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




 
                     STABILIZING INSURANCE MARKETS
                         FOR COASTAL CONSUMERS

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 13, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-119


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    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
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair         PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
EDWARD R. ROYCE, California          HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York               RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio                  JOSEPH CROWLEY, New York
VITO FOSSELLA, New York,             STEVE ISRAEL, New York
JUDY BIGGERT, Illinois               WM. LACY CLAY, Missouri
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
PATRICK J. TIBERI, Ohio              JIM MATHESON, Utah
J. GRESHAM BARRETT, South Carolina   STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida           BRAD MILLER, North Carolina
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JIM GERLACH, Pennsylvania            NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida            MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
GEOFF DAVIS, Kentucky                DEBBIE WASSERMAN SCHULTZ, Florida
MICHAEL G. FITZPATRICK,              BARNEY FRANK, Massachusetts
    Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 13, 2006...........................................     1
Appendix:
    September 13, 2006...........................................    53

                               WITNESSES
                     Wednesday, September 13, 2006

Baker, Wendy, President, Lloyd's America, Inc....................    23
Chamness, Charles, President and CEO, National Association of 
  Mutual Insurance Companies.....................................    34
Daniel, David, Daniel & Eustis, on behalf of the Independent 
  Insurance Agents and Brokers of America........................    26
Heidrich, Gregory W., Senior Vice President, Policy Development 
  and Research, Property Casualty Insurers Association of America    30
McCarty, Kevin M., Commissioner, State of Florida, on behalf of 
  the National Association of Insurance Commissioners............    20
Nutter, Franklin W., President Reinsurance Association of America    28
Racicot, Hon. Marc, President, American Insurance Association....    32

                                APPENDIX

Prepared statements:
    Brown-Waite, Hon. Ginny......................................    54
    Clay, Hon. Wm. Lacy..........................................    56
    Delahunt, Hon. William D.....................................    57
    Foley, Hon. Mark.............................................    59
    Hinojosa, Hon. Ruben.........................................    61
    Kanjorski, Hon. Paul E.......................................    62
    Shaw, Hon. E. Clay, Jr.......................................    63
    Baker, Wendy.................................................    65
    Chamness, Charles............................................    71
    Daniel, David................................................    76
    Heidrich, Gregory W..........................................    82
    McCarty, Kevin M.............................................    89
    Nutter, Franklin W...........................................   104
    Racicot, Hon. Marc...........................................   110

              Additional Material Submitted for the Record

Baker, Hon. Richard H.:
    Statement of Mark Drennen, President and CEO, Greater New 
      Orleans, Inc...............................................   117
    Letter from the Commercial Mortgage Securities Association...   124
    Text of Windstorm Conference Call............................   128
Brown-Waite, Hon. Ginny:
    Statement of the National Association of Realtors............   158
Hinojosa, Hon. Ruben:
    Assorted materials from the Texas Department of Insurance....   163
Kelly, Hon. Sue:
    Article by Carl Hiaasen, ``Just say no to stronger building 
      code''.....................................................   168
Statement of ProtectingAmerica.Org...............................   170


