[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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Washington, DC 20402-0001
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
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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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