneously solve the problem. However, my research to date suggests that substantially more options will exist when these types of features are further investigated. At the present time I am not aware of any insurmountable barrier to a carefully devised solution to the risk spreading problem.

E DEVELOPING A WORLDWIDE CAPACITY FOR COVERAGE The "capacity of the insurance industry to provide coverage for a particular risk is measured in terms of the amount of money which may be pooled at any given time to cover the risk described in a given policy.

Capacity for the purposes of a treaty risk must be measured somewhat differently. Depending on the way in which the U.S. government might become involved in the funding and facilitation of investment protection, the risks and the amount of exposure to loss which would be faced by the industry and/or the government could vary widely.

I can envision circumstances in which the total losses per consortium might be kept below $50,000,000. I can envision other circumstances in which the combination of the Enterprise (depending on its authority and regulations) and the domestic legislation might result in losses by the government or by the consortia up to the full amount of each project investment. Consequently, depending primarily on the precision with which the domestic legislation is drafted, and depending secondarily on the outcome of the LOS negotiations, I would estimate that contingent losses could range from as low as $25,000,000 to as high as $1,000,000,000 per project. This substantial variation in estimate should serve as a telling symptom of the degree to which there will be a relationship between the losses incurred and the structure of the domestic legislation.

Serving as an umbrella over the entire scheme, of course, is the nature and text of the treaty which is eventually ratified. The foregoing estimations are based on an assumption that the CNT would be adopted in full and that adverse interpretations of most key provisions are applied.

I do not believe that an operable or conclusive estimate of the "capacity of the private insurance market or other money markets to participate in financing this risk has yet been presented. I state this because I do not believe that a full array of facts and feasible options has been made available to any party who has made such an estimate to this date. Rather than viewing capacity estimates as a ceiling on the possibilities of private participation, I view them as a bottom line which, combined with an imaginative government program, could be leveraged to provide vastly greater amounts of private capacity. The essential premise is that private capacity should be leveraged rather than be relied upon as an exclusive solution.

In estimating the amount which can be leveraged, I should point out that it is very difficult to obtain precise figures on the amount of political risk insurance which has actually been underwritten throughout the world. There are indications that syndicates at Lloyd's of London are already collecting more than $100,000,000 per year in political risk premiums. Similarly, we may observe that Lloyd's has participated in a re-insurance agreement with OPIC for the past six years under which Lloyd's 'has set aside a capacity of $45,000,000 for one risk/per day/per country. I am also personally aware of the possibility of obtaining capacities, through domestic sources, for land-based political risk in the range of $10,000,000-$20,000,000, and I am also aware of capacity being discussed with international underwriters in amounts ranging from $20,000,000-$40,000,000. Consequently, it is fair to suspect that the existing private capacity from direct underwriting of traditional political risks, irrespective of domestic legislation in this fact situation, may be at least in the approximate range of $40,000,000-$150,000,000.

The challenges to this Committee, therefore, are: (1) to devise the best available government mechanism to leverage this and other potential private capacity, and (2) to reduce the financial exposure of the American taxpayer. II. Legislation As a Vehicle for Risk Engineering and Risk Reduction

Although the foregoing review of traditional insurance issues demonstrates my agreement with the identification of problems, I part company with prior testimony when the focus turns to solutions.

I do not view the most efficient and essential government role as being that of an outright guarantor. I agree with the view expressed by Mr. Hunt from OPIC that, when dealing with with political risk management, the industry, not the government, should be "out front” at the inception of risk. I also agree, however, with the various mining, banking and insurance industry witnesses who have stated that some form of government participation is needed in order to allow the mining projects to reach fruition.

A desirable means of integrating the need for government participation with the goal of reduced financial guaranties is to use domestic legislation as a catalyst, or last resort, rather than as a guarantor up-front. The insurance industry principle which would support such a role is that of risk management and engineering. With traditional property or casualty risks, an insurer relies upon itself to enforce safety and construction standards upon the insured in order to manage the insured risks. There are substantial limits, however, on what insurers can do alone to engineer or manage political risks. Accordingly, a premier role to be played by a system enabled by domestic legislation is in the area of managing the political risk by managing the financial means employed to reduce the consequences of political risks.

Legislation designed to provide investment security, while it minimizes government financial and political involvement, should include and address the following items in order to engineer the risks involved: 1. Subrogation and salvage capacity; 2. Incentives for the attraction of private debt and equity investment capital; 3. Incentives to secure and attract private insurance underwriting capacity; 4. Incentives to leverage a reduced level of direct financial participation by the government; 5. Requirements for reasonable amounts of risk retention by consortia participants; 6. Layering of risk and defining the mix of risk sharing on each level of liability; 7. Conversion of guaranty features into loans and other recoverable financing instrument; 8. Incentives to sound management by mining companies to reduce losses and for insurance companies to act to reduce risk; and 9. Multi-lateralizing of risk bearing. III. Requisite Amounts of Contingent Government Liability Under Hybrid Financing

Concepts and Under Pending Legislative Proposals An investment security partnership comprised of a government facilitating agency (with some contingent guaranty powers and imaginative enabling powers), combined with consortia members, private underwriters and defined relationships with the financing community, would have the capacity to provide investment security at a significantly reduced cost to the government. Although my colleagues and I have not had the opportunity to model or professionally cost-out a hybrid program, my sense of the relavent variables indicates that approximate maximum government exposure in the event of loss would be 10-15% of the total investment. I make that estimate on the assumption that each consortium would realize a substantial recovery of invested capital, as would secured creditors. Translating this into a ballpark figure, the approximate loss, assuming a carefully designed program, would reach about $50,000,000-$75,000,000 on the upside.

I would like to emphasize that all figures presented above are merely estimates. Because of what I perceive to be complex interrelationships among various aspects of proposed and contemplated legislation, I might offer substantial variations in estimates depending on changes which might be made to each proposal.

The key variables in reaching an estimate are (1) the text of domestic legislation, (2) regulations issued by the agency charged with implementation of a domestic licensing framework and (3) the text and regulations adopted by the United Nations and the international regime. In making my estimates, I have accepted the CNT under its most adverse interpretation and I further assume detailed legislation

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