                     STABILIZING INSURANCE MARKETS
                         FOR COASTAL CONSUMERS

                              ----------                              


                     Wednesday, September 13, 2006

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Richard H. Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Kelly, Brown-Waite, Feeney, 
Hensarling, Campbell, Foley, Shaw; Kanjorski, Hooley, Moore of 
Kansas, Hinojosa, Israel, Clay, Baca, Lynch, Scott, and 
Wasserman-Schultz.
    Chairman Baker. I would like to call this meeting of the 
Subcommittee on Capital Markets to order this morning.
    I am advised that Mr. Kanjorski, the ranking member, is on 
his way, and in order not to keep our distinguished panel 
waiting unusually long, agreement has been reached to proceed, 
and we do expect his arrival momentarily.
    The committee meets today to examine and hear witness 
testimony on the state of readiness of our Nation's insurance 
industry and the ability of State governments to meet the needs 
of constituents facing increasing frequency and severity of 
natural disasters of all sorts.
    I wish to make clear that it is not my intention that this 
meeting be viewed as a response merely to a Hurricane Katrina/
Rita problem, nor even just as a hurricane response concern. In 
fact, this should be the beginning of a thorough and 
longstanding examination of all peril risk, including 
earthquakes, wind, and any other calamity which may befall 
American people, wherever they may be.
    The remedies that have been suggested have been varied, and 
the remedies that are attempted to be put in place at the State 
level have resulted in varying consequences. I note that, in 
California, with the creation of the California Earthquake 
Authority, to date, I am told, no more than 13 percent of 
Californians have availed themselves of that coverage.
    By contrast, in the State of Florida, with the creation of 
their CAT fund, it has, to some observers, been over-subscribed 
and, in 2005, resulted in a $1.4 billion operating deficit.
    So the consequences of these market aberrations are 
significant, and the remedies attempted to seek resolution have 
obtained varying results.
    In order to put a Louisiana perspective on our problem, 
however, I wish to enter into the record a statement from the 
Greater New Orleans, Inc., organization, and particularly their 
addendum in which they give specific examples of what has 
occurred since the storm. For example, a particular restaurant 
located in the French Quarter which did not flood, which did 
not suffer wind damage, in the prior year paid $27,000 for 
their 2005 coverage, which included a 2-percent wind 
deductible, with a maximum deductible under any circumstance of 
$25,000. The 2006 renewal for the same limits is $242,000. That 
is up from $27,000, and includes a deductible of 5 percent. 
That is more than doubling the deductible, with no dollar limit 
on that withholding.
    The second is with regard to a health care provider with 
$1.5 billion in property insured. The previous policy had a 
wind limit of $200 million in damages to be paid. The total 
premium was $1.3 million. The renewal has a wind limit coverage 
of $25 million, down from $200 million, and the premium stays 
the same.
    Now, I am not one to inject myself into business 
operations, nor to express concern about someone having to pay 
increased premiums in light of duly identified risk. In each of 
these cases, neither business entity made a claim or suffered a 
loss during the course of Katrina.
    One of the remedies I wish to examine is how site-specific 
the risk assessment is by the industry in determining, property 
by property, whether they are likely to suffer loss, which 
leads us to the building code discussion. If we know there is a 
frame of wood constructed to less than adequate standards, it 
would be understandable for that business owner to pay a higher 
premium than someone built on an elevated site with a steel 
structure, but yet that screening of risk by property does not 
appear to be effectively utilized today.
    Others have suggested various remedies, from the full-scale 
creation of a Federal backstop to various variations in tax 
reserving, but I do not believe that a clear remedy has yet 
been identified, and this committee's work will take us through 
many hours of hearings to finally seek that remedy.
    As I have said, this is not a one-State problem, it is not 
a one-party problem, it is just a big problem, and I want to 
commend the members of the committee--Ms. Brown-Waite, Mr. 
Feeney, Ms. Wasserman-Schultz, and Ms. Maloney--each of whom 
have expressed various recommendations about resolution. As 
well, today, we have Mr. Shaw and Mr. Foley joining the 
committee--and I ask unanimous consent that they be considered 
members of the panel for today's considerations--who have come 
from their State's concern with their own perspectives about 
how resolution might be achieved.
    As a result of reading the testimony, and members' 
expressions of interest, I intend, assuming there is no 
unforeseen calamity befalling political fortunes, early next 
year to engage in a series of roundtable discussions. As the 
ranking member knows, we have done this on other matters of 
consequence, and we do not get all stakeholders around the 
