[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                  IS AMERICA'S HOUSING MARKET PREPARED

                   FOR THE NEXT NATURAL CATASTROPHE?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 28, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-103

                 HOUSE COMMITTEE ON FINANCIAL SERVICES






                    U.S. GOVERNMENT PRINTING OFFICE

31-532 PDF                  WASHINGTON : 2006
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                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California

                 Robert U. Foster, III, Staff Director
           Subcommittee on Housing and Community Opportunity

                     ROBERT W. NEY, Ohio, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California
    Chairman                         NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana          JULIA CARSON, Indiana
WALTER B. JONES, Jr., North          BARBARA LEE, California
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
CHRISTOPHER SHAYS, Connecticut       BERNARD SANDERS, Vermont
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida           BRAD MILLER, North Carolina
KATHERINE HARRIS, Florida            DAVID SCOTT, Georgia
RICK RENZI, Arizona                  ARTUR DAVIS, Alabama
STEVAN, PEARCE, New Mexico           EMANUEL CLEAVER, Missouri
RANDY NEUGEBAUER, Texas              AL GREEN, Texas
MICHAEL G. FITZPATRICK,              BARNEY FRANK, Massachusetts
    Pennsylvania
GEOFF DAVIS, Kentucky
CAMPBELL, JOHN, California
MICHAEL G. OXLEY, Ohio
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 28, 2006................................................     1
Appendix:
    June 28, 2006................................................    51

                               WITNESSES
                        Wednesday, June 28, 2006

Burke, Dennis C., Vice President of State Relations, Reinsurance 
  Association of America.........................................    34
Csiszar, Ernst, President and CEO, Property Casualty Insurers 
  Association of America.........................................    36
Gray, William M., Professor Emeritus of Atmospheric Science, 
  Department of Atmospheric Science, Colorado State University...    10
Loy, James M., Admiral, U.S. Coast Guard (retired), National co-
  Chairman, Protectingamerica.org................................    14
McCarty, Kevin M., Florida Insurance Commissioner, on behalf of 
  the National Association of Insurance Commissioners (NAIC).....    11
Plunkett, Travis B., Legislative Director, Consumer Federation of 
  America (CFA)..................................................    16
Racicot, Marc, President, American Insurance Association.........    37
Russell, Tim, Mayor, Foley, Alabama and President, Baldwin Mutual 
  Insurance Company, Foley, Alabama, on behalf of the National 
  Association of Mutual Insurance Companies......................    39
Soto, Alex, President, InSource, Inc., Miami, Florida, on behalf 
  of the Independent Insurance Agents and Brokers of America, 
  Inc............................................................    41
Treutel, David A., Jr., President, Treutel Insurance Agency, 
  Inc., Bay St. Louis, Mississippi...............................    43
Williams, Guy, President, Gulf Coast Bank and Trust Company of 
  New Orleans, Louisiana, on behalf of the American Bankers 
  Association (ABA)..............................................    18

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael..........................................    52
    Ney, Hon. Robert.............................................    58
    Brown-Waite, Hon. Ginny......................................    59
    Burke, Dennis C..............................................    62
    Csiszar, Ernst...............................................    73
    Gray, William M..............................................    81
    Loy, James M., with attachments..............................   102
    McCarty, Kevin M.............................................   134
    Plunkett, Travis B...........................................   145
    Racicot, Marc................................................   160
    Russell, Tim.................................................   168
    Soto, Alex...................................................   173
    Treutel, David A.............................................   179
    Williams, Guy................................................   187

              Additional Material Submitted for the Record

    Statement of the National Association of Realtors............   194
    Statement of the National Multi Housing Council and the 
      National Apartment Association.............................   199


                  IS AMERICA'S HOUSING MARKET PREPARED



                   FOR THE NEXT NATURAL CATASTROPHE?

                              ----------                              


                        Wednesday, June 28, 2006

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:04 p.m., in 
room 212B, Rayburn House Office Building, Hon. Robert Ney 
[chairman of the subcommittee] presiding.
    Present: Representatives Ney, Brown-Waite, Neugebauer, 
Waters, Lee, Cleaver, and Green.
    Also present: Representatives McCarthy, Israel, Taylor, and 
Wasserman-Schultz.
    Chairman Ney. Good afternoon.
    The Subcommittee on Housing and Community Opportunity will 
be meeting to discuss the capacity of America's housing market 
to withstand future catastrophic events and the strain that 
natural disasters are having on the homeowner insurance 
markets.
    For the past decade, the rising toll from natural disasters 
places significant strain on homeowner insurance markets in 
parts of the country that frequently experience catastrophic 
events.
    In the aftermath of Hurricane Andrew in 1992, and the 
California North Ridge earthquake in 1994, many insurers 
stopped underwriting policies in these areas entirely, leaving 
many families with very little protection against catastrophic 
losses.
    Insurers continue to be reluctant to enter coastal States 
that are at risk for severe earthquakes and hurricanes due to 
the increasing costs of paying for the damage that will be 
caused in a once-in-a-lifetime event.
    Many factors that underlie why the U.S. coastal areas may 
have increased risk are related to an above-average cycle for 
large hurricanes as well as increased coastal development.
    Up until the 20th century, most of the U.S. coastline was 
sparsely populated and protected from storms by marshy wetlands 
and sandy barrier islands, but for almost 60 years, there has 
been a surge in coastal development that has put more than half 
of the United States population within 50 miles of the sea.
    During the 105th and 106th Congresses, the Committee on 
Banking and Financial Services, now of course the Committee on 
Financial Services, held four hearings to address the issue of 
preparing the housing market in the event of a natural 
disaster.
    In those hearings, members discussed proposed legislation 
that would have created a Federal reinsurance program to 
protect insurance companies that would be unable to cover the 
costs of a large-scale natural disaster.
    Due to the frequency and severity of natural disasters, the 
Federal Government has taken a greater interest in seeking to 
relieve the strain placed on public and private insurance pools 
engaged in catastrophic risk management and financing.
    With focused public debating on whether to implement a 
comprehensive solution to the problem presented by the housing 
markets natural catastrophic exposure, the 109th Congress has 
several legislative proposals that addressed these issues. I'm 
certain today's discussion will focus on several of these 
initiatives.
    While there may be competing philosophical views regarding 
the nature and role of the Federal Government, all parties 
would agree that the problem of insurance availability in 
disaster prone areas is a real and worthy issue that needs to 
be looked at by the Congress.
    I hope today's hearing will raise important questions 
regarding the ability of American's housing market to withstand 
future natural catastrophic events, especially in light of the 
recent availability and affordability issues surrounding the 
homeowner insurance.
    With that, I will yield to the ranking member, the 
gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I'd like to thank you for holding this hearing today, and 
basically commend you not only for this hearing, but for all of 
the work that you have been doing relative to the great Katrina 
disaster and all of the work that you are doing to try and 
increase the ability of American citizens to own homes.
    I need not remind you of a visit that we made to the Gulf 
Coast Region to conduct an assessment of the disaster that had 
taken place in the area and the time that we spent both in 
Louisiana and in Mississippi and what we learned.
    First of all, we were able to view the terrific devastation 
of Hurricane Katrina and witness firsthand the loss of 
tremendous housing stock; but secondly, to hear from those 
citizens about their attempt to rebuild or to reconstruct their 
lives only to find that they were having tremendous problems 
with the insurance companies.
    We learned that there were people who did not have 
insurance. The insurance was not required by the lender who 
provided the mortgage opportunity.
    We learned that there were people who thought they were 
well covered only to find out about the debate between wind and 
water and which was responsible for the destruction.
    We discovered that there were some issues with our own 
insurance program, the flood insurance program, and some 
changes that had to be made, and we went forward already with 
those changes. The bill was on the Floor yesterday.
    We learned an awful lot about the mapping problem and the 
fact that the maps are outdated and really are not serving the 
purposes intended to be served.
    So with all of that, this hearing today really does make a 
lot of sense, because we've got to figure out what we can do to 
protect the housing stock in the event of other disasters that 
are sure to visit themselves upon us in one way or another.
    So I think that you have captured it pretty much in your 
statement, and I'm hopeful that we can hear information from 
our panel this afternoon about what we can and should be doing.
    And with that, Mr. Chairman, I would like ask unanimous 
consent to just make sure that we allow for others who want to 
participate in this hearing to participate in a way that would 
allow them to have opening statements, and to question the 
witnesses.
    I yield back the balance of my time.
    Then, I would ask unanimous consent that the following 
members of the Financial Services Committee who do not serve on 
the Housing Subcommittee be permitted to participate in today's 
hearing by delivering opening statements and asking questions 
of the witnesses.
    Chairman Ney. Without objection.
    Ms. Waters. Ms. Wasserman-Schultz, and Mr. Israel, and 
further, Mr. Chairman, I ask unanimous consent--I beg your 
pardon--and Mrs. McCarthy.
    I further ask unanimous consent that the following members 
who do not serve on the Financial Services Committee also be 
permitted to participate in today's hearing by delivering 
opening statements and asking questions of the witnesses: the 
gentleman from North Dakota, Mr. Pomeroy, and the gentleman 
from Mississippi, Mr. Taylor should be included in that.
    I yield back.
    Chairman Ney. Without objection.
    Ms. Waters. Thank you.
    Chairman Ney. And I have a statement for the record, a 
statement from the National Association of Realtors.
    Without objection, it will be made part of the record.
    And I'm going to yield to, and I want to thank, the 
gentlelady from Florida, Congresswoman Ginny Brown-Waite, who 
asked for this hearing, and has been spending quite a 
considerable amount of time addressing this issue.
    The gentlelady.
    Ms. Brown-Waite. Thank you very much, Mr. Chairman, for 
holding this hearing today.
    I certainly want to thank the witnesses who have taken time 
out from their busy schedules to come here and deliver their 
statements.
    We're obviously holding this hearing to determine whether 
the housing market is prepared for a major national 
catastrophe.
    When we think of natural catastrophes, lately we think of 
hurricanes hitting Florida and other Gulf States as well as 
along the eastern coast, but hurricanes are not the only 
threats facing the United States.
    In the last 2 centuries, there have actually been 24 
tsunamis that have harmed the United States. In fact, there is 
a 10 to 14 percent chance that a tsunami comparable to that of 
South Asia will hit the West Coast in the next 50 years.
    Over 75 million Americans live in metropolitan areas 
subject to moderate to high earthquake risk, and researchers 
are warning that a repeat of the 1906 San Francisco earthquake 
is very likely.
    What I'm finding more startling is that the insurance 
industry might not be prepared.
    In California, only 14 percent of homeowners actually have 
earthquake insurance, and if there was a repeat of the 1906 
earthquake, it could cost up to $500 billion in insured losses. 
If the 1938 Long Island Express hurricane hit today, it would 
cost tens of billions of dollars of insured losses.
    Since policyholder surpluses for all lines, not just 
homeowners, only stood at $370 billion in 2004, every Member of 
Congress needs to be concerned that the industry doesn't have 
the capacity to withstand a great natural catastrophe.
    Floridians learned all too well what happens when the 
industry isn't ready for a catastrophic natural disaster.
    When Hurricane Andrew hit in 1992, many insurers became 
insolvent. This is the largest number of insolvencies at one 
time in U.S history. Sixty-three insurance providers pulled out 
of the State for fear of future excess losses, leaving 
homeowners with no insurance at all.
    Many estimate that if Hurricane Andrew had hit a 
metropolitan area, like downtown Miami, the amount of insured 
losses would have bankrupted the entire industry nationwide.
    Why does this Congress have to wait for a catastrophe to 
happen again before we act?
    Floridians learned some valuable lessons after Hurricane 
Andrew. We made some changes to hurricane preparedness that 
were radical at the time but that now many States are 
emulating.
    Florida enacted some of the strongest building codes in the 
Nation and set up forward thinking mitigation plans.
    We established Citizens Insurance to insure that homeowners 
would never again be without coverage. Citizens is the insurer 
of last resort.
    Most importantly, we also established a State catastrophic 
fund, the first of its kind in the Nation.
    Florida's CAT fund is a tax exempt, low cost source of 
reinsurance to property owners. The CAT fund ensures that while 
reinsurance rates rise, a minimal affordable amount will always 
be available to insurers in the State.
    This is really a safety net that has brought insurers back 
to the State of Florida and helped them remain solvent.
    After the 2004 and 2005 season when five hurricanes ravaged 
Florida, only one company became insolvent. If this safety net 
worked for Florida, we really need to consider this nationwide.
    That's why I've introduced the bill, H.R. 4366, the 
Homeowners Insurance Protection Act, which would create a 
national catastrophic fund.
    To participate, States would have to have their own State 
catastrophic fund to handle hurricanes, earthquakes, tornadoes, 
or anything else. States are also encouraged to establish 
building codes and mitigation plans to prepare for natural 
disasters.
    Chairman Ney. I'm sorry. I would note that the gentlelady's 
time has expired, if you would like to summarize.
    Ms. Brown-Waite. I certainly will.
    This bill has been around for many years, long before this 
committee ever discussed or considered TRIA. The fund it 
creates is a very unique program.
    It's also categorically different from the Federal flood 
insurance program, and to compare the two is simply an 
indication that someone hasn't read the bill.
    This bill guarantees that no longer would the Federal 
Government be the insurer of last resort.
    I certainly appreciate the chairman holding this hearing 
and from the discussions with my colleagues both on this 
committee, and not on this committee; they believe that this 
bill is part of the solution nationwide.
    Again, Mr. Chairman, thank you very much, and I yield back 
the balance of my time.
    Chairman Ney. I thank the gentlelady, and I will give you 
notice when your time has expired, everybody.
    We have some votes coming up and we have a lot of 
witnesses.
    So, the gentlelady from California.
    Ms. Lee. Thank you, Mr. Chairman.
    Let me thank our witnesses for being here and our ranking 
member for convening this very important hearing.
    I come from the Bay Area of California, and homeowners in 
my district are likely to be impacted by earthquakes, 
mudslides, and fires. We very seldom have floods and 
hurricanes, but that's really not the reality for all 
Americans, as we have witnessed in the past couple of years.
    In 2005, for example, there were a total of 27 storms in 
the Atlantic region, including 14 hurricanes.
    So on the first anniversary of last summer's devastating 
Hurricane Katrina, and as this anniversary approaches, I think 
we need to reflect on how all facets of housing, public and 
private, renters and homeowners, the lender and the insurer, 
how the entire, really, country has been impacted.
    There are hundreds of thousands of people who remain 
displaced and dozens of communities that will never be rebuilt.
    With an estimated cost of about $200 billion in damages to 
the Gulf region, the cost of homeowner insurance has 
skyrocketed and left many homeowners to take on very dangerous 
risk.
    For example, also, going back to the Bay Area, where I'm 
from, all homeowners are required, at least insurers are 
required to offer earthquake insurance, and only about 14 
percent of California homeowners have purchased earthquake 
insurance, quite frankly, because it's just too expensive. 
There's no way the majority of Californians can afford 
earthquake insurance.
    So we need a national natural disaster insurance plan 
really in order to prepare communities across the country for 
these natural disasters.
    So while many of us come from disaster prone areas, as it 
relates to hurricanes and floods, some of us also are impacted 
by these disasters such as earthquakes and mudslides.
    And so we're all in this together and we have to figure out 
how the entire country can move forward and not be devastated a 
second time around as a result of the devastation by a natural 
disaster.
    Thank you, and I yield the balance of my time.
    Chairman Ney. Does the gentleman have a statement?
    The gentleman from Missouri, Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I express appreciation to you and Ranking Member Waters for 
scheduling today's hearing and to the witnesses for joining us.
    I have a different direction that I would like to travel 
with regard to dealing with this subject, is America's housing 
market prepared for the next natural catastrophe?
    We have been rather active under the leadership of Chairman 
Ney since the hurricanes of the Gulf Coast. It was clearly the 
worst natural disaster in my lifetime, and perhaps in North 
America in the last 200 or 300 years or more.
    My perspective about preparing for the next natural 
catastrophe is a little different, because I am very much 
concerned that American citizens believe that they're paying 
for the rehabilitation of the Gulf Coast, just like they think 
they're paying for the war, and they're not.
    Most Americans don't realize we're borrowing every single 
penny we use to rebuild the Gulf Coast. That ought to cause the 
American Government to drop its head in shame. We're borrowing 
money from China to rebuild New Orleans. That is absolutely 
unacceptable.
    One of the things that I'm hoping that we can get some of 
the Congressional leadership to do is to try to enter into some 
kind of agreement with China so that, if we should have to go 
to war with them, that we could sign an agreement now that they 
would finance it, because if we wait until that time comes, I 
don't think they're going to finance it, and we'll be in 
trouble.
    So I think that we are going to go into a catastrophe and 
everything is impacted by the fact that we're not prepared.
    Whatever you say, we're still not prepared, because we 
don't have the dollars to deal with it and if we have another 
catastrophe at the level of Katrina and Rita, the insurance 
industry is going to be decimated as well as those who are 
making investments with housing.
    So it comes back on the government, and this government is 
irresponsible. We're almost $9 trillion in debt. We're almost 
$150 billion in debt to China, $100 billion in debt to Japan. 
We are even in debt to the Caribbean islands. And I don't know 
how we're going to discuss this issue in the wake of the fact 
that we don't have any money and we're borrowing every penny we 
use today.
    Chairman Ney. Time has expired.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Chairman Ney. The gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I thank the ranking 
member as well, for this hearing, and I thank you, the members 
of the panel, for giving us this very valuable portion of your 
time. I assure you we greatly appreciate your attendance and we 
look forward to hearing from you.
    I'm not sure that I was supposed to be next, now that I'm 
looking at all of these members.
    Thank you.
    When you're a neophyte, you learn quickly that you wait 
your turn.
    But Mr. Chairman, while the hearings may focus on a number 
of things, one of the great issues that we will ultimately have 
to confront that is causing a great amount of consternation 
across the Nation happens to be this question of wind versus 
water and whether or not I really do have a right to have my 
house receive some attention from an insurance policy that I 
have been paying on for a long period of time.
    People are greatly concerned about the language in the 
policy, and hopefully, notwithstanding our needs today and our 
concerns today, at some point we will focus on this so that 
people can have policies that they can understand and policies 
that will make it conspicuously clear as to whether wind or 
water is going to be the factor and how a layperson will know, 
as opposed to having someone say, ``Your house was covered, but 
by the way, the house next door, which suffered the same 
damage, is not.''
    I yield back the balance of my time. Thank you.
    Chairman Ney. The gentlelady from New York.
    Mrs. McCarthy. Thank you, Mr. Chairman, and thank you again 
for allowing us to sit in and even ask questions.
    My opening statement will be brief.
    Since Katrina, many of us have been meeting, and the more 
that we talk about what solutions are out there, the more 
problems we are actually finding.
    I'm from Long Island. We haven't had a major storm in a lot 
of years, and I want to make sure that we are prepared for the 
future.
    A lot of the questions that we had heard and questions 
brought up was that a lot of people don't carry any kind of 
insurance. A lot of people and communities aren't building the 
homes that they should be building in areas that are close to, 
say, the beaches and things like that.
    So we're talking about zoning, we're talking about making 
sure that if the government is backing flood insurance, that it 
is mandatory that they also carry some sort of insurance.
    These are things I'm hoping that we're going to hear from 
all of you and that we can learn from all of you.
    We do not expect, with all the problems that we saw on the 
Gulf Coast, for the insurance industries to have the answer to 
every problem, but we as a Nation need to face these problems.
    We, as a Nation, need to look at every part of this country 
and how can we--because I've been here for 10 years now, and 
I'll be very honest with you, we're always having emergency 
fundings to help one of our States, whether it's a flood, a 
tornado, earthquake, hurricanes.
    We're all in the same boat, so we have to come up with some 
solutions that are going to work for everybody and be fair for 
everybody, so that obviously, if our homes are destroyed, we 
can rebuild.
    Thank you, Mr. Chairman.
    With that, I yield back the balance of my time.
    Chairman Ney. I thank the gentlelady.
    The gentleman from New York, Mr. Israel.
    Mr. Israel. Thank you, Mr. Chairman.
    Let me thank you and the ranking member for your courtesy 
in allowing me to sit in on this subcommittee hearing, and I 
will return the favor by being extremely brief, less than 2 
minutes.
    I just held a hurricane preparedness summit in my district 
on Long Island last week, and one of the panelists was an 
insurance company executive who suggested that every one of my 
constituents review their insurance policies to make sure that 
they will be fully protected or as protected by their policies 
as they believe that they will be protected in their own minds.
    The problem is that, for many Long Islanders, if they take 
a look at their policies and they realize that the deductibles 
are too high or the coverage is not as expansive as they 
thought, there may not be many options.
    The fact of the matter is that several insurance companies 
on Long Island have made a business decision, which I 
understand, but I'm not happy with, to curtail the availability 
of homeowners coverage.
    They made those decisions based on the fact that the 
National Weather Service has said that Long Island has a very 
good chance of getting a Category 3 hurricane this season and a 
good chance of having a Category 5 hurricane over the next 15 
years.
    So I appreciate the fact that we're having this hearing. I 
appreciate the fact that my colleagues are focusing on it.
    My predecessor in Congress, Congressman Rick Lazio, 
introduced a catastrophic, comprehensive bill that would have 
helped with this problem. Unfortunately, it didn't pass. It's 
now 7 years since then, and we're having the same discussion.
    I'm pleased to join with Congresswoman Brown-Waite on her 
legislation and I hope that we will fashion from this hearing 
bipartisan accord to make sure that when my constituents look 
at their policies, they have the full measure of protection 
rather than the guesswork that they're doing now.
    So I thank the chairman, and I yield back.
    Chairman Ney. The gentleman, Mr. Taylor, who hosted us down 
in Gulfport when we had the hearing, went to Louisiana, 
Gulfport, and we saw firsthand the pieces left not only of Mr. 
Taylor's home but of his constituents', and we appreciated the 
time you took with us and the concern you have for the people 
you represent.
    Mr. Taylor. Thank you, Mr. Chairman.
    I appreciate, first, you letting me sit in, and above all, 
being recognized.
    Mr. Chairman, for tens of thousands of Mississippians in 
the weeks after the storm, they discovered that their insurer 
was neither a good friend or on their side, that people who for 
years and decades had paid premiums thinking they were going to 
get some fairness out of the insurance company have been told, 
no, ``It's not what you think it was, it's not the way you read 
your policy,'' and the insurance companies have found every 
excuse not to pay what people thought were legitimate claims.
    Just yesterday, this House, unanimously by a voice vote, 
decided to look into whether or not we as taxpayers have been 
abused, whether or not claims that should have been paid by 
private insurance companies were shifted to the Federal flood 
insurance, because in the writing of the Federal flood 
insurance policy, we allowed the same company that writes that 
policy to adjudicate the claim.
    I think the overwhelming majority of us believe that when 
given the opportunity, and you tell someone, ``Well, you can 
pay that bill or you can stick the government with the bill,'' 
well, they stuck the government with the bill, and it's not a 
coincidence that the insurance industry had about $44 billion 
in profits last year and that the national flood insurance 
program lost about $25 billion. One got stuck with the other 
one's bills.
    The other thing that I would hope that this panel would 
talk about is, you know, we pay, as a Nation, a heck of a lot 
of money to put the hurricane hunters out there. It's a huge 
expense. We pay a lot of money to have the weather satellites 
out there. We pay to have civil defense folks.
    We do that so that people will get adequate warning to get 
the heck out of there in time before a hurricane.
    In my case, a sheriff's deputy actually came into Sunday 
morning mass in Long Beach, Mississippi, and kind of whispered 
something in the priest's ear, and he announced that was the 
last mass he was going to say that day, and that people needed 
to get the heck out of there. That was a great public service.
    But what has happened in the wake of this storm with the 
whole wind versus water is completely contrary to that. I 
cannot tell you how many people have told me that during the 
next storm, they're staying in their house with a video camera, 
if that's what it takes to get some justice out of their wind 
insurance policy.
    In my case, I found pieces of my tin roof 30 feet up in the 
air. It didn't float there, it flew there. I found other pieces 
of my tin roof 150 yards from where my house used to be.
    I took the time to walk the adjuster there, showed him the 
big holes where it had been ripped off, only to have that 
adjuster say, ``We see no wind damage.'' Come on. Who's kidding 
whom?
    The Navy Oceanographic Lab says Bay St. Louis and the 
surrounding area had 6- to 8 hours of hurricane force winds 
before the water ever showed up, and yet the only people who 
got any justice were the people who had flood insurance.
    Chairman Ney. Time has expired.
    Mr. Taylor. Mr. Chairman, again, I appreciate you doing 
this.
    I'm very anxious to hear from this panel, because it does 
have to be addressed, and people don't need to be staying in 
their houses with a video camera for the next hurricane to get 
some sort of justice from their insurance company.
    Chairman Ney. Thank you.
    Our panel today is:
    First, Dr. William Gray, professor emeritus of Atmospheric 
Science at Colorado State University in Fort Collins, Colorado. 
Professor Gray is a specialist in tropical meteorological 
weather conditions. He's made Atlantic Basin seasonal hurricane 
forecasts for more than 20 years.
    Next, we have Kevin McCarty, the Florida insurance 
commissioner. He's testifying today on behalf of the National 
Association of Insurance Commissioners, an organization 
representing insurance regulators nationwide.
    Admiral James Loy is the national co-chairman of 
ProtectingAmerica.org, a coalition of interested parties 
working to establish financial catastrophic backstops at the 
State and national level.
    After serving as commandant of the Coast Guard from 1998 to 
2002, Admiral Loy was appointed to the position of Deputy 
Secretary of the Department of Homeland Security.
    Travis Plunkett is legislative director of the Consumer 
Federation of America, an organization that seeks to advance 
pro-consumer policy at the Federal and State government level.
    And last on the first panel is Guy Williams, the president 
and CEO of Gulf Coast Bank and Trust Company of New Orleans, 
Louisiana, testifying on behalf of the American Bankers 
Association.
    Mr. Williams currently serves as director of the New 
Orleans Financial Authority and is president of the New Orleans 
Small Bank Group. He has just completed his term as president 
of the Louisiana Bankers Association.
    Welcome to the panel, and we begin with Dr. Gray.

