Johnson & Higgins The Honorable Billy Tauzin July 20, 1994 Page 2 Our efforts have intensified since July 1st and our activity is the product of over two years of development and research. Commercial providers of financial guarantees for shipowners became necessary only after Congress enacted OPA '90, which was largely in response to the EXXON VALDEZ oil spill, and was the culmination of previous unilateral pollution legislation by the U.S. We have endorsed the position taken by many International shipping organizations, as well as by many in the United States, namely that the international regime of the Civil Liability and Fund Convention, In effect since 1989, and currently in force in 57 countries, is best suited for dealing with all pollution. Accordingly, we have eschewed public statements of support for the COFR regime established by OPA '90 and, indeed, have supported and continue to support efforts within the shipping community to achieve an international solution for the United States. The traditional providers of both pollution insurance and "Evidence of Financial Responsibility" are the shipowners' Protection & Indemnity Associations or P&I Clubs. The Clubs have stated repeatedly that they are prepared to continue providing pollution insurance for their members' ships while in U.S. waters, and "Evidence of Financial Responsibility", but they cannot assume, as guarantors, all the conditions and exposures contemplated by the Rules as finally adopted. Unfortunately, the Coast Guard has not been able to offer a compromise to the Clubs that would allow them to continue to provide Evidence of Financial Responsibility as in the past. Consequently, shipowners and operators need a new insurance product that meets the requirements of OPA and the Interim Rule and that keeps shipowners' costs to a minimum. This is the purpose of the "First Line" effort. Johnson & Higgins and BankAssure intend to continue efforts to bring the "First Line" concept to fruition and hence available to shipowners and operators under the law as currently enacted. As insurance brokers, our mission is to assist our clients in analyzing and assessing their risk management needs and, where appropriate, to negotiate sound, economical insurance solutions on their behalf. From time to time, sultable insurance products are not available to our clients and in such circumstances we will seek to arrange for new insurance facilities and products. Relative to OPA '90 issues, we believe it important to present shipowners and operators with a means to comply with statutory and regulatory requirements through Johnson & Higgins The Honorable Billy Tauzin Chairman July 20, 1994 Page 3 a financially sound enterprise dedicated to the provision of a reasonably priced insurance product that will complement existing market resources. This, perhaps, is a perspective that may be somewhat different from that of the participants at your Hearing or those who have submitted comments to the Coast Guard. We thank you for this opportunity to provide our views to the Subcommittee and we request that this letter be incorporated in the record of the Hearing. Sincerely, Michael J. Northmore untalinge D. Darby Duryea Graham D.R.D. Barnes MN/di TESTIMONY OF JERRY A. ASPLAND PRESIDENT, ARCO MARINE, INC. and CHAIRMAN, API GENERAL COMMITTEE ON MARINE TRANSPORTATION BEFORE THE SUBCOMMITTEE ON COAST GUARD AND NAVIGATION, HOUSE COMMITTEE ON MERCHANT MARINE AND FISHERIES ON FINANCIAL RESPONSIBILITY FOR WATER POLLUTION (VESSELS) Good Morning, Mr. Chairman and Members of the Subcommittee. My name is Jerry Aspland, I am President of ARCO Marine, Inc. and Chairman of the American Petroleum Institute's (API) General Committee on Marine Transportation. API represents over 300 companies involved in all aspects of the oil and gas industry, including exploration, production, transportation, refining and marketing, API member companies and their marine affiliates transport large volumes of petroleum and petroleum products into and within the United States, as well as own and operate sizable tanker and tank barge fleets under both U.S. and foreign registry. API member companies also charter a significant portion of the world's independent tanker and tank barge tonnage responsible for carrying the bulk of the imported oil that makes up approximately half of the United States petroleum consumption. Consequently, API is deeply concerned by the recently published Coast Guard Interim Final Rule (IFR) entitled "Financial Responsibility for Water Pollution Vessels", (CGD 91-005), 59 FR 34210 and have two requests. First, we respectfully request the Committee to seek monthly reports from the Coast Guard regarding the ability of the affected community to file approvable financial responsibility applications. Second, if circumstances do not develop as envisioned by the Coast Guard, we request this Committee to petition the Coast Guard to supplement the rulemaking to allow for more flexibility and compliance options. As a representative of the seafaring segment of the petroleum industry that makes its living at sea, I am here today on behalf of men and women who have a deep and abiding respect for the marine