table at one time, but we afford everybody a chance to be 
heard, and I believe, if we begin this process in January, 
before we get into the difficulties of the storm season next 
year, perhaps the House can come to some resolution on needed 
reforms, and so, I thank all the members of the panel who have 
given of their time today.
    There are many others who wish to be heard, and as we go 
forward, we will ensure that all perspectives have been made 
available to the members, and with that, I would recognize the 
ranking member, Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    This morning, the Capital Markets Subcommittee returns to 
an issue that we have often reviewed in the past--the 
availability and affordability of insurance in coastal areas.
    From our past work on these matters, we know that the cost 
of reinsurance typically rises after major events, particularly 
as providers reassess risk. Most recently, this contraction has 
led to problems in rebuilding along the Gulf Coast after 
Katrina.
    In addition, 7 of the 12 most costly disasters in our 
Nation's history occurred in 2004 and 2005, so others are also 
affected.
    I share the concerns of my colleague about helping the 
communities affected by these catastrophes. I also want to 
ensure that we take effective steps to ensure that people who 
live in less risky areas pay appropriate and reasonable rates 
for their insurance policies.
    While today's hearing will allow us to gather the 
additional views of a number of experts on these matters, we 
are still awaiting the results of the three catastrophic 
insurance studies being prepared by the Government 
Accountability Office.
    In the next Congress, we should hear from the GAO about the 
findings on these matters.
    In the meantime, today's hearing will help us to better 
discern the quality of the adjustment process and consumer 
confusion in the insurance products that they should purchase 
and at what levels.
    We will additionally look into what, if any, role the 
Federal Government should play in providing natural 
catastrophic insurance. I have, however, long had deep 
reservations about inserting the Federal Government into the 
private markets.
    Finally, I hope that we will explore the interest in 
creating an all-perils policy that would protect homeowners 
regardless of the cause of the damage. This product would cover 
perils like floods, fire, hurricanes, wind damage, and 
earthquakes in just one policy.
    While this type of product would end consumer confusion 
about what coverage they need and likely result in less 
litigation about insurance settlements, it would also come at a 
considerable cost.
    In sum, I look forward to hearing from our witnesses. This 
is a topic that deserves Congressional action and review, and I 
can assure the future ranking member that we will continue it 
next year.
    Chairman Baker. I appreciate the gentleman's optimism.
    Ms. Brown-Waite.
    Ms. Brown-Waite. Thank you very much, Mr. Chairman.
    Mr. Chairman, I would like to ask unanimous consent to 
enter a statement into the record from the National Association 
of Realtors.
    Chairman Baker. Certainly, without objection.
    Ms. Brown-Waite. Thank you very much. In this, it 
highlights the fact that it is a national problem, and it 
certainly is having an impact on the cost of rents, as well as 
a slowdown in the housing market. So I think it is certainly 
very pertinent.
    Thank you.
    I cannot thank the chairman enough for holding this hearing 
today.
    The insurance crisis that Florida and many other States are 
facing is imminent, and we need to find solutions immediately.
    I also want to thank the witnesses who are here. We 
certainly have an array of them from various areas in our great 
Nation.
    As many of you know, I have introduced H.R. 4366, the 
Homeowner's Insurance Protection Act, with my colleague, Mr. 
Shaw, who is here today, and the bill has many cosponsors.
    As I have been meeting with industry groups and other 
members, I hear claims that the market is stable, there is 
enough reinsurance, and that there is no problem. Well, to 
those people making those claims, I would suggest that they 
visit Florida, Mississippi, Alabama, South Carolina, New York, 
and many other States.
    Basically, every person living in Florida is a victim of a 
market that is nowhere near stable, and it is not just Florida. 
I am not talking about millionaires who live on the beach, as 
the cliche goes. I am talking about retirees living on Social 
Security, young families, and people just starting a business, 
as well as farmers whose families have been in Florida for 
centuries.
    Florida homeowners' premiums are increasing at double-digit 
rates, or their policies are dropped entirely, and they have to 
get insurance from the State's insurer of last resort; Citizens 
is the name of the entity that was created.
    This insurer of last resort will soon become the largest 
insurer in our State, which will spell even more of a disaster.
    However, if homeowners are facing affordability questions, 
business owners are facing a threat far worse: availability.
    Because there is no Citizens insurance property coverage, 
Florida has moved past the initial outrage stage and is now in 
full-blown panic.
    Business owners are no longer scared because their rates 