STATEMENT OF WILLIAM M. GRAY, PROFESSOR EMERITUS OF ATMOSPHERIC 
  SCIENCE, DEPARTMENT OF ATMOSPHERIC SCIENCE, COLORADO STATE 
                           UNIVERSITY

    Mr. Gray. I appreciate being invited to this session.
    I've been looking at hurricanes for a long time, and if you 
go anyplace along the coast, you find that even in southeast 
Florida and along the Texas Gulf Coast, the frequency with 
which these storms hit is quite low. You could live 5, 10, 20, 
or 30 years and never be affected strongly by one of these 
storms.
    As a result, it's a very tough problem. It's a low 
probability thing, and there's no way you're going to stop 
people from living along these nice coastal areas.
    We are now in this cycle of higher major hurricanes in the 
Atlantic Basin.
    When I and some of my colleagues have looked back at the 
damage these storms do, if you normalize by coastal population, 
inflation, and wealth per capita, you see that it's these major 
storms, these Saffir/Simpson Category 3, 4, or 5 storms, that 
do 80- to 85 percent of the damage, even though they only 
account for roughly 20- to 25 percent of the number of named 
storms.
    Now, we're in a new era for these major storms.
    The Atlantic Basin has this multi-decadal cycle where you 
go 20- to 30 years and you don't have so many of the major 
ones, and then the same period, roughly, where you have a whole 
lot of them.
    Like in the 1940's and 1950's, we had this era where we had 
a lot of major storms, and we had a lot of landfalls during 
that period, but in the 1940's and 1950's, the coastal 
population was not very great.
    So we're quite surprised at this, but we're not surprised, 
I'm not surprised. I knew something was coming.
    When you build up the southeast U.S. coast like we have for 
the last 3 or 4 decades, and then you move into a new cycle, it 
was inevitable, we'll see, that we were to see hurricane damage 
like we've never previously seen it--not that we have more 
storms than we had in the last active period, but that there's 
so much more in harm's way now.
    Now, I don't believe the people on the southeast coast 
realize how lucky they've been over this long period.
    From the late 1960's to the middle 1990's, we had a great 
downturn in the frequency that these major hurricanes formed 
and of them coming ashore. Also, we moved into this new era in 
1995.
    In the last 11 years, we've had 45 major storms, and at a 
rate of about 3 times more than we had during the 1970 to 1994 
period, that quarter century.
    So now the first 9 years of this active era from 1995 
through 2003, we had 32 Atlantic Basin major storms and only 3 
hit the United States, less than 1 in 10, when the long-term 
average is about 1 in 3 or one in three-and-a-half, so we were 
not prepared for the last 2 years.
    In the last 2 years, we've had 13 Atlantic Basin major 
storms, of which 7 have hit the United States.
    So it's natural that we're not psychologically prepared for 
this, but it's not so surprising.
    If the New Orleans levees has not been breached, the damage 
would have been much less, perhaps only 40- or 50 percent of 
what we have had.
    So now, global warming.
    There have been a lot of people jumping in with the global 
warming question, and in my view, this is not due to global 
warming.
    Although the globe has warmed over the last 30 years, the 
amount of storms around the globe in frequency and intensity, 
as best we can tell over the last 20 years, has not changed.
    The Atlantic Basin has changed, but this is natural, due to 
the ocean's circulation in the Atlantic.
    Chairman Ney. Doctor, your time has expired. Thank you.
    [The prepared statement of Mr. Gray can be found on page 81 
of the appendix.]
    Chairman Ney. I'd actually like to let you go on about the 
global warming; I kind of like it.
    But we'll have to move on to Mr. McCarty.
    Mr. Gray. Well, I have it in my written testimony, my views 
there.
    Chairman Ney. Yes, sir, it will be entered.
    Mr. Gray. They are all there.
    Chairman Ney. It's going to be entered as part of the 
record.
    Mr. Gray. I wanted to say something about the insurance 
industry.
    Chairman Ney. We can get on to that. It will be entered as 
part of the record.
    And our ranking member is going to be trying to get on the 
phone with Mr. Gore, also.
    [Laughter]
    Chairman Ney. Mr. McCarty.