environment. We strongly support the goals of OPA'90 to reduce the risks of oil spills and to provide a rapid and effective means of responding to an oil spill. We also recognize that a critical component of this goal is ensuring that vessel owners and operators have the financial means available to meet potential liabilities which may arise after a spill. API continues to endorse the principles enunciated by the Coast Guard that the polluter pays and that funds should be available without legal action. Nonetheless, the subject of this hearing is not an environmental issue it is a technical insurance issue. We should make clear also that API regards the Coast Guard as a highly sophisticated and dedicated agency. Our often contentious disagreement with the Coast Guard on the Certificate of Financial Responsibility (COFR) rulemaking in no way diminishes our respect and regard. However, because API's principal commitment is to the efficient and dependable supply of petroleum products to U.S. consumers, we feel obligated to state that the Coast Guard has been exceedingly narrow in its selection of the commercial alternatives of financial responsibility which are available under OPA'90, and we believe that the IFR has the potential to disrupt the flow of oil to the U.S. industry and place whole segments of the United States economy at risk. We also believe that the Coast Guard's rule would result in higher premia than current P&I insurance without commensurate benefits; that OPA'90 allows the Coast Guard to promulgate regulation that would enable vessel owners to meet the Act's financial responsibility requirements utilizing their P&I insurance; that independent shipping firms that have high quality operations but cannot afford a COFR will likely leave the U.S. trade or go out of business; and, that it is uncertain whether the specialty insurance groups envisioned by the Coast Guard will emerge as planned. Congress clearly demonstrated its intention to provide flexibility and discretion to responsible parties in evidencing the increased financial responsibility called for by OPA’90. The law explicitly provides that the financial responsibility requirements may be established by any one, or by any combination of six methods which the Secretary of Transportation determines to be acceptable. The Explanatory Statement of the OPA'90 Conference Committee noted that the Secretary of Transportation's authority in this regard was "....to foster a continuing market for providers of financial responsibility." Despite this guidance, the Coast Guard's rule effectively prevents vessel owners from using the established and financially sound international Protection and Indemnity (P&I) Club system to satisfy financial responsibility requirements under OPA'90. This system provides for 97 percent of all certificates presently issued to tank vessels by the Coast Guard. The Coast Guard's Interim Final Rule. Despite hundreds of comments from shipping groups urging flexibility, the IFR essentially mirrors the Coast Guard's proposed rule. The only means for demonstrating financial responsibility are insurance, surety bonds, guaranties or self-insurance. The basic components of each of these are unchanged. A new "other evidence" option allows for approval by the Coast Guard of a specialized letter of credit or some other commercially uncommon form of evidence. In all cases, except self-insurance, evidence providers will be considered guarantors. Many oil companies and their marine affiliates may be able to meet self-insurance requirements for their own fleets if the Coast Guard grants a waiver of the working capital requirements. Some large U.S.-based independent vessel owners also appear to possess enough financial strength either to self-insure or utilize a surety bond. As a result, these companies, which represent only about one-third of the tanker owners who will require a COFR may gain a distinct cost and strategic market advantage over less highly capitalized though high-quality operators. Without the ability to use P&I insurance, it is unclear to API how the remaining two-thirds of tanker capacity will be able to provide sufficient evidence of financial responsibility to enable them to continue operations in U.S. waters. The Coast Guard Regulatory Impact Analysis (RIA). In the Regulatory Impact Analysis (RIA) accompanying the Coast Guard's rule, the agency distorts the influence API members have with P&I Clubs and attempts to preemptively deflect responsibility for the rule. For example, at Page 56, the Coast Guard states that "[a]ny severe economic disruption that would ensue because of a disruption in vessel operations appears to be remote, and is fully within the control of the international shipping community." The Coast Guard argues that because P&I Clubs are comprised of shipowners and operators, who elect the Club's directors and support the Club's managers, that they, therefore, ultimately control the P&I Clubs decisions. In reality, the Coast Guard knows that the international shipping industry is a highly diverse community composed of not only tanker owners, but also owners of container ships, cruise ships, car carriers, tug and barge fleets