STATEMENT OF KEVIN M. MCCARTY, FLORIDA INSURANCE COMMISSIONER, 
      ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                      COMMISSIONERS (NAIC)

    Mr. McCarty. Thank you, Mr. Chairman.
    My name is Kevin McCarty, and I'm the insurance 
commissioner for the State of Florida.
    I'm also here as the chair of the Property and Casualty 
Committee of the National Association of Insurance 
Commissioners as well as the chair of its Subgroup on 
Catastrophe Insurance, and have been for many years.
    I would like to thank the chairman and the ranking member 
and members of the subcommittee for inviting me here to testify 
today on behalf of the association, and I'd also like to thank 
this body for passing the good flood legislation reform bill 
yesterday.
    In particular, our association is very appreciative of the 
inclusion of the provision for nonbinding mediation, which we 
think is going to be critical to serving the consumers of 
Florida and the rest of the Nation.
    The NAIC is currently, and has for a number of years, been 
active in developing a comprehensive national plan for managing 
the risk of catastrophic natural disasters.
    In addition, the NAIC recently adopted a resolution 
supporting a natural disaster plan and calling for a Federal 
commission to study the issues and alternative solutions to our 
current national plan.
    Natural catastrophes are an economic problem, not just an 
insurance issue. I firmly believe that insurance is a critical 
component, but not a complete answer to our Nation's recovery 
in the aftermath of a natural disaster.
    Insurance claim payments are the economic engine that 
revitalizes an area after a disaster, but as experience 
repeatedly has demonstrated to the people of Florida as well as 
the people along the Gulf of Mexico, pre-event disaster 
planning, effective mitigation, rational building codes, and 
effective enforcement of building codes is a crucial part of 
the solution.
    To the question presented to us today, ``Is America's 
housing market prepared for the next natural catastrophe,'' I'm 
afraid the answer is yes, to a limited point, but only to a 
limited point.
    Today, the ability of the housing markets, as well as local 
and regional economies, to withstand and possibly recover from 
the next disaster depends critically on what that peril is, 
where it's located, and the severity of the disaster itself.
    Wind events, including tornadoes and hurricanes, are 
considered a basic part of the insurance policy and the vast 
majority of homeowners have that coverage.
    Flood, on the other hand, is only rarely written in the 
private marketplace, and since 1968, the national flood program 
has been the public solution to managing the risk of flood.
    Finally, seismic activities, which we've talked about 
briefly today, especially earthquakes, are not considered a 
standard part of the policy, it's not required in your 
mortgage, it's not required in a federally backed guarantee 
mortgage, it's not considered a standard peril in a policy, and 
except for the California Earthquake Authority, there's limited 
private sector availability, so coverage is restricted very 
often in these places.
    If the next catastrophe is a significant flood, the ability 
of affected housing markets and economies to endure and recover 
is going to depend on the degree the properties were insured 
with the NFIP.
    Unfortunately, the evidence from 2004 and 2005 suggests 
that far too many properties in our country are underinsured or 
not insured at all. Either they're outside the mandatory flood 
area or the maps were so antiquated no one knew that they were 
subject to a flood.
    A recent study by the Rand Corporation provides evidence 
that suggests that the takeup rates outside the mandated zones 
is about 5 percent and the takeup rate, even where it's 
mandated, is only 75 percent.
    If the next disaster is an earthquake, the ability of an 
affected housing market in those areas and the recovery of the 
economy will be dependent on the degree of disaster relief 
coming from the Federal Government.
    The reason, quite simply, is that the majority of residents 
in catastrophically prone earthquake areas do not buy for this 
risk.
    In California, the takeup rate of an optional earthquake 
coverage is 14 percent. The same takeup rate is frequently 
suggested in the New Madrid area and along the eastern seaboard 
that is a seismically active area.
    The economic results of a major earthquake, as 
Congresswoman Brown-Waite has already referred to, would be 
cataclysmic to the economy of the United States.
    So how will we deal with this? How would these homes be 
rebuilt? Without houses for people to live in and businesses to 
return to, how will the economy in the local area ever recover?
    Given these scenarios, one might think that a market for 
earthquake insurance is growing. Instead, we have seen quite 
the opposite. After North Ridge, 35 percent of the people of 
California had earthquake coverage. Today that number is less 
than 15 percent. Yet across the country, insurance companies 
are substantially reducing their appetite for writing this 
coverage.
    If the next disaster is a catastrophic hurricane, the 
impact is likely to be quite different than either of the 
scenarios I've already suggested.
    The ultimate impact is going to depend on the severity of 
the storm and the level of preparation in the local or State 
area.
    For a moderate storm, the wind damage will be covered by a 
standard homeowner policy and the insurance company will pay 
the claim, so long as the insurance companies have the 
financial wherewithal to pay those claims.
    Chairman Ney. The witness's time has expired.
    Mr. McCarty. I would just like to suggest that there are 
several things that we need to do, including a Federal backstop 
program, encouraging insurance companies to accumulate 
catastrophe reserves, which has been suggested by 
Representative Foley, and also the potential of having personal 
savings accounts to help consumers mitigate against future 
claims.
    We know we're going to have a natural disaster. It's not a 
matter of if, but when, and we need to have our Nation, our 
States, and our local governments coordinated in planning for 
those disasters.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. McCarty can be found on page 
134 of the appendix.]
    Chairman Ney. And all witnesses, without objection, also, 
your statements will be entered, of course, as part of the 
record.
    Admiral.

 STATEMENT OF JAMES M. LOY, ADMIRAL, U.S. COAST GUARD (RET.), 
          NATIONAL CO-CHAIRMAN, PROTECTINGAMERICA.ORG.

    Admiral Loy. Thank you, Mr. Chairman, and members of the 
subcommittee.
    I appreciate the opportunity to appear before you today in 
my capacity as co-chairman of ProtectingAmerica.org, an 
organization committed to finding better ways to prepare and 
protect American families from the devastation caused by 
natural catastrophes.
    My fellow co-chairman is James Lee Witt, former Director of 
the Federal Emergency Management Agency.
    Our coalition members include first responders, emergency 
management officials, insurers, municipalities, small 
businesses, Fortune 100 companies, and private citizens.
    ProtectingAmerica.org was formed to raise the national 
awareness about the important responsibility we all have as 
citizens to prepare and protect consumers, families, 
businesses, and communities.
    We hope to build a campaign to create a comprehensive 
natural catastrophe management solution that saves lives, 
protects homes and property at a lower cost, improves 
preparedness, and reduces the financial burden on consumers and 
taxpayers, all in an effort to protect our property, to save 
money and lives, and speed recovery efforts after one of these 
catastrophes.
    The simple fact is that natural catastrophes can and do 
occur virtually anywhere in our country. The unfortunate 
reality is that tens of thousands of our fellow citizens are 
unable to pick up their lives where they left off after these 
catastrophes occur.
    Some quick facts.
    Fifty-seven percent of the American public live in areas 
prone to catastrophes like hurricanes, earthquakes, or other 
natural disasters, and more are moving to those areas every 
day.
    Seven of the 10 most costly hurricanes in U.S history have 
occurred in the last 5 years.
    Some of the most valuable real estate in this country is 
squarely in the catastrophes' path, on the Atlantic, Gulf, and 
Pacific coasts, and on top of the New Madrid fault in the 
Greater Mississippi Valley.
    In the past 100 years, 11 hurricanes have made direct hits 
on New England; 6 have made direct hits on Long Island. The 
most famous of those, in 1938 became known as the Long Island 
Express, 700 people killed, 63,000 left homeless, and if that 
storm hit 20 miles west of this 1938 landfall today, the losses 
would be staggering.
    Although the San Francisco quake of 1906 is the best known 
earthquake in America, perhaps a $400 billion event if it hit 
today, in fact the New Madrid series of quakes in the early 
1800's covered a far greater area with a force every bit as 
strong as the Frisco earthquake.
    The New Madrid earthquakes emanated from New Madrid, 
Missouri, and struck over a 3-month period in 1811 and 1812. 
They changed the course of the Mississippi River, shook the 
ground from Mississippi to Michigan, and rang church bells in 
Boston. Structures were damaged throughout the Mississippi 
Valley.
    These quakes are largely unknown today because they struck 
at a time when earthquake zones were largely a wilderness. What 
was then the newly acquired Louisiana purchase now encompasses 
major population centers across the Midwest.
    Katrina notwithstanding, when catastrophe strikes, our 
after-the-fact response programs and protocols have 
historically done a remarkable job getting victims into 
shelters and mobilizing emergency supplies.
    All Americans, regardless of whether or not they've been 
victimized by a catastrophe, owe our first responders an 
enormous debt of gratitude and thanks.
    While little can be done to completely eliminate the actual 
crisis, ProtectingAmerica.org believes that its impact can and 
must be mitigated.
    Programs that would improve preparedness, increase public 
education, enhance prevention and mitigation efforts, and 
augment support for first responders can improve our national 
capability to prepare and protect those who live in harm's way.
    ProtectingAmerica.org believes that in addition to 
minimizing the extent of catastrophic losses through prevention 
and mitigation programs, we should also reduce the taxpayer 
subsidy of recovery efforts.
    ProtectingAmerica.org advocates the establishment of a 
stronger public-private partnership as part of a comprehensive 
integrated solution.
    The solution would include privately funded premium-based 
catastrophe funds in catastrophe-prone States that provide more 
protection at lower cost to consumers.
    These State-level CAT funds would serve as a backstop to 
the private insurance market and would generate investment 
earnings that in addition to helping to pay claims could also 
be used for mitigation, prevention, preparation, and first 
responder programs.
    We have been advocating the creation of a national 
catastrophe fund that would serve as a backstop to 
participating State funds in the event of a mega-catastrophe.
    Those State funds would be financed through mandatory 
contributions by insurance companies in each of those States in 
an amount that reflects the risk of the policies that they have 
written in each State, actuarily sound premiums, no tax 
dollars, growth potential with the same structure of tax 
advantages we each enjoy in our IRA's.
    Qualified State funds would be able to repurchase 
reinsurance from the national backstop program. Rates for this 
coverage would again be actuarily based and self sufficient and 
would only be available to those State programs that have 
established prevention and mitigation funding as described 
above.
    Chairman Ney. Time has expired.
    Admiral Loy. Mr. Chairman, the last two hurricane seasons 
have been devastating wakeup calls. We at ProtectingAmerica.org 
believe that this committee is the right venue to offer America 
a better, more comprehensive national catastrophe solution.
    Thank you for the time, and we would be happy to answer 
your questions.
    [The prepared statement of Admiral Loy can be found on page 
102 of the appendix.]
    Chairman Ney. Thank you. Mr. Plunkett.

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                  FEDERATION OF AMERICA (CFA)

    Mr. Plunkett. Chairman Ney, Ranking Member Waters, members 
of the subcommittee, and other concerned members, my name is 
Travis Plunkett. I am legislative director of the Consumer 
Federation of America.
    I would particularly like to thank Representative Taylor 
for being here, because of the extraordinary work he has done 
in fighting unfair claims practices in the Gulf Region since 
Hurricane Katrina.
    I appreciate the opportunity to offer the Consumer 
Federation's comments on the very important issue of the impact 
of natural disasters on the ability of homeowners to purchase 
insurance.
    In order to understand why many insurers are dramatically 
increasing home insurance rates and dropping coverage in 
coastal areas, and what the Federal Government should or should 
not do about it, I would like to emphasize three points.
    First, these rate hikes, coverage cutbacks, and non-
renewals are a betrayal of the promises property casualty 
insurers made to consumers and regulators in the wake of 
Hurricane Andrew in 1992.
    In particular, insurers have reneged on a promise that new 
weather modeling procedures that they implemented, which caused 
considerable pain to consumers at the time, would stabilize 
rates and not lead to sharp swings in pricing and coverage, and 
coverage cutbacks, in the future.
    The industry's shameless violation of these promises 
indicates either mismanagement or duplicity, and they have 
harmed the credibility of those who are now claiming that they 
need Federal assistance for catastrophe losses.
    Second point. The insurers who are now proposing such 
programs have not come close to making the case that the 
private market can't handle these losses, even during a period 
of increased hurricane activity.
    In fact, there is much opposition to these proposals from 
insurers and reinsurers who think the market can handle the 
situation, and much evidence that primary insurers are in one 
of the strongest financial positions in their history to cover 
these losses.
    Thirdly, if this body does consider a Federal catastrophe 
insurance program, we urge you to consider only plans that 
mandate and enforce wise construction in coastal areas, that 
are actuarily sound, and that do not impinge on the ability of 
the private market to cover these losses.
    In particular, it makes no sense to create an expanded 
catastrophe insurance program until the one that exists, the 
national flood insurance program, is in the black and doing a 
much better job at mitigating and limiting reckless 
construction.
    Now let me address in somewhat greater depth each of these 
issues.
    After Hurricane Andrew, insurers adopted new ratemaking 
techniques based on scientific models that forecasted damage up 
to 10,000 years into the future, rather than using a simple 
history of hurricanes for the last few decades.
    That is, they built into their rate base losses due to 
periods of intense activity as we're going through now and 
periods of little or no activity. A consumer might pay a little 
more in downtime, but a huge hurricane the next year wouldn't 
cause rates to shoot through the roof or the insurer to refuse 
to renew coverage.
    Insurers also cut back a great deal of coverage and sharply 
increased out-of-pocket costs for consumers by introducing much 
higher percentage deductibles, new deductibles, caps on 
replacement cost payouts, and other coverage costs.
    This upheaval did hurt consumers. Consumer groups, however, 
largely supported many of these changes because we understood 
that the industry was not well prepared for Andrew and because 
it brought the promise of price stability.
    We were shocked to learn this spring that, at the urging of 
the insurance industry, Risk Management Solutions and other 
modelers are moving from a 10,000-year projection to a 5-year 
projection, which will cause a 40 percent increase in loss 
projections in Florida and a 25 percent jump in the Northeast. 
We've called on regulators to reject these rate hikes.
    The insurance industry has a serious credibility problem 
with these rate hikes. What is their excuse for engaging in 
another round of massive and precipitous actions? They surely 
knew that forecasters had predicted for decades that an 
increased period of hurricane activity and intensity would 
occur from the mid-1990's to about 2010.
    In particular, the non-renewals announced by insurers like 
Allstate raise the question of whether they are using the 
threat of hurricane damage as an excuse to drop customers who 
from their point of view are not terribly profitable.
    Whether it was mismanagement that started a decade ago or 
the clever use of an opportunity today, consumers are being 
unjustifiably harmed.
    I also point out in our testimony, and I will not go into 
great depth here, that the industry is enjoying its highest 
profits in history. Its retained earnings are extremely high. 
Its financial position is very strong.
    In our testimony, as well, we have a number of principles 
that we would recommend being met before any Federal program is 
considered.
    Chairman Ney. Time has expired.
    Mr. Plunkett. Thank you very much.
    [The prepared statement of Mr. Plunkett can be found on 
page 145 of the appendix.]
    Chairman Ney. Thank you.
    Mr. Williams.

STATEMENT OF GUY WILLIAMS, PRESIDENT, GULF COAST BANK AND TRUST 
 COMPANY OF NEW ORLEANS, LOUISIANA, ON BEHALF OF THE AMERICAN 
                   BANKERS ASSOCIATION (ABA)

    Mr. Williams. Chairman Ney, Ranking Member Waters, and 
members of the subcommittee, my name is Guy Williams. I'm 
president of Gulf Coast Bank and Trust in New Orleans, and I'm 
testifying on behalf of the American Bankers Association.
    Hurricanes Katrina, Rita, and Wilma caused unprecedented 
devastation to the Gulf Coast Region. Lives, homes, businesses, 
and neighborhoods were lost. Tens of thousands of people were 
displaced. The rebuilding has just begun.
    I'm proud that the banking industry was one of the first to 
respond. We learned many valuable and painful lessons which 
will help us and others to face future catastrophes.
    I recently served on an ABA task force on emergency 
preparedness which prepared a toolkit for ABA members that will 
help them prepare for and deal with emergency situations. In 
fact, I have one of these toolkits with me today.
    When a disaster strikes, we want every consumer to know 
that their bank is prepared. Banks are required by law to have 
extensive disaster recovery plans and State and Federal 
regulators routinely examine banks on their preparedness.
    Post-9/11 procedures strengthened our ability to deal with 
a broad range of disruption. Our experiences after last year's 
hurricanes enhanced those abilities. In even some of the 
hardest hit areas, banks were up and running the day after 
Katrina hit.
    My bank could not return to any of its offices or our 
operations center. Nonetheless, we reopened the Monday after 
the storm in rented facilities; our Internet banking product 
continued to operate 24/7; and we made $18 million in 
reconstruction loans in the first 30 days after the storm.
    Banks are key players in the recovery from any disaster, 
from ensuring that cash is available immediately; making bridge 
loans for short-term recovery; and providing long-term 
financing for construction. Banks are integral to disaster 
recovery.
    In the aftermath of last year's storms, bankers put 
competition aside. Bankers from across the country immediately 
began providing assistance to banks in the most affected areas 
and bankers in the affected areas shared resources and 
facilities in order to serve our communities.
    We began working with our customers to help them deal with 
the disaster and plan for the recovery. We extended forbearance 
on loans. We pushed the SBA to make disaster loans more 
available, mostly unsuccessfully. And we began making new loans 
to help customers rebuild.
    The lack of available and affordable property and casualty 
insurance after a disaster is a serious ongoing concern.
    Insurers have stopped writing new homeowners coverage in 
coastal areas around the Gulf. Many insurers, including the 
market leaders, are declining to renew policies. Insurers 
cannot find reinsurance at rates low enough to offer homeowners 
policies at a rate that the State governments consider 
appropriate.
    As a result, Gulf residents are forced to replace their 
coverage with a policy written by the State's insurer of last 
resort.
    The State of Louisiana has a backstop insurance program 
called the Louisiana FAIR plan. It provides insurance to those 
residents who are unable to obtain it in the private market.
    Unfortunately, the Louisiana plan is actuarily bankrupt, 
and only the full faith and credit of the State of Louisiana is 
keeping it afloat.
    In order to cover last year's losses, all insurance 
policies issued in Louisiana will be subject to an 18 percent 
surcharge this year to replenish the FAIR plan.
    Because of its low limits and precarious financial 
condition, the FAIR plan is not the answer, nor will other 
States' similar plans suffice in the face of future disasters.
    Just this week, my bank approved two commercial loans that 
may not close because the borrowers cannot secure windstorm 
insurance at any price.
    Without affordable insurance, our continued recovery is in 
doubt. Due to limitations faced by both the private insurance 
market and the State-sponsored backstop plans, the ABA believes 
that the creation of a Federal disaster insurance program is 
necessary.
    Legislation to do so has been introduced in the last 
several Congresses. The latest proposal has been introduced by 
Representative Ginny Brown-Waite.
    Absent such a program, taxpayers cover the cost of 
uninsured and underinsured properties. Providing a backstop 
ensures that insurance will remain available and affordable.
    Mr. Chairman, thank you for inviting me to testify today, 
and thank you for your help with flood insurance yesterday.
    [The prepared statement of Mr. Williams can be found on 
page 187 of the appendix.]
    Chairman Ney. Thank you very much.
    The first question I want to ask, and I appreciate the 
panelists today, about--a question that's raised all the time.
    For example, let's not pick on earthquakes, but use it as 
an example.
    Is it fair for taxpayers in non-earthquake areas to 
subsidize the damage of people that are in earthquake areas?
    Yes, Mr. McCarty.
    Mr. McCarty. I may be a little prejudiced on this, Mr. 
Chairman, since mortgages require people to have hurricane 
coverage, so 92 percent of the policyholders in homes in 
Florida are covered. We buy most of the flood insurance, 42 
percent of the flood insurance.
    And clearly, I think that the message, however, is that if 
it costs too much for the coverage and if we're looking at 
governments coming in after the fact, very generously 
responding to a natural disaster and providing block grants and 
monies for them to rebuild homes, then I think we're putting 
the wrong incentives in our system.
    We should be trying to put in incentives for us to purchase 
insurance and require that.
    I think that if you are taking out a loan and it's a 
federally backed loan, then you ought to be required to have 
catastrophic coverage, including hurricane, flood, tsunamis, as 
well as earthquakes.
    Chairman Ney. But should that risk be spread across the 
United States?
    Mr. McCarty. It should be spread across, because any 
insurance risk is spread across, but it should be risk driven.
    So a Florida homeowner in a coastal area will pay 10 or 15 
times the premium you'll pay in a safer location.
    Obviously, if you live on the New Madrid area in the 
Midwest, or in the San Andreas area on the West Coast, it 
should be price driven.
    But if more people are purchasing, and everyone who has a 
loan is required to have the coverage and pay a premium 
commensurate with that risk, actuarily sound as the admiral had 
alluded to, then you're paying into the system your fair share 
commensurate, where the risk of the loss potentially is there 
to pay out.
    Chairman Ney. For example, with the piece of legislation we 
have, if you have a second home, it phases in where you're 
paying a different actuarial rate, because it's a second home, 
on the Federal flood.
    But I'm saying on the private market, I think, for example, 
my premiums after New York went up, I believe I was told they 
went up because you're in Ohio but you're paying for what 
happened, to basically spread the risk around because how could 
people, you know, be able to cover a catastrophic event.
    And I realize if you're in California or another earthquake 
prone area you would have a certain actuarial rate, but I'm 
just saying for disasters, should that then also be spread 
across policyholders across the United States.?
    Mr. McCarty. Well, you know, if 49 of 50 States have a risk 
of catastrophic events, so everyone should pay a certain amount 
of premium for their catastrophic risk, so in that sense, it 
should be spread around the country.
    But I think it's very important to point out, and I think 
that others have testified to that you can't have a subsidized 
rate. We don't want to model this after some of the struggles 
we've had with the Federal flood program. It should not matter 
whether your risk is a first home or a second home.
    The risk of potential catastrophic loss should be 
conditioned on the condition of the property, the risk of loss 
from a catastrophic event, how well it's mitigated, shutters, 
et cetera, retrofitting.
    But the concept of the risk spreading around the country 
makes sense, but it should be specific to the risk of loss for 
that particular risk and it should be actuarialy sound, it 
should not be subsidized.
    Chairman Ney. Mr. Plunkett, I wanted to ask you, you stated 
in your written testimony that expanding taxpayer involvement 
in catastrophic insurance by creating a taxpayer backed 
disaster insurance pool isn't a sound idea, and the national 
flood insurance program should likewise be fixed.
    Now that we've approved yesterday some reforms to the flood 
insurance program, would you consider looking at a different 
way of expanding the Federal authority regarding catastrophic 
insurance if we cover the catastrophic insurance in the same 
way as we're trying to reform the flood insurance program?
    Mr. Plunkett. Mr. Chairman, both the House bill and the 
Senate bill on the flood insurance program are a step in the 
right direction, but let me say that we think that we need a 
couple of years to make sure that what you're proposing to do 
works and to see that the program gets back into the black 
before we launch another Federal program.
    In particular, we think that you're going to need to look 
at more measures to ensure that localities do better at 
requiring building codes that ensure wise construction and that 
the States do better at mitigation.
    We don't know that the House bill does enough there. 
There's very little in the House bill that would not just 
encourage mitigation, but to do everything that the Federal 
Government has within its power to ensure that better 
mitigation and better construction occurs.
    Some States are doing better than others, but overall, a 
huge problem with the national flood insurance program is that 
much unwise construction has occurred.
    So there are a few steps in the right direction, but we 
don't know at all that the unwise construction will be stymied.
    Chairman Ney. Thank you.
    The gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I want to concentrate a little bit, and perhaps Mr. McCarty 
can help me.
    You're insurance commissioner in Florida; is that right?
    Mr. McCarty. Yes, ma'am.
    Ms. Waters. And you have the responsibility for helping to 
oversee the insurance companies that do business in your State; 
is that right?
    Mr. McCarty. Yes, ma'am.
    Ms. Waters. You have heard perhaps more than once that 
consumers are pretty unhappy with insurance companies.
    For those who do pay premiums, it seems as if when they 
make claims, the insurance company is doing everything possible 
to keep from paying the claims, to deny the claims.
    I suspect there is little wonder that the amount of 
coverage in some areas is diminishing rather than increasing, 
such as mentioned here in several places in this testimony.
    What do you recommend for consumers who are dealing with 
insurance companies who have a lot of money, who have a lot of 
confused wording in policies, who deny claims and leave 
consumers holding the bag?
    What have you done? You represent the whole group of 
commissioners all over the country. Have you dealt with this 
issue? If so, how?
    Mr. McCarty. Well, I do come here with two hats. I am 
representing the National Association, but I am the insurance 
commissioner of Florida, and Florida has had a bit more to deal 
with than other States in terms of dealing with companies in a 
natural disaster.
    I'm generally not an apologist for the insurance industry, 
but I would say that with respect to 2005 in particular, the 
insurance industry performed remarkably well in terms of its 
claim paying ability.
    2004, I think, was a little more problematic. I think a lot 
of that has to do with the vast number of storms and the 
shortage of adjusters.
    We implemented in Florida a fairly aggressive mandatory 
mediation program. Most, about 90 percent, of the claims were 
paid within 90 days. We had a 92 percent success rate with our 
mediation program.
    We also had calibrated with the data collection from our 
consumer services offices, so we were able to identify early 
those companies that were not promptly dealing with consumers, 
not returning phone calls, or not adequately paying claims.
    We then used our market investigation unit to thoroughly go 
through those claims processes.
    Some of them we found had some startup problems because 
their own offices were destroyed or damaged because of a storm.
    Others had a pattern of practice where they were not 
treating the consumers appropriately. We dealt with those very 
harshly.
    And I think that would be the model.
    Other States, one of the things you have to understand also 
is just how huge this problem is.
    I recently concluded a tour of the area. We had 2.5 million 
claims, and that huge volume of claims in itself did overwhelm 
the industry for a period of time.
    But on balance in Florida--I can't speak for the other 
commissioners in other States--they performed well, with the 
exception of the area in Hurricane Ivan, where we had the 
difficulty whether the damage was water damage or the damage 
was wind damage, and one of the problems we had was the 
inability to get the flood insurance program to sit down with 
the insurance company, and thankfully, through the good work of 
this committee, that will hopefully be addressed--
    Ms. Waters. Let me just interrupt you for a moment, because 
this is a national issue. It sounds as if you're doing well in 
Florida.
    Is this discussed at your national association, and if so, 
why do consumers believe that they're not being treated fairly 
by the insurance companies when they make their claims 
generally?
    Mr. McCarty. I think there's a misunderstanding, as has 
been alluded to before, as to what exactly is covered in the 
policy.
    You pick up a policy and look, most folks who have been 
paying in Mississippi thought they were covered for flood. They 
had no reason to believe that they weren't covered.
    It was very disconcerting for these folks who had been 
paying premiums for a number of years that their most important 
investment that they had, and they looked through the pages and 
some endorsement clause somewhere says this is not covered.
    Ms. Waters. Is there anything that the insurance companies 
can do about helping people to understand what their coverage 
is and what it is not?
    Mr. McCarty. And I think some agents do a very good job 
working with their policyholders and educating them, and I 
think others perhaps could do a better job, and certainly the 
industry, I think has recognized through this hurricane season 
that they, too, have to do a better job.
    Many of them have been advocating changes in the policy 
forms, advocating checklists and consumer education checklists.
    Commissioners from other States certainly encourage people 
to contact their insurance departments and consumer outreach 
programs to help explain what's in a policy, and what's not in 
a policy.
    I know in your State, California, that the commissioner has 
been very active in trying to promote an understandable policy 
and working to make sure that Californians have a better 
understanding of what's covered and what's not.
    It is--we are a collection of various States. We do work 
together on a national basis with a national planning to help 
other States use checklists and other best practices and 
procedures, and I say that in those instances where it doesn't 
work, those companies are the responsibility of the insurance 
commissioner of that State, to take them to task.
    Ms. Waters. Thank you very much. I now yield back the 
balance of my time.
    Chairman Ney. Thank you.
    The gentlelady from Florida.
    Ms. Brown-Waite. Thank you very much, Mr. Chairman.
    I was a little concerned with Mr. Plunkett's testimony 
because I don't think that he has read the bill.
    Taxpayer dollars are specifically prohibited from being 
used. This is funded by insurance companies. And I wanted to 
set the record straight on that.
    Additionally, if I may ask Mr. McCarty, could you tell me 
if there was a decision made by your colleagues, the insurance 
commissioners from around the Nation, about a national 
catastrophic fund?
    Mr. McCarty. Well, there's certainly a great deal of 
disagreement.
    We did pass a resolution recently endorsing the concept of 
the establishment of a commission and a national catastrophic 
fund, and a recognition that at some point, we don't know 
whether it's $25 billion or $55 billion that the insurance 
industry cannot sustain a catastrophic event like the 1906 
earthquake or the 1938 Long Island Express, which would 
essentially bankrupt part or a good part of the industry.
    We do endorse the concept of a national plan, endorse a 
commission to go through the various issues that we've talked 
about, some of which has been laid out today, particularly 
catastrophe reserves and potentially looking at personal 
savings accounts, but also a comprehensive plan to make sure we 
have, as Mr. Plunkett has referred to, better building codes, 
actuarialy sound rates, elimination of unnecessary price 
controls by States, so that we encourage maximizing the private 
sector, maximizing personal responsibility, and using the 
Federal backstop as a rational backstop instead of an emotional 
backstop, bailing-out money after the event for insured 
properties.
    Ms. Brown-Waite. Thank you very much, Mr. McCarty.
    Mr. Plunkett, did you ever read the bill?
    Mr. Plunkett. Of course. I'm well aware that you've 
proposed a pool.
    The issue there is that without strong mitigation 
protections and strong building protections, it's not taxpayers 
who are going to be hurt, it's the ratepayers who will pay the 
additional assessments that the insurers will pass on because 
they are required to fund such a pool.
    The other issue in general, and we would be glad--more than 
happy in fact--to provide specific comments to you, but we've 
looked at a number of the proposals in Congress right now and 
the other broad concern is that these proposals cover 
unnecessary catastrophe losses.
    I mean, one proposal--another one, not yours--would cover 
hail damage. There's no evidence that there is a problem with 
potential catastrophe losses for hail damage nationally.
    Now, I understand the goal is to cover as much as possible 
so you can spread the risk as much as possible, but once again, 
ratepayers pick up the tab here, and one really has to--
    Ms. Brown-Waite. Are you aware that actually--
    Mr. Plunkett.--carefully justify--
    Ms. Brown-Waite. Are you aware, sir, that actually in the 
bill we do call for building codes and that we also have 
mitigation language in there?
    I'm appalled that there are some areas where there are 
absolutely no building codes. Frankly, they're not in the areas 
that are most prone to disasters.
    But we do call for stronger building codes. We also call 
for mitigation.
    As a matter of fact, you have to have stronger--you have to 
have building codes in places to even qualify for the CAT fund.
    So, you know, I guess it's a question of whether you look 
at this as the glass being half empty or half full, but you 
have to consider that either pay now or you're going to pay 
later, because if there is a catastrophic fund that is funded 
by the insurance companies, then that will provide--that will 
make sure that homeowners' claims are paid. That's my goal, 
sir.
    And I would think that as a consumer group, that should be 
your goal.
    Mr. Plunkett. Congresswoman, projection is always the best 
approach, you're absolutely correct. We would agree with you 
there.
    But we think stronger measures are needed on mitigation. 
New Orleans has building codes, and in New Orleans we've seen 
people lining up at City Hall to get their adjustments changed 
so that their homes wouldn't be determined to be more than 50 
percent damaged.
    We've proposed some--
    Ms. Brown-Waite. Many of them--
    Mr. Plunkett.--very far reaching measures here.
    Ms. Brown-Waite.--building codes were there, many of those 
older homes were there before the building codes were even 
there.
    But, you know, it is either pay now or the Federal 
Government is going to pay later. I'd rather have the insurance 
companies pay into a catastrophic fund, and that's really the 
difference here.
    Chairman Ney. Time is expired.
    Ms. Brown-Waite. I thank the gentleman.
    Mr. Williams. Mr. Chairman?
    Chairman Ney. Yes.
    Mr. Williams. Since he's addressed New Orleans, may I 
respond?
    Chairman Ney. Yes.
    Mr. Williams. The State of Louisiana passed a comprehensive 
building code in this last legislative session.
    The City of New Orleans provides a mediation program so 
that homeowners whose homes were evaluated to be 40 percent, 50 
percent, or 55 percent, can appeal that evaluation and 
determine whether or not that home needs to be razed, but 
that's simply an administrative procedure to give the consumer 
his day in court and due process, which is certainly something 
that the consumer league which you represent should be in favor 
of.
    Thank you, Mr. Chairman.
    Chairman Ney. Thank you.
    Mr. Plunkett. Mr. Chairman, would it be possible to tell 
you what we've said on that item?
    Chairman Ney. Hold that thought, and we'll move on to the 
gentleman from Missouri, and then we'll come back to that.
    Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman,
    Who would be responsible for the gaps in the private 
coverage? Who should be responsible for the gaps in private 
coverage?
    Mr. McCarty. Congressman, I'm not sure what you mean by 
gaps in coverage. Do you mean their deductible or where there's 
a gap between the wind and water damage?
    Mr. Cleaver. Yes, what happened to our colleague.
    Mr. McCarty. Well, quite candidly, that should not occur.
    If the property is appropriately rated and they're 
collecting a premium for both the exposure of wind and the 
exposure of flood, the combination of the policies, given that 
it's partially by one and partially by the other peril, should 
be enough.
    Mr. Cleaver. I know, but it did happen.
    Mr. McCarty. Well, we had the same problem, sir, in 
Florida, and we think that part of that problem was--and we had 
a different experience than the Mississippi experience. Our 
problem was that we weren't getting the flood payments paid.
    But what happens is, the flood folks will tell you that 
it's 30 percent damaged by water. The wind folks from the other 
part of the policy will say it's 30 percent. And the poor 
homeowner is left with it not being made whole.
    That's why I think the legislation in the flood legislation 
that previously passed requiring that both parties participate 
in a mandatory State-run mediation would get at that issue, at 
least get the parties talking so that, ``Listen, my home is 
destroyed. It cost $150,000 or $200,000 to fix. I need to get 
the benefit of the bargain from both of my contracts.''
    Anytime you have a bifurcated product where one company is 
selling one piece of the coverage and someone else, you run the 
risk of that problem, so either the insurance company has to be 
on the hook for the whole amount and then backstop through the 
Federal Government or you have to have some kind of legal 
mechanism to ensure that the person is made whole.
    Mr. Cleaver. I mean, if a Member of Congress is 
experiencing this problem, think about what's happening to all 
of the other people down in the region, and these are real 
people. These are human beings.
    Let me ask one final question.
    Insurance companies, is there some kind of unwritten, 
unspoken policy that everybody just can't get their claims 
paid?
    I'll ask anybody. I don't care.
    Something is going wrong; it looks as if people are trying 
to figure out a way not to pay.
    Admiral Loy. Let me just make a positive observation--that 
should not be the case. That policy is outlandish, if it is 
there, so--and I don't believe that it is.