and others. It is precisely the diversity of the P&I Clubs' membership that prohibits them from acting cohesively on problems as complex as answering to pollution liability claims in U.S. courts. This is especially so considering that only a minority actually need the coverage required by OPA'90. The influence of this minority, of which API membership is a part, is diminished further when considering that participants in the U.S. trade generate only 15 percent of the P&I Club premia, but are responsible for 60 percent of the claims. API respectfully submits that it is the Coast Guard that is in the best position to monitor the validity of the assumptions regarding the availability of COFR guarantors. The United States government acting through the Coast Guard, not the international shipping industry, has the means and responsibility to ensure that the economy and the members of the American society are neither damaged nor needlessly inconvenienced by this rule. Specialty Insurance. The Coast Guard is relying on the emergence of two new Bermuda-based specialty insurers who, according to the Regulatory Impact Analysis, will "step into the shoes of the P&I Clubs and offer insurance guaranties under the proposed COFR rules." Conceptually, API does not in any way oppose the development of specialty insurers, yet we believe that there is still enormous uncertainty regarding their economic viability. Both facilities named by the Coast Guard exist only in the most incipient stages of development. It is revealing that the language used by the Coast Guard in the IFR and RIA to tout these companies is almost entirely in the future tense. API is unaware that either of these companies has any members. This may be because they are novel and untested. In any case, it is very uncertain whether there is sufficient reinsurance in the world's markets to accommodate insurers who would appear to be holding a relatively high concentration of risk. Recent catastrophes have sent Lloyd's into a prolonged cycle of contraction which has forced the insurance industry to begin searching unsuccessfully for untapped capacity. API members question if reinsurance is available for these specialty companies. If it is, why haven't reputable reinsurers come forward publicly to confirm such availability? Given these unknowns, it is disturbing that the Coast Guard, to date, has chosen not to air for public comment the criteria it has established for judging these specialty insurers to be "acceptable." Assuming these criteria exist, a large disparity exists in the IFR by virtue of the Coast Guard's requirement that a new specialty insurer need only provide up to $300 million in coverage for the bulk of the industry it insures. This is in contrast to requirements that a well-established multinational corporation which is required to provide cumulative guaranties far in excess of this amount for the vessels it charters. An additional problem is that specialty insurance is very costly. Rating quotations, to date, indicate they are six to nine times more expensive than the P&I surcharge on vessels making U.S. voyages. The Coast Guard RIA estimates a figure of $415 million dollars in premia per year. Assuming specialty insurers emerge as planned, owners of largely smaller independent tanker fleets, who may have no choice but to enroll in them, would be placed at a competitive cost disadvantage. When considering that vessel owners will, out of necessity, continue to carry P&I insurance, there appears to be a fundamental inequity in requiring smaller independent companies to pay hundreds of millions of dollars to entities which, simply represent a means for meeting Coast Guard COFR requirements. This represents an extremely inefficient use of scarce capital and ultimately an unnecessary charge to U.S. consumers. P&I Insurance. Theoretically, the polluter pays principle, if correctly applied, provides some incentive for vessel owners to incur costs to reduce the chance of an oil spill. The Coast Guard has insisted that these costs be "internalized." Yet, the average sized vessel owner cannot internalize potential costs as high as $250 million let alone actually pay these costs should an oil pollution incident occur. These companies must externalize these potential costs by using insurance which offers broad-based low cost coverage. P&I Clubs offer coverage far in excess of OPA'90 limits and, in fact, are contractually obligated to indemnify the vessel owner if he breaks the limits of liability up to the policy limits of $500 million, or $700 million where excess coverage has been obtained. Under this mutualization and reinsurance scheme, the major portion of the oil spill liability risk is spread internationally through premia or "calls" on all Club members. Another portion is concentrated in the United States through a "per call" surcharge. P&I Clubs share their risk with the $14 billion Lloyd's market. Over the past ten years, P&I Clubs have had an impeccable record of paying for oil spill response and clean-up costs. While the Clubs have indicated that they are not interested in insuring the additional risks associated with being guarantors under OPA'90, API, from |