    Mr. Plunkett. Congressman, we certainly think that some of 
the issues that Congressman Taylor has brought to light 
regarding unfair claim settlement practices and particularly 
insurers who have customers with wind coverage trying to shift 
losses to flood insurance, we certainly have seen some of what 
look to be very serious cases of that kind of unfair practice 
occurring in the Gulf Coast Region, very recently.
    Mr. Cleaver. Maybe we need some Federal legislation to make 
it a felony when companies do that to human beings and citizens 
of our country.
    I yield back the balance of my time.
    Mr. McCarty. I'd just like to add, I do think there are a 
number of States, not all States, that have a number of tools 
in the toolbox to deal with that.
    Clearly, if it's an unfair trade practice. States, I think, 
can aggressively pursue companies who do that, but there are 
also bad State provisions and laws in general in all 
jurisdictions.
    So if a company is in fact treating a consumer in their 
desperate times in this fashion, they could be subject to 
sanctions by the courts.
    Unfortunately, we don't want to get to that point. We want 
companies to settle their claims promptly. And I do believe--
    Mr. Cleaver. We're already there.
    Mr. McCarty. Yes, sir, I understand. But I do believe the 
legislation, the flood legislation and the amendment that you 
put in there will go a long way to address this issue, and I 
really appreciate that coming in. It will help I think many of 
the people who were affected this past hurricane season.
    Chairman Ney. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    I'm going to kind of take back up a point that the 
gentleman from Missouri is making, and it's something that I've 
been thinking about quite a bit, even before Katrina.
    And that is the confusion to people that are buying 
insurance that, you know, yes, you're insuring your home, but 
it covers everything but.
    And I think one of the problems that begins to happen there 
is the ``but'' part, and when the ``but'' part happens, then 
that's when the confusion occurs.
    I know that there's been some thought about the government 
getting more involved in that process, but maybe the 
government's involvement has been part of the problem, both 
from sending the signal that if that ``but'' happens, the 
Federal Government is going to--if that exception happens, it's 
going to, you know, come in and save the day, or the 
understanding that this is not a flood policy but if your roof 
leaks, it covers you, and ruins the carpet, but if the water 
rises from the rain around it, you're not covered.
    And I'm not so sure that down the road what we really need 
is for the Federal Government to get out of the flood insurance 
business and let the marketplace determine what that risk is 
and have an endorsement.
    You know, I've got endorsements for all--I mean, I get my 
insurance policies and there's an endorsement for this and an 
endorsement for that, and that particularly for people in a 
flood plain, that they understand that there's a disclaimer 
there that this does not include flood insurance but you can 
get an endorsement for that.
    I'd like to kind of explore that concept with the panel and 
see what your thoughts are.
    Dr. Gray?
    [No response]
    Mr. Neugebauer. Mr. McCarty?
    Mr. McCarty. I think that you're absolutely correct.
    We are constantly struggling with sophisticated consumers, 
who have a difficult time understanding what's in their policy 
and what's not, and clearly what happened, particularly in 
Mississippi, with the number of people who were lulled into a 
false sense of security.
    They were not in the flood zone. The flood maps had not 
been updated. So they did not believe they had to purchase that 
coverage.
    And I think most people think if their home is destroyed, 
regardless of the peril, that they're going to get paid.
    And so that's why the National Association has put forth a 
recommendation for adoption by the States of a consumer 
education checklist, so it goes through there and you check off 
whether you have flood, earthquake, hurricane, mold, mold 
exclusion, etc., so that would be a better choice.
    An alternative, as you have alluded to, is perhaps having a 
requirement that people buy comprehensive coverage if they have 
a mortgage, and if the rest of us are going to have to be 
backing that mortgage, a federally guaranteed mortgage, that is 
an all-peril policy.
    I entertained the concept of eliminating the flood program, 
privatizing the flood program, and having a Federal backstop 
similar to what we're talking about today. The industry did not 
evidence any appetite for writing the flood program directly, 
and I think that would be an impediment to advancing this 
project.
    Certainly it would be easier if you had an all-perils 
policy so irrespective of the loss, or what caused the loss, 
the consumer would be paid on their policy.
    Admiral Loy. Sir, I think the commissioner is right on 
track here, and your thoughts are very constructive.
    At the other end of the day, it's a matter of trying to 
understand what the Federal role and the legislator's role can 
be in incentivizing good behavior at the other end of the day, 
whether it's good behavior, that there be sanctions on the part 
of the insurance companies if they're not doing what they're 
supposed to be doing, but also good behavior, meaning informed 
behavior, on the part of the consumer who is attempting to 
cover these extraordinary parts of his life's experiences--
houses, car, whatever.
    So the notion of cognizance and oversight and sort of 
incentive standardization across the country are the kinds of 
things that can be legislated into the construct that we at 
ProtectingAmerica.org are attempting to advocate, and part of 
that can clearly be if you, in the State of ``X'' are looking 
for, in a mega-catastrophe circumstance, assistance at some 
threshold from the national backstop program, that will only be 
available to you if you have in fact done A, B, C, and D along 
the lines you're just describing in your State, and the same 
circumstance can very much apply between the State and the 
balance of what we would hope would be everything sort of 
Category 3 and below that would be normally handled by the 
commercial marketplace and the insurance industry.
    So the notion of what we're attempting to build in this 
comprehensive construct that ProtectingAmerica.org advocates is 
incentivizing good behavior on the part of the legislation that 
would be forthcoming--
    Ms. Brown-Waite. [presiding] The gentleman's time has 
expired. Thank you very much.
    Next, we have the gentlelady from New York, Mrs. McCarthy.
    Mrs. McCarthy. Thank you, and I appreciate this 
opportunity.
    Mr. Williams, I'm curious. With the disaster that happened 
on the Gulf Coast and certainly in Louisiana, you probably had 
an awful lot of mortgages down there with your customers.
    Mr. Williams. Yes, ma'am.
    Mrs. McCarthy. And here we are having fights with the 
insurance companies, in which they couldn't get their monies 
for the claims on the homes that they lived in.
    And so how much of a disaster was it for the bankers in the 
Gulf Region on all the insurance companies that--I should say 
all the banks that probably had customer who couldn't actually 
pay their mortgage anymore?
    Mr. Williams. I think it's fair to say that we're all mad 
at the insurance companies.
    But start with the biggest risk, which is flood. We had a 
diligent program at our bank to make sure that everyone who was 
in the flood zone had flood insurance, and to date, every 
single customer at our bank who was in the flood zone had flood 
insurance, because we insisted that they get it. If they didn't 
get it, we bought it for them.
    So we had no exposure to people in the flood zone not 
having flood insurance.
    We did have some problems with people who were told by the 
government, ``You're not in a flood zone, you don't need flood 
insurance.'' Fortunately, there weren't so many that we 
couldn't work those out, and we've been working them out on an 
individual basis.
    But that was a bit of a problem, and it particularly was a 
problem when months later the Corps of Engineers says, ``Guess 
what, guys? We blew it. Our design was bad. Our engineering was 
wrong. And it was really our fault.''
    So people were told by their government, ``You do not need 
flood insurance, it is not required, you're not in a flood 
zone.''
    The Corps of Engineers, which designed and built the 
levees, says, ``Whoops, we made a mistake.''
    And at that point, the consumer is left to hold the bag. 
Fortunately, Congress did appropriate some money and that is 
forthcoming.
    Mrs. McCarthy. With that being said, we're going to be 
hearing the next panel coming up soon, and I don't know when 
we're going to go down for votes, but I did have the 
opportunity to review the testimony, and one of the panelists, 
Mr. Burke, on behalf of the Reinsurance Association of America, 
states that there is no evidence that State catastrophe funds 
result in the availability of more homeowners' insurance.
    Mr. McCarty, you had brought this up a number of times. 
What was the availability of insurance in Florida before the 
creation of Florida's State program and what is it now?
    Mr. McCarty. Well, the RAA has been saying that for a long 
time, and it's no more true today than it was when they first 
said it.
    The fact of the matter is that the Florida Hurricane 
Catastrophe Fund was the anchor for the recovery of the Florida 
marketplace.
    We had nearly a million policies that were being nonrenewed 
by the private marketplace. We had substantial coverage change 
where consumers had much more deductible, much higher 
deductibles. We had significant rate increases. And even with 
all of those in place, there was a contraction in the 
reinsurance marketplace.
    The Florida Catastrophe Fund provided a limited amount of 
relatively inexpensive reinsurance for the primary marketplace. 
There's still plenty of opportunity to purchase reinsurance in 
the private sector. It is a public-private partnership for the 
large part that worked, that paid through 8 storms and $38 
billion or $35 billion worth of damage.
    So yes, the CAT fund has been exhausted of the capital, but 
it still has bonding authority, it has recapitalized $2.5 
billion. It is what I believe a very true success story, plus 
$10 million--there are allocations every year that have to go 
for mandatory mediation. They give credits and discounts for 
retrofitting homes, et cetera.
    So they're trying to--we're trying to use this as a model 
of providing incentives as well as disincentives in a system so 
that people act in their economic best interest to protect 
their home, and I think it has been a very successful program, 
and I think it would be a model for the rest of the country in 
terms of a State program and a facility above that would serve 
to provide greater stability and long-term viability of the 
insurance marketplace and the economy of the country, because 
the insurance industry only insures up to a certain amount. 
They can't insure up to a one in a 1,000 year event. No one 
could afford the premiums. They are in the risk assuming 
business.
    Some of the scenarios that we've talked about that happened 
in the past, you know, these could very well happen in the 
future, would definitely bankrupt the insurance industry and 
there would not only--people would not be able to rebuild their 
homes, they would not be able to revitalize the economy.
    I think it's a key component part of any national plan 
along with all the other things--
    Ms. Brown-Waite. The gentleman's time has expired.
    Mrs. McCarthy.--retrofitting and responsible building codes 
and building code enforcement.
    Ms. Brown-Waite. The gentleman from Mississippi, Mr. 
Taylor, you are recognized.
    Mr. Taylor. Thank you, Madam Chairwoman.
    The gentleman, Mr. Cleaver, touched on this, but I would be 
curious if anyone in the panel could offer a suggestion on what 
should be the mechanism, hard and fast mechanism for resolving 
the dispute that arises between wind and water, because I don't 
have any faith, based on what's happened in Mississippi, in the 
remediation that's going on.
    The second thing is, and I think most Americans who hear 
this are going to be shocked to hear it, is it really a good 
idea that the insurance industry is not regulated?
    They were given exemption from Federal regulation during 
the Great Depression. It might have made sense then. I don't 
see how something that is so important to every American could 
escape the regulation.
    The gentleman on the panel is from a relatively 
sophisticated, high tax State, that provides high services, but 
that's not the norm around the country.
    Mississippi, on the other hand, is a fairly low tax State, 
that provides low services, and boy do we know it when 
something like this happens. There really isn't much of a State 
agency to go to bat for the consumers.
    I don't say that happily, because I've got tens of 
thousands of people who are on the verge of losing everything 
in the wake of what the insurance company has done to them.
    So the first question is, would you have a recommendation 
for a hard and fast judge, so to speak, who is going to decide 
whether it's wind or water?
    The second one, is I'd like to open up to the panel, do you 
think it's time for Federal regulation of the insurance 
industry?
    Mr. Williams. Congressman, as a bank with an awful lot of 
customers who are having disputes with their insurance company, 
and a bank that has yet to collect on our own business 
interruption insurance, I would suggest binding arbitration 
with a short timeframe.
    Mr. Taylor. And who would you get to be the arbitrator?
    Mr. Williams. I think there are a number of alternatives.
    You have the American Arbitration Association. There are a 
number of groups that do that. Something unrelated to 
insurance, but something that would be short-term where you 
could get a quick answer.
    We all know that litigation is an option, but our customers 
can't wait and can't litigate for years.
    Mr. Taylor. I'm sure the gentleman is aware that just in 
the past 2 weeks, State Farm settled on some insurance claims 
relating to a tornado from 1999. Those people waited almost 7 
years for justice.
    Mr. Plunkett. Congressman, the consumer community would 
strongly oppose mandatory arbitration of the kind that you see 
in credit card contracts and other, many other contracts, 
because most often the playing field is tilted towards the 
entity, usually the business involved, or an association of the 
businesses involved that are paying the tab for that 
arbitration.
    Voluntary arbitration is a possibility. Much tougher 
oversight by State regulators, administrative law oversight as 
mandated by State regulators is a possibility.
    Clearly, many States aren't doing enough here.
    Regarding your question on the McCarran-Ferguson anti-trust 
exemption, consumer groups have long called for repeal. We 
don't think it's justified. We think a great deal of collusive 
activity by the insurance industry is allowed.
    It's a virtually unprecedented exception, not totally, but 
virtually unprecedented, and we'd like to see it repealed.
    The question of Federal versus State regulation, you've 
also touched on that.
    We don't have a particular dog in that hunt, but we do 
understand that, in smaller States with fewer resources, good 
strong oversight to the benefit of consumers is harder, and we 
just think there needs to be strong consumer protections. The 
trend has been in the other direction.
    And, in fact, the insurance industry is whipsawing the 
States because they're threatening greater Federal oversight as 
a way to get the States to sort of back off in some ways in 
terms of strong consumer protections.
    So one has to be careful when one looks at Federal 
regulation as to what type of regulation one is looking at.
    Mr. Taylor. Admiral?
    Admiral Loy. Mr. Taylor, I'm not sure I'm smart enough to 
talk about the hard and fast dispute resolution, other than 
from a fairness doctrine that I would hope would, as Mr. 
Plunkett suggests, if anything, tilt toward the consumer as 
opposed to those who would be perceived as taking advantage of 
the consumer.
    On the regulation side, the construct that we have thought 
our way through that appears largely in H.R. 4366, the House 
bill. I would get back to this notion of inducing fair and 
reasonable behavior on the part of the players in the system 
and making it quite clear in the legislation that that's what's 
expected.
    Ms. Brown-Waite. The gentleman's time has expired.
    I appreciate your lengthy answer and I am sure that Mr. 
Taylor would like to hear the rest of it, but we do have to 
recognize another member of the committee whom I should have 
recognized before, the gentlelady, also from Florida, who also 
has a hyphenated name, Ms. Wasserman-Schultz.
    Representative Wasserman-Schultz, you're recognized.
    Ms. Wasserman-Schultz. Thank you so much, Madam Chairwoman, 
and actually, as a non-member of the committee, I want to thank 
the chairman through you for allowing me to participate, and I 
wouldn't mind if Mr. Taylor wants the gentleman to finish his 
answer, just yielding some of my time in order for him to be 
able to do that.
    Mr. Taylor. Thank you.
    Admiral Loy. Thank you, ma'am. I'll just be very quick.
    You know, the notion of incentive standardization and 
consumer protection, those kind of thought patterns have to be 
part and parcel of the construct that this committee and this 
venue would consider in terms of going forward.
    Your first question, sir, about arbitration is at least at 
the moment fixated on how do we fix those tens of thousands of 
Mississippians and others in the wake of this immediate 
nightmare, but going forward, to have, as the commissioner has 
mentioned, tools of the trade in the hopper that are fair to 
lead towards arbitration judgments, that's got to be built into 
the system.
    Mr. Taylor. Thank you, sir.
    Ms. Wasserman-Schultz. Thank you.
    Mr. Plunkett, where do you live?
    Mr. Plunkett. I live near here, in Maryland, born in New 
Orleans, lived all over the Gulf Coast, and grew up in southern 
Missouri.
    Ms. Wasserman-Schultz. Okay. Well, then, you should have a 
passing familiarity with the danger of living in a region like 
the Gulf Coast or the one that I represent, which includes Fort 
Lauderdale, Hollywood, and Miami Beach.
    And I concur with my colleague, the gentlelady from 
Florida, that--and with Commissioner McCarty, whose testimony I 
appreciate and whom I very much appreciate the opportunity to 
work with.
    I was elected to the Florida legislature in 1992, the year 
that Hurricane Andrew hit. In fact, the primary in that 
election year was delayed by a week in one of the counties that 
I represent because no one knew where the precincts were.
    And quite honestly, if we didn't adopt a catastrophe fund, 
which we struggled mightily to do, and we were only able to be 
successful after convening a commission that included all of 
the presidents of the universities, who were able to make an 
objective overview and study of the matter and make 
recommendations that we could buy into in a bipartisan way, 
only then were we ensured of not losing the entire property and 
casualty industry in the State of Florida.
    There would be, and I firmly believe we wouldn't have any 
P&C companies doing business in our State if we did not adopt a 
catastrophe fund.
    Now, I feel like I have a little bit more--not more, but I 
have--I think I'm well within my pedigree to disagree with you, 
since I've been the recipient of about every award that your 
organization and its Florida affiliates gives out, and I have a 
very longstanding reputation of agreeing with the Consumer 
Federation and your affiliates.
    I completely disagree with you on this. It is irresponsible 
to take the position that we should not adopt a national 
catastrophe fund and that the reason for that is that consumers 
would be on the hook.
    You don't think consumers are on the hook now? You don't 
think consumers are struggling to obtain property and casualty 
insurance, afford property and casualty insurance, rebuild 
their homes and be able to actually live in the communities 
that get hit by hurricanes?
    Mr. Plunkett. Well, certainly as we point out in our 
testimony, they are struggling in coastal areas--
    Ms. Wasserman-Schultz. So what's your answer?
    Mr. Plunkett.--serious issues, and let me mention that 
we're not opposed to State CAT funds.
    In fact, our insurance director, Bob Hunter, was involved 
in discussions and debates after Hurricane Andrew that led to 
the creation of that fund in Florida.
    We have made the point that we don't think the case has 
been proven yet for such a national fund, but at the same time 
have offered principles in the testimony for review of that 
approach if considered.
    So we think we're engaging in a very responsible, 
constructive way.
    One piece to the puzzle that isn't discussed very 
frequently is proper regulation. One of the things that was 
done right after Hurricane Andrew was that Allstate and others 
were forbidden for one year, as I understand it, from pulling 
out, because a precipitous move involving tens of--in fact 
hundreds of thousands of ratepayers was proposed.
    In other States, the ability to look at rates, to examine 
rates, has been crucial to preventing some insurers, certainly 
not all, from taking advantage of these situations.
    So our solution is strong regulation, including rate 
regulation, and then getting the national flood insurance 
program in order, and making sure that whether ratepayers pay 
or taxpayers pay--
    Ms. Wasserman-Schultz. Mr. Plunkett, why isn't--
    Mr. Plunkett.--set up fairly.
    Ms. Wasserman-Schultz. Why isn't it far better--and I'm 
certainly for a regulatory scheme that would ensure consumer 
protection, but why isn't it far better, rather than 
artificially propping up the market, doing something that would 
actually open up the market and make sure that the free market 
system could be effective with a healthy dose of regulation?
    I mean, if we had continued in perpetuity the moratorium 
that you referred to, which was far longer than a year, and 
there were a number of other things that we actually did--
    Mr. Plunkett. Congresswoman, we have called for perpetuity. 
We--
    Ms. Wasserman-Schultz. Well--
    Mr. Plunkett.--concerned about the immediate impact.
    Ms. Wasserman-Schultz. If a moratorium in perpetuity is 
your solution, then we really are on a different page.
    Thank you, Madam Chairwoman.
    Ms. Brown-Waite. The gentlelady's time has expired.
    If Mr. Plunkett will submit a written answer on that, and 
the Chair notes that some members may have additional questions 
for this panel which they may wish to submit in writing.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    I want to thank the panel for being here and for 
participating. I think every member learned a great deal. And I 
hope that you all have a safe trip home.
    Thank you very much.
    As you leave, we're going to be calling the second panel 
up.
    I will briefly read their names.
    It is Mr. Dennis Burke, vice president of State Relations 
for Reinsurance Association of America.
    Mr. Ernst Csiszar, president and CEO, Property Casualty 
Association of America.
    Governor Marc Racicot, president of the American Insurance 
Association.
    Mr. Tim Russell, president of Baldwin Mutual Insurance 
Company of Foley, Alabama, testifying on behalf of the National 
Association of Mutual Insurance Companies.
    Mr. Alex Soto, president of InSource, Inc., in Miami 
Florida, testifying on behalf of the Independent Insurance 
Agents and Brokers of America.
    As well as Mr. David A. Treutel, Jr., of Treutel Insurance 
Agency of St. Louis, Missouri--I'm sorry, Bay St. Louis, 
Mississippi. I apologize.
    Welcome. We'll give you a moment to get seated and we have 
some water there for you.
    We'll proceed in the same order, so the first presenter 
will be Mr. Burke. Welcome.

     STATEMENT OF DENNIS C. BURKE, VICE PRESIDENT OF STATE 
         RELATIONS, REINSURANCE ASSOCIATION OF AMERICA

    Mr. Burke. Good afternoon, Acting Chairwoman Brown-Waite, 
Ranking Member Waters, and members of the subcommittee.
    My name is Dennis Burke, and I am vice president of the 
Reinsurance Association of America, the RAA. It's a pleasure to 
be here to appear before you this afternoon.
    As this committee has called a hearing to address the 
question, ``Is America's housing market prepared for the next 
natural catastrophe,'' I am here to present the reinsurers' 
perspective.
    Reinsurance enables insurers to offer more homeowners 
insurance in catastrophe-prone areas. The United States 
attracts reinsurance capacity from all over the world, as was 
demonstrated after the 2005 hurricanes in which the global 
reinsurance community paid approximately half of the $80 
billion in losses.
    Despite the resilience of the reinsurance market, some 
insurers are claiming that there is a need for a Federal 
natural disaster reinsurance program. The RAA does not believe 
that market conditions warrant such a program.
    First, the primary industry made a $45 billion profit after 
paying for the hurricanes.
    Second, the capital markets responded strongly after the 
hurricanes by investing $24 billion in reinsurers, and an 
additional $4 billion to $6 billion in new and existing 
catastrophe bonds and other capital market alternatives to 
reinsurance.
    What does that mean for actual reinsurance capacity?
    Reinsurance capacity is adequate in most markets throughout 
the United States. There is anecdotal evidence that in some 
markets, notably Florida, the demand for reinsurance has 
exceeded supply. The RAA believes that this imbalance will be 
temporary.
    If the free market is permitted to work, these temporary 
price spikes will be followed by increased competitors entering 
the market, increased competition, and a moderation of price. 
The markets do take time to adjust, however.
    At the core of H.R. 4366 is the creation of State and 
Federal catastrophe funds to provide reinsurance for natural 
disasters.
    As the gentlelady from New York noted, we do not believe 
there is any evidence that State catastrophe funds result in 
the availability of additional homeowners' insurance. The RAA 
believes that natural disaster risk is insurable in the private 
market and that State catastrophe funds displace the private 
market.
    Only Florida has a catastrophe reinsurance fund that meets 
the standards of the bill, and we would state that Florida is 
not a success story. It is broke and it is in debt.
    The model of the Florida hurricane fund is one that offers 
inexpensive reinsurance premiums up front because it's 
backloaded on the backs of taxpayers.
    When the fund runs out of money, it issues bonds. Insurers 
do not pay off the bond debt, policyholders pay off the bond 
debt. They are taxed to do so in the form of insurance 
assessments.
    State catastrophe funds also violate one of the fundamental 
tenets of insurance, spreading of the risk. Private reinsurance 
spreads risk globally. A State catastrophe fund concentrates 
the risk in one jurisdiction and shifts the risk from insurers 
to policyholders.
    The RAA believes that the public policymakers should make 
it their top priority to remove regulatory constraints and 
price constraints and enable the private insurance market to 
willingly assume more risk.
    If policymakers follow competitive free market practices, a 
Federal natural disaster catastrophe fund is unnecessary.
    Our specific concerns with H.R. 4366 are noted in our 
written testimony. We'd like to note three things, however.
    The trigger levels for the Federal reinsurance program are 
far too low and interfere with a functioning private 
reinsurance and insurance market.
    Second, there is no assurance that the Federal program will 
result in an increased offering of homeowners' insurance. 
Unlike TRIA, which has a mandate to offer additional coverage, 
there is no requirement that those insurers who benefit from 
the Federal program offer more homeowners' insurance.
    Third, if H.R. 4366 was the law, all catastrophe or most 
catastrophe risk would be in State and Federal Government 
catastrophe funds.
    In the event of a catastrophe, policyholders and taxpayers, 
who are already suffering under the catastrophic burden, would 
now have a tax or a policy assessment burden imposed upon them 
as well, whereas if it was insured in the private market and 
the global reinsurance market, funds would everybody coming 
from global reinsurers to the much-needed areas.
    In conclusion, the reinsurance industry has responded to 
virtually every catastrophe that has occurred in the United 
States in the last century. It continues to serve a vital role 
of providing capacity to insurers so that those insurers may 
offer additional homeowners' insurance. We urge you not to 
interfere with this functioning private market.
    Thank you.
    [The prepared statement of Mr. Burke can be found on page 
62 of the appendix.]
    Ms. Brown-Waite. Next, Mr. Csiszar. Welcome.

    STATEMENT OF ERNST CSISZAR, PRESIDENT AND CEO, PROPERTY 
            CASUALTY INSURERS ASSOCIATION OF AMERICA

    Mr. Csiszar. Thank you, Madam Chairwoman, and members of 
the committee.
    I appreciate the invitation to appear before you today. I 
represent some 1,000 property and casualty companies throughout 
our association, and they operate in every State of the union, 
including those States that have significant catastrophe 
exposures.
    Quite frankly, I think the industry faces a dilemma.
    What you heard from Professor Gray is very, very true. More 
people--about 39 percent more if you start counting from 1970 
onward, larger homes, more expensive homes, more net worth by 
individuals tied up in their home, a geographic distribution 
that is simply awful.
    Twenty-five percent of total insured value of total 
exposure is in one State, in Florida. New York comes a close 
second. Texas is in there. All the coastal States along the 
Atlantic as well as the Gulf Coast.
    Add to that, an increasing frequency of storms with higher 
severity, destruction of coastal wetlands and sand barriers 
that open up the entire coastline, the significantly increased 
storm surges, and the significantly increased damages, and what 
you face here, I describe it as an inverted pyramid.
    The Insurance Services Office, in a recent publication, 
estimated that just the hurricane exposure along the Atlantic 
and the Gulf Coast, the insured value of that amounts to $7.2 
trillion--$7.2 trillion.
    What my friend from the RAA, and I know he didn't do this 
on purpose, but I'll mention it, what he neglected to mention 
is that there is really only about $100 billion worth of 
capacity that's dedicated to catastrophe exposures.
    Some of it comes from reinsurance, some of it comes from 
the capital markets in terms of catastrophe bonds, some of it 
comes from what the insurers, companies like ours, retain, a 
total of $100 billion.
    For perspective, the insured value, not for tsunamis, not 
for earthquakes, not for hailstorms, not for floods, not for 
anything but hurricanes, I repeat, is $7.2 trillion. You have 
$100 billion worth of capital sustaining an enormous amount of 
exposure. Hence, we are all looking for solutions.
    The PCI has recently adopted a policy statement that sets 
out in effect a mix of policy solutions. There is no single 
best solution to this entire problem.
    We start with the fact that there are ways in which we can 
reduce exposure. Building codes, we've heard about those 
before; loss prevention; mitigation; preparedness effort; 
better preparedness; as well as better land use planning 
overall.
    Secondly, we welcome much-desired reforms to the NFIP, and 
we hope that those reforms ultimately will also address what I 
would describe as the single two most significant problems with 
the program.
    One, pricing. I have seen estimates, for instance, that 
suggest that a flood policy even in today's terms with the 
enhancements that we've seen is only at about 35 percent of the 
true risk of those properties, on average. So the pricing is 
inadequate.
    Repeat claims. I understand that in the recent storms, 
Katrina and Wilma and Rita, about one-third of the claims that 
are being paid out are in fact repeat claims.
    So the reforms are welcome. They're well needed. And we 
hope that they will continue and go much further than where 
they are.
    Thirdly, free markets. We don't have a free market in this 
industry. We have never had a free market in this industry. Our 
prices are set by the regulators. They're set by the Kevin 
McCartys of the world.
    I was a regulator. I was insurance commissioner in South 
Carolina for 6 years. I know how those rates are set. They are 
not set adequately. They're suppressed, and they're suppressed 
in many cases for political reasons, pure and simple political 
reasons. The end result is, there is no free market.
    So how do you attract capital? How do you make yourself 
attractive when the rates of return, regardless of how much 
profit you've made last year, the rates of return, particularly 
on capital invested for catastrophe exposure, is inadequate?
    I'll give you one example.
    Last year, in Louisiana, as a result of Katrina, we paid 
out $20 billion in claims. The entire State of Louisiana 
produces about $1 billion worth of premiums. That is 20 times 
more than the premiums for homeowners in Louisiana.
    Ms. Brown-Waite. The gentleman's time has expired.
    Mr. Csiszar. I will conclude by simply stating that we 
support State CAT funds and we also support a Federal role, but 
we would prefer to see credit arrangements on that Federal 
role, and I'll be more than happy to explain that further.
    Thank you.
    [The prepared statement of Mr. Csiszar can be found on page 
73 of the appendix.]
    Ms. Brown-Waite. Thank you. I'm sure there will be some 
questions.
    Governor Racicot.

   STATEMENT OF MARC RACICOT, PRESIDENT, AMERICAN INSURANCE 
                          ASSOCIATION

    Mr. Racicot. Good afternoon, and thank you, Madam 
Chairwoman.
    My name is Mark Racicot, and I represent the American 
Insurance Association here this afternoon. We work with major 
property and casualty insurance companies around the country.
    And of course, I appreciate the opportunity to be here this 
afternoon and to address this matter of extraordinary 
importance to our industry and to our Nation.
    Like have many members of the committee, I, too, have had 
the opportunity to see firsthand the extraordinary and terrible 
destruction that Hurricane Katrina inflicted upon the Gulf 
Coast, on the residents there, the businesses there, and 
communities there.
    The damage was and is both breathtaking and heartbreaking, 
and the private sector property insurers have been very 
diligent and are proud to be one of the financial engines 
trying to drive Gulf Coast recovery.
    Just for the record, for insurers, 2005 was the most costly 
year on record. Total catastrophe losses totalled more than $70 
billion.
    Insurance companies adjusted more than 3 million hurricane 
claims, as you heard the commissioner from Florida say, close 
to 95 percent of them already concluded, 1.6 million of those 
claims were from Hurricane Katrina alone.
    Yet, despite last year's recordbreaking losses, 
approximately $28 billion of new capital has entered the U.S. 
property insurance market since Hurricane Katrina struck.
    Although the property insurance market currently is under 
stress in several Atlantic and Gulf Coast States, we strongly 
believe the solution to this stress lies in improving and not 
displacing private sector ability to serve homeowners and 
businesses in the path of potential storms.
    The challenge is how to enable markets to manage 
catastrophe risk. We believe this can be done without 
establishing new government mandates or programs and without 
subsidies from taxpayers living in less risky areas.
    To this end, AIA has constructed a reform agenda, including 
both Federal and State initiatives.
    While we recognize that not all elements of our agenda are 
politically popular, we believe that now is the time to tackle 
these complex issues head on before the degree of difficulty 
gets even higher. The risks of not doing so in good faith are 
extraordinary, and could have grave consequences for our 
citizens and for our economy.
    The AIA natural catastrophe agenda comprises four major 
parts, which are expanded on in my written comments.
    First, AIA advocates protective measures to keep people out 
of harm's way and strengthen their ability to withstand future 
hurricanes.
    These measures include enactment and enforcement of strong 
building codes, policies to encourage retrofitting of existing 
buildings, and sensible land use planning.
    Secondly, AIA advocates regulatory and legal reforms to 
improve the stability of insurers' operating environment.
    Central to insurability to manage CAT risk is the ability 
to predict such disasters and charge an appropriate premium. 
Unfortunately, the political climate in many States leads to 
arbitrary rate suppression and expensive, unpredictable 
insurance regulatory mandates.
    Insurers also must have confidence that the insurance 
policies they write will be upheld following a major disaster.
    If trial lawyers or others successfully and retroactively 
rewrite insurance contracts, the predictability upon which a 
healthy insurance system is based is undermined.
    Third, AIA supports tax incentives to encourage residents 
to take more responsibility for hurricane preparation and 
response.
    There are other ways that Federal and State tax policy also 
can enhance affordability and encourage the use of proactive 
measures.
    Finally, AIA advocates national flood insurance program 
reforms to ensure that the NFIP continues its vital role in 
protecting homes and businesses.
    Among needed NFIP reforms are phasing out current subsidies 
and replacing them with risk-based premiums, expanded program 
mandates to cover more homeowners in more places, increases in 
coverage limits and deductibles, and policy terms that are more 
consistent with private insurance.
    Additionally, NFIP must complete its map modernization 
initiatives as soon as possible.
    We also analyzed the Brown-Waite-Shaw Homeowners' Insurance 
Protection Act, and respectfully, very respectfully, disagree 
with the premise that government must step in and displace 
large segments, or potentially displace large segments, of the 
private property insurance sector.
    It's also important to note that creation of State and/or 
Federal CAT funds would do very little to solve the many 
complex issues surrounding the natural catastrophe risk.
    To the contrary, such funds could supplant and discourage 
the private market, cause unfair subsidies, increase unwise 
building in catastrophe-prone regions, and compromise the 
property insurance infrastructure that has served this Nation 
so long and so well.
    So while we do not support creation of catastrophe funds, 
we do support the bill's provisions that target opportunistic 
pricing of the building and construction issues that are facing 
the country and the prevention of fraud.
    One final note, Madam Chairwoman, and that is that we also 
support the creation of a national commission to look beyond 
insurance to such critical risk management issues as public 
education and mitigation.
    Thank you very much.
    [The prepared statement of Mr. Racicot can be found on page 
160 of the appendix.]
    Ms. Brown-Waite. Thank you for being here, Governor.
    Next we have Mr. Tim Russell. Welcome.

STATEMENT OF TIM RUSSELL, MAYOR, FOLEY, ALABAMA AND PRESIDENT, 
BALDWIN MUTUAL INSURANCE COMPANY, FOLEY, ALABAMA, ON BEHALF OF 
     THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES

    Mr. Russell. Good afternoon, Members of Congress and 
members of this committee and Ranking Member Waters.
    My name is Tim Russell, and I am pleased to testify today 
on behalf of the National Association of Mutual Insurance 
Companies.
    We represent approximately 40 percent of the premium volume 
of the property casualty industry in this great country.
    I'm also the president of Baldwin Mutual Insurance Company. 
We are a single State writer in Alabama. We write about 35,000 
families' policies.
    I also have the distinct opportunity to serve as Mayor of 
the great city of Foley, Alabama.
    Foley is a coastal city that was directly impacted by 
Hurricane Ivan in 2004 and by Hurricane Katrina in 2005.
    In my dual roles as president of Baldwin Mutual Insurance 
and Mayor of Foley, I have seen a unique perspective on the 
devastation caused by natural disasters and the challenges that 
face insurers, government policymakers, citizens, and many 
others in preparing for and managing large-scale natural 
disasters.
    As we have heard from the previous testimony, we know that 
2005 was one of the worst years of natural disasters in this 
great country.
    For residents in our city, we were still recovering from 
Hurricane Ivan when Hurricane Katrina hit. Hurricane Ivan was 
the worst single catastrophe loss in the history of the State 
of Alabama.
    I wish I could sit here today and say that the worst is 
behind us, but again, many previous witnesses have testified 
today that our catastrophic exposure in America is greater than 
ever.
    NAMIC, our trade association, is pleased that the members 
of this committee are making a serious effort to understand the 
nature of catastrophic risk and the role that insurance can 
play to better prepare for and manage future large-scale 
natural disasters.
    To assist in this effort, NAMIC convened a special task 
force in December of 2005 to identify and analyze the critical 
issues that we believe policymakers should consider as they 
move forward.
    Today I'd like to share with you, the members of this 
committee and those representatives, several observations and 
recommendations that emerged.
    We have four key points.
    The first principle is the belief that market freedom and 
competitive pricing will lead to innovation in developing 
solutions to problems relating to natural disasters and 
insurance mitigation.
    NAMIC believes that insurance markets function most 
efficiently in the absence of government rate suppression and 
underwriting restrictions.
    A flexible regulatory environment in which insurers are 
free to price coverage based on risk will create incentives for 
property owners in high-risk areas to invest in loss mitigation 
measures.
    Likewise, risk-based pricing will create incentives for 
individuals, homebuilders and mortgage lenders, to engage in 
risk avoidance strategies.
    The second important principle is the belief that 
competitive pricing and risk-based underwriting are essential 
to development and maintaining a viable disaster insurance 
market.
    Lawmakers and regulators alike sometimes impose rating and 
underwriting restrictions on property insurers that allow high-
risk property owners to pay artificially low premiums, forcing 
lower-risk property owners to subsidize the insurance cost of 
high-risk buyers for paying inflated premiums.
    NAMIC believes that using the insurance pricing mechanism 
creates hidden cost subsidies among risk classes, and this is 
not good public policy.
    A third principle is the mitigation, and that mitigation is 
indispensable in disaster risk management and insurance.
    Effective mitigation efforts include the development of 
strong building codes, which our city supports. We have shown 
that strong building codes reduce property and human damage 
during natural disasters.
    In my capacity as Mayor of Foley, I spent a great deal of 
time surveying damage firsthand during Hurricane Ivan and then 
later Hurricane Katrina, and can tell you that those homes that 
were built in less strong capacities and less building codes 
suffered much greater damage than those with modern building 
codes.
    Earlier this year, the LSU hurricane center released a 
study that concluded that if Mississippi were to have adopted a 
tougher building code, it could have saved an estimated $3 
billion the next time that a hurricane Category 3 storm hits 
the State.
    NAMIC supports the concept of Federal legislation that 
would create financial incentives to encourage States to adopt 
and enforce strong statewide building codes.
    With respect--
    Ms. Brown-Waite. The gentleman's time has expired.
    Mr. Russell. Thank you very much, members.
    And the last principle is that we believe in the Federal 
flood insurance program--thank you for your recent act in that 
regard--and strongly support the reform of the Federal program.
    [The prepared statement of Mr. Russell can be found on page 
168 of the appendix.]
    Ms. Brown-Waite. Thank you very much for being here, Mr. 
Russell.
    Next, we have Mr. Alex Soto, also from Florida. Welcome.

   STATEMENT OF ALEX SOTO, PRESIDENT, InSOURCE, INC., MIAMI, 
  FLORIDA, ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND 
                    BROKERS OF AMERICA, INC.

    Mr. Soto. Thank you very much, Madam Chairwoman.
    My name is Alex Soto, and I am the president-elect of the 
Independent Insurance Agents & Brokers of America; you know us 
as, ``The big I.''
    We have 24,000 member agencies which are small businessmen 
and women, 300,000 agents and their employees, that are located 
virtually everywhere in the United States.
    We are the people who deal as intermediaries between the 
insurance company and our clients and the consumers.
    But I'll tell you, I make my living as an agent in Miami, 
Florida. I am the president of an agency called InSource, Inc. 
We're located, our main office, in Miami. We have a branch in 
Broward County. We have 65 employees, and we sell an array of 
all insurance products: financial services, homeowners, 
automobiles, and business insurance to business owners.
    We represent a number of the brand name insurance companies 
that each of you are familiar with and that are represented by 
these associations to my right.
    We have a very good, warm relationship with those companies 
and we also have a good working relationship with the 
associations that are represented here today.
    I want to take a moment to tell you what is happening in my 
marketplace, which is the entire State of Florida, and most 
particularly, south Florida.
    There is a systematic contraction of the insurance 
marketplace in Florida, and particularly in south Florida, and 
it is spreading to what we call the smile of the United States, 
which is the entire coast from Mexico all the way to New 
England.
    We represent--not only do business with those companies, 
but we also access as what is known as the surplus lines 
business, which are companies that from a ratemaking mechanism, 
and this is important, are not regulated by the Department of 
Insurance, so they have the freedom to set price according to 
what they believe a particular risk bears.
    And it's important to note that we have seen this 
contraction in the marketplace in personal lines and in 
commercial lines over a number of years. This is not something 
that has occurred or has only occurred since Katrina, Rita, or 
Wilma.
    We represent about 50 insurance companies in the surplus 
lines market and in the direct marketplace, and yet we 
practically don't have any product to sell today, and it has 
occurred during a period of time that we have just heard 
capital has increased.
    So this anomaly of Florida is not a short-running anomaly, 
and let me tell you how it occurs.
    It starts with a phone call or a letter from one of our 
insurance company partners indicating to me that they are 
shutting down in a particular area, and worse yet, they may be 
non-renewing a number of our insureds.
    I immediately in that conversation stress to the company 
that if they need more rate, if they need more premium, we are 
well acquainted with the Department of Insurance and have a 
good working relationship with them, and we can get them more 
rate.
    Their response uniformly has been, ``It's not about rate. 
Rate is an important component. But it's about reinsurance, 
it's about our capital, it's about our exposure.''
    We are in effect--and in fact, this commentary comes from 
some surplus lines companies that are not rate regulated, and 
they tell us, ``our reinsurers are forcing us to take these 
steps.''
    Therefore, we happen to believe that this is a national 
problem, this is a taxpayer problem, this is an economic 
problem, and in order to protect insureds and in order to 
protect taxpayers, we ought to, we ought to have the Federal 
Government have a role in providing a backdrop and a gapstop, 
reinsurance, and whether that reinsurance is only to 
catastrophe funds in States such as mine, in the State of 
Florida, or even beyond that, the private marketplace, and 
maybe that attachment point will be substantially high, we 
believe there's a role, measured, limited, and it's got to be 
sold at actuarial rates.
    We are encouraged by proposals that allow insurance 
companies to accumulate tax-free reserves. We salute the 
reforms in Florida. We do believe that less regulation is 
better.
    I look forward to the day that insurance companies compete 
for the business of my clients so that prices will be moderated 
and coverage broadened.
    We all have indicated that we believe in strong building 
codes and mitigation. I think we need to, and my colleagues and 
I need to invest in those research programs. There are very 
exciting programs going on in Florida that lead to mitigation.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Soto can be found on page 
173 of the appendix.]
    Ms. Brown-Waite. The gentleman's time has expired. Thank 
you.
    Mr. Taylor, I understand that our next presenter is from 
your area. If you'd like to introduce him, I would appreciate 
that.
    Mr. Taylor. Thank you, Madam Chairwoman.
    Dave Treutel is a true community leader in the Bay St. 
Louis area. He's up here, to the best of my knowledge, on his 
own nickel to talk about some of the mistakes that he as an 
independent insurance agent has seen that need to be corrected.
    I think it's fair to say that he's picked up a heck of a 
lot of business since the storm because the people that the 
Governor and others may represent have let us down.
    And so I'm very pleased that he's here today, and look 
forward to what he has to say.

    STATEMENT OF DAVID A. TREUTEL, JR., PRESIDENT, TREUTEL 
       INSURANCE AGENCY, INC., BAY ST. LOUIS, MISSISSIPPI

    Mr. Treutel. Thank you, Congressman. Thank you, Madam 
Chairwoman.
    My name is David Treutel and I am president of Treutel 
Insurance Agency, a third-generation independent agency located 
in Bay St. Louis, Mississippi.
    I serve on the board of directors of the Mississippi Wind 
Pool, the Governor's Recovery Commission on Katrina, and on the 
agents advisory boards of several insurance companies.
    I'm an active member of the Independent Insurance Agents & 
Brokers of America and served as president of the Mississippi 
Association in 1998.
    However, I'm speaking here today on my own, in my capacity 
as a private citizen, and as an independent insurance agent who 
saw some of the worst from Hurricane Katrina.
    On August 29, 2005, Hurricane Katrina made its way into my 
hometown, making an indelible imprint on the lives of my 
family, my insureds, my business, my small town, our 
Mississippi coast, our State, and ultimately our country.
    Winds from Katrina damaged much in its path, with water 
over 30 feet high and sent inland over 10 miles in my county.
    My home, 3 miles inland, and not in the flood plain, was 
devastated. My extended family counted losses that included 15 
autos, 8 homes, and 3 businesses.
    However, we consider ourselves fortunate that we survived, 
unlike the five neighbors who drowned within a block of my 
home.
    Katrina's winds and 7-foot floodwaters severely damaged my 
2-story office building. We quickly set up a makeshift tent in 
the parking lot of my town's Chamber of Commerce to serve 
insureds in the 110-degree heat index.
    At the same time, we commuted back and forth over 110 miles 
each way to an office apartment set up outside of Mobile, 
Alabama.
    These daily round trips to Mobile continued for almost 6 
months, and we logged 38,000 miles on my vehicle.
    Our agency has over 10,000 policy holders, and we 
ultimately handled close to 8,000 claims in the ensuing months.
    As we try to prepare for the next natural catastrophe, I'd 
like to raise several issues that my insurance agency and 
insureds face.
    One, the lack of available, sufficiently trained adjusters 
was an early problem.
    Two, communication was a serious problem. The simple 
process of having an adjuster and an insured make contact often 
did not happen for quite a while.
    Three, multiple policies meant dealing with multiple 
adjusters in most cases.
    Four, multiple policies also meant dealing with extremely 
different insurance contracts that did not complement each 
other. This situation often left an insured without proper 
coverage even when they had purchased all that was available in 
the marketplace.
    Wind versus flood. Multiple policies create a difficult 
situation when two or more perils cause or contribute to the 
same loss. Millions of dollars are spent by companies through 
engineering firms to support the eternal question: which came 
first, the water or the wind?
    As a result, millions of dollars that could have gone to 
consumers will be spent on litigation and additional 
engineering studies.
    Multiple policy confusion led many insureds to believe 
incorrectly that they would be paid fully for each separate 
policy they purchased.
    Number seven, major inconsistencies in the adjustment 
process.
    Insureds who were neighbors and had insurance policies 
written with different insurance agents and companies quite 
often had vastly different outcomes when or if their claims 
were paid. Homes on the same block had varying outcomes with 
their insurance claims.
    Number eight, confusion on proper values on the homes.
    Nine, State catastrophe pools cannot do it alone.
    Based on these issues, I would make the following 
recommendations.
    One, that companies offer one all-risk policy that would 
include insurance for natural disasters, wind, flood, and 
earthquake, provided that they have access to adequate 
insurance and reinsurance.
    This would mean one adjuster for all risks, avoiding the 
wind versus water debate, costly litigation, and excess costs 
for engineering studies.
    Two, continue to use existing State and Federal earthquake, 
wind, and flood catastrophe programs.
    Three, implement a Federal reinsurance backstop devised 
similar to TRIA. A limited Federal backstop could complement 
State and Federal catastrophe pools which could include a 
Federal role to help make reinsurance more available and 
affordable to States and their catastrophe pools.
    Four, tax incentives for companies and consumers to be 
prepared for the next catastrophe.
    Five, more properly equipped and trained adjusters. Both 
private carriers and Federal or State catastrophe programs 
should review their approach to handling disaster claims.
    Six, better communication with compatible state-of-the-art 
equipment. Communication issues should be reviewed in light of 
current available technology to find solutions in advance of 
the next round of catastrophes.
    In conclusion, the current process for dealing with 
catastrophe losses is not an efficient or effective process. It 
is not effective for all interested parties, particularly the 
American people--my clients and your constituents.
    Natural disasters can and will occur anywhere in our 
country at any time. Failure to act effectively now will 
continue to cost consumers and taxpayers much more than it 
should.
    Thank you for the time to speak this afternoon and thank 
you for the generous response that Mississippi has received 
from all of you after Katrina.
    Most importantly, our heartfelt thanks go to the many 
millions of generous Americans across our great country.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Treutel can be found on page 
179 of the appendix.]
    Ms. Brown-Waite. Thank you very much.
    There are some of you on the panel that I have met with and 
you've expressed concern about my bill, and most of you 
represent the reinsurers.
    Let's take a worst-case scenario, and I'd like to use Mr. 
Csiszar's figures of $100 billion worth of coverage for a 
possible $7.2 trillion exposure along the coast, and perhaps 
simultaneously in the same year, an earthquake on the other 
coast.
    Can those who do not support this bill assure this Congress 
and citizens that there actually is going to be adequate 
capacity and coverage should such a major catastrophe happen?
    I'm talking about several hurricanes dwarfing, God forbid, 
Katrina, along with perhaps something on the other coast.
    Mr. Burke, you're recognized.
    Mr. Burke. Representative Brown-Waite, we cannot state that 
if $7.3 trillion worth of disasters occurred during a given 
year, $100 billion, or even $800 billion, which is the combined 
property casualty insurance and reinsurance capacity, could 
support such catastrophic events, but the reality is that the 
property and casualty insurance industry is based upon facts.
    As Dr. Gray pointed out, massive hurricanes do not happen 
every day. They are few and far between. Earthquakes do happen, 
but they don't happen every day.
    I would point out that in California, earthquakes are 
excluded under most insurance policies because there is a--or 
at least homeowners' policies--because there is a government 
pool out there, the California Earthquake Authority.
    So the likelihood of all things happening at the same time 
in all places is, in fact, remote.
    If all things happened at all times during the same year, 
that would be a problem, and I would suggest that to have 
adequate reinsurance or insurance and reinsurance available at 
that time would be cost prohibitive to policyholders and no one 
could afford to support that sort of catastrophic risk.
    So actually, in those extreme--and I'm talking very 
extreme--circumstances, in excess of probably $200 billion to 
$300 billion, I think an after-the-fact Federal solution would 
be appropriate in those circumstances.
    Ms. Brown-Waite. So we have to wait, just so I'm sure I 
understand you, you're suggesting we wait until there's a 
catastrophe, is that what you're saying?
    Mr. Burke. I am suggesting that in the realm of 
possibilities, the types of catastrophes that would exceed free 
market capability are so remote that I do not--particularly if 
we free the private market by ending rate suppression, which 
would attract additional capacity to the industry--
    Ms. Brown-Waite. Sir, I can just tell you that I have a 
daughter who lives in another State, my family lives in 
Florida, and if you think that the people who are paying the 
rates out there think that rates are suppressed, you can go 
into my district and you deal with people who are paying more 
for homeowners insurance than they are for their taxes.
    To say rates are suppressed I believe is no longer an 
adequate excuse.
    I would ask Governor Racicot if he would comment also.
    Mr. Racicot. Well, I think, Madam Chairwoman, that the 
answer given by Mr. Burke addresses the issue, and that is that 
you can imagine all kinds of extraordinary situations, but the 
insurance model of this country for 150 or 175 years has been 
based upon modeling, upon risk assessment based upon history 
and projection into the future and trending, and it is based 
upon an actuarial science that allows for you to draw 
possibilities and to price those possibilities or risks.
    And pursuant to that system, obviously, that's what we 
believe the private market can respond to. That's why we see 
new capital entering into the reinsurance market so rapidly.
    But you can certainly, if you desire, conjure up an 
extraordinary situation that no one could imagine--
    Ms. Brown-Waite. Well, I think, too, in response to I 
believe it was Mr. Soto, who said it's not about the rate, it's 
about the exposure, at some point, you know, the insurance 
companies are going to be saying, ``We can't afford the 
reinsurance we had before,'' and at that point, it may be too 
late.
    I think we need to plan for natural disasters and we need 
to plan so that our constituents aren't left in a lurch with a 
piece of paper policy that they think has some coverage to it.
    Mr. Racicot. Madam Chairwoman, if I could address that.
    First of all let's place these questions in their context. 
This is the most highly regulated industry in the United States 
of America, at the State level. It's always been regulated at 
the State level.
    They pass upon the rate structure. They pass upon the 
language of these contracts. They approve wind and water 
definitions within these policies. They require solvency.
    So it's within that context that we're talking about these 
particular issues.
    Now, we know that--
    Ms. Brown-Waite. Governor, my time is up, also. My time is 
up. I have to--I can't take more time than anyone else.
    The gentleman from Mississippi, Mr. Taylor, do you have any 
questions?
    Mr. Taylor. Yes, ma'am, I do. Thank you.
    Ms. Brown-Waite. You're recognized.
    Mr. Taylor. Governor, could we directly quote from your 
Page 6:
    ``Pending `wind versus water' litigation brought by the 
Mississippi attorney general private plaintiffs epitomizes the 
problem that insurers face in an uncertain legal environment, 
particularly where cases are fraud [sic] and [sic] `hometown' 
juries. Insurers should not be made to pay claims for losses 
that are beyond the scope of an individual's policy, and for 
which the policyholder did not pay premiums.''
    Governor, when an extremely powerful U.S. Senator, the 
former majority leader, when a sitting Federal judge, when a 
sitting Congressman feel like they have to go to court to get 
fairness from the insurance company, the problem is not with 
the individual, it's with your industry.
    Secondly, you talk about the importance of sticking to 
contracts. In each of those contracts was a hurricane 
deductible.
    Now, if you're going to have a hurricane deductible, a 
prudent person would think you'd be covered for a hurricane.
    And so if someone who has voted for almost every tort 
reform measure that's come before this body, I've got to tell 
you, the problem isn't the legal system, the problem is with 
your industry.
    Mr. Racicot. Well, Mr. Congressman, I would steadfastly 
disagree with you, with all due respect.
    Let me point out, first of all, that if you take a look at 
what has happened in Mississippi during this last year, you'll 
find that the record total of homeowner insurance claims 
payments resulting from the 2005 hurricanes in Mississippi is 
enough to wipe out all of the homeowner premiums paid in that 
State during the past 17 years.
    Mr. Taylor. You wrote the policies. No one dragged you to 
the State of Mississippi.
    Mr. Racicot. But let me--
    Mr. Taylor. You were certainly happy to take their payments 
all these years.
    Mr. Racicot. No, you're asking about where is the problem 
here, and I'm just trying to describe the context for you.
    First of all, this extraordinary amount of claims has been 
paid out.
    Secondly, these contracts are regulated by your State. 
Commissioner Dale regulates these contracts, and approves the 
language. In that State, you have solvency requirements that 
they have to meet as well. In that State, the rates are 
approved, as well.
    So everything that is done in that State is done with the 
approval of your State authorities, and whether you're a 
Congressman or a painter doesn't matter. The sanctity of 
contracts is absolutely critical to establishing a stability 
within which people can do business.
    Tell me, I don't know what your business is, or what are 
the contracts you have, but I'm certain that you would agree 
that the foundation stone upon which this democracy depends is 
the sanctity of contracts. If they can be changed at any point 
in time, and what I'm telling you is that when you have a 
regulatory environment, as you quoted there, that changes at 
the whim and caprice of elected officials because there are 
huge political pressures upon them, and they set about to 
abrogate contracts after they have been entered into, agreed 
upon, and reviewed by State authorities, you cannot have a 
stable regulatory environment that attracts capital--
    Mr. Taylor. Governor, do you think it is in the best 
interests of the taxpayers that employees of your industry go 
out and look at the damages and decide whether the taxpayers 
through the Federal flood insurance program should pay the 
claim or your industry should pay the claim? Do you think that 
is a good thing for the taxpayers, that no one from the 
government even bothers to check that? If your industry files a 
claim, the Federal flood insurance program pays it?
    And I will give you a for instance.
    If that lady Member of Congress wants to be reimbursed for 
her trip to the airport, she has to send me a voucher. She has 
to actually have the receipt from the taxicab for that 15 or 20 
bucks.
    But if someone who works for State Farm or Allstate or 
Nationwide walks onto a piece of property and just makes an 
arbitrary decision that all of that was water damage and no 
wind damage, despite all evidence to the contrary, despite 
evidence that they had wind damage 10 miles further inland, 20 
miles further inland, 50 miles further inland, 100 miles 
further inland, but down there where they can blame it on the 
water, they're going to blame it all on the water, do you think 
that's a good thing for the taxpayers?
    Mr. Racicot. Well, I don't agree that that's what happens. 
If it does happen, there are a number of different 
possibilities for--
    Mr. Taylor. I want to make your industry aware, it's called 
the Fraudulent Claims Act, and it calls for treble damages in 
addition to a $5,000 to $10,000 fine per incident.
    Please make the presidents of the associations that you 
represent aware of that, because it's coming.
    Mr. Racicot. There are already State-based statutes, 
Congressman, that are very, very strong in their application, 
criminal statutes, for deceitful practices, fraud, any kind of 
oppression or breach of a fiduciary duty that has to do with 
insurance contracts.
    In this particular instance, there are going to be disputes 
about what the facts in an individual case might reveal to be 
either wind or water.
    Even though the language is approved by the commissioner 
before those contracts were ever utilized, there are a number 
of different venues you can address that in.
    One, of course, right off the bat, is with the 
commissioner's office. They have--
    Ms. Brown-Waite. The gentleman's time has expired.
    Mr. Racicot.--regulatory control. The second thing you can 
do is with an arbitration or mediation process.
    The third thing to do if you have to is to resort to 
litigation.
    But remember--
    Ms. Brown-Waite. The gentleman's time has expired.
    Mr. Racicot. Oh, I'm sorry. Excuse me.
    Ms. Brown-Waite. The gentleman from Ohio, Mr. Ney.
    Chairman Ney. Thank you.
    Ms. Brown-Waite. You're recognized.
    Chairman Ney. Thank you, Madam Chairwoman.
    Mr. Csiszar--I'm sorry if I mispronounce--you were also 
going to say something else when your time ran out.
    Would you like to comment?
    Mr. Csiszar. Thank you, Mr. Chairman.
    I was referring to the fact that, as PCI, we recognize the 
value of State-based CAT funds, and where necessary, we support 
State-based CAT funds.
    The second thing I was going to add was that we also 
support a Federal role.
    We think that the most innocuous type of Federal role under 
these circumstances revolves around credit.
    We think that a national program, an overall national 
program will always--and I saw this at the NAIC--you always run 
into the argument, ``Well, why should Iowa support the 
millionaire in Florida?''
    One way around that is to turn the program into a credit 
program so that in essence, a Federal credit becomes available 
when a State has a State-based CAT fund, and that credit then 
of course is repayable from that State.
    So we support a liquidity approach, if you will, to the 
problem by providing liquidity from the Federal level to the 
State level to that State CAT fund.
    Chairman Ney. Who would determine that Federal credit?
    Mr. Csiszar. That's something that would have to be worked 
out under a program with the Federal Government and the 
particular State, the particular State CAT fund.
    Chairman Ney. We've heard about mitigation. I don't know if 
it was you or not that said that in certain cases mitigation 
could have saved $3 billion, or was it $3 million?
    Mr. Russell. That was me, sir. Research at LSU Institute--
LSU is Louisiana State University, independent research of the 
insurance industry.
    I don't know if you were in the room when I was testifying, 
but I am the Mayor of a city, the fastest-growing city in the 
State of Alabama, by the way, with some 17,000 homes under 
construction at this time.
    Proper building codes are absolutely essential to all of us 
in mitigating loss in America, absolutely essential, and we all 
have to support that, in my opinion.
    Yes, some people would be affected adversely if they could 
not afford that, and that's where we as elected officials, me 
being the Mayor, need to step up to the plate and provide 
governmental remedies to help pay and subsidize individuals. 
That's testimony on my own, away from the insurance industry.
    But proper mitigation would save us all billions of dollars 
in catastrophic loss.
    Chairman Ney. Thank you.
    I yield back the balance of my time.
    Ms. Brown-Waite. Just for the record, we have a written 
statement that has been submitted by the National Multi-Housing 
Council, and I ask unanimous consent to have it entered into 
the record.
    Without objection, it will be entered into the record.
    There may be some additional members who have more 
questions for this panel that they may wish to submit in 
writing, and without objection, I would like the hearing record 
to remain open for 30 days for members to submit written 
questions for those witnesses and also for the witnesses to 
have time to submit their responses.
    Without objection, this hearing is adjourned. Thank you for 
being here.
    [Whereupon, at 4:38 p.m., the subcommittee was adjourned.]

                            A P P E N D I X



                             June 28, 2006
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