will increase. They are having to close their doors and leave 
the State, simply because they cannot get insurance. No area, 
including Florida, can withstand this type of economic 
meltdown.
    Congress has to find a solution to this crisis, and I 
recognize that the solution is multi-faceted.
    The solution should include States passing and enforcing 
strong building codes and mitigating disasters before they 
strike, ensuring that companies are writing prudently, that 
they are purchasing adequate amounts of reinsurance, and that 
they are not over-exposing themselves.
    Also, relieving the market of unnecessary regulatory 
burdens and giving insurers the tools that they need to enhance 
competition, such as allowing them to build up tax-free 
reserves; certainly making sure that the insurers of last 
resort are the private insurers, not the Federal and State 
Government, as my bill does by creating a Federal catastrophic 
fund, not funded by taxpayer dollars.
    Giving homeowners and business owners the tools that they 
need to prepare for disasters themselves, like my colleague, 
Mr. Feeney, does by creating the catastrophic savings account, 
is also another approach. I hope that all the panelists here 
today have some innovative suggestions as to what Congress can 
do to help you better provide a more affordable product to our 
constituents around the country, because we should refuse to 
wait until the next big disaster hits, whether it is a 
hurricane, earthquake, or tsunami, before Congress wakes up and 
enacts a solution to a crisis that already is on our doorstep.
    Mr. Chairman, I thank you very much, and I look forward to 
hearing from our speakers today, and I yield back the balance 
of my time.
    Chairman Baker. I thank the gentlelady and want to commend 
her for her hard work on this subject and assure her and Mr. 
Shaw, the cosponsor of the measure, that the committee will 
examine carefully those recommendations as we proceed in future 
weeks.
    Mr. Israel?
    Mr. Israel. Thank you, Mr. Chairman, and thanks also to our 
ranking member, for convening this hearing.
    Congresswoman Carolyn McCarthy, my colleague from Long 
Island, and I sent a letter to the chairman and ranking member 
some time ago requesting this hearing, and we deeply appreciate 
your responsiveness on a very critical issue.
    I'm on the Armed Services Committee, and we're conducting a 
markup today on the issue of military tribunals. So I am going 
to need to do a lot of shuttling back and forth, but this issue 
is critically important to my constituents.
    I represent Long Island, New York. In fact, a few months 
ago, I saw a computer model of what would happen to Long Island 
in the event of a Category 3 hurricane, and Mr. Chairman, it 
was good news and bad news.
    The bad news for me was that the entire north shore of my 
Congressional district, on the Long Island Sound, would be 
flooded. The entire south shore of my district, along the 
Atlantic Ocean, would be flooded. That's the bad news.
    The good news for me, Mr. Chairman, is that, on Long 
Island, it is the waterfront properties where most Republicans 
live, because they can afford those properties, and so that is 
kind of a divine form of redistricting.
    The fact of the matter is that it does not matter, as you 
said, Mr. Chairman; it is not a Democratic problem, it is not a 
Republican problem, it is a big problem, and it is a problem 
for my constituents on Long Island.
    Already two insurance companies have made the decision 
either to provide limited renewals of homeowners policies or 
not to sell any additional homeowners policies at all. This is 
creating considerable frustration and concern in my district.
    I think that there are some sensible solutions to this, and 
I hope to play a constructive and bipartisan role in pursuing 
those solutions.
    I appreciate the fact that insurance companies need to 
ensure that they can meet their obligations and provide levels 
of protection to my constituents, but we cannot leave anyone 
literally high and dry. We need to develop a national framework 
for this.
    I am a cosponsor of Ms. Brown-Waite's bill, and I think it 
is a good step.
    I am absolutely open to all other steps, and look forward 
to continuing to have a dialogue with industry, with consumers, 
and with my colleagues on this committee to find an ultimate 
solution that is effective, that is sensible, and that is also 
fair.
    I thank the chairman and yield back the balance of my time.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman, for holding this 
important hearing to examine the state of the natural 
catastrophe insurance market.
    Clearly, the 2005 hurricanes wreaked a tremendous loss in 
human lives and in economic loss, live property damage, with 
over $50 billion in insured losses, and so, consequently, we 
have Congressional interest and public debate on the issue of 
how to address disaster financing.
    A key question before us today is how did the insurance 
markets perform in this catastrophe? Were they successful, or 
is there clear evidence of market failure? As I examine the 
record, I think the answer is that the market performed 
reasonably well, at least the private sector did. The insurance 
industry demonstrated resiliency and flexibility in the wakes 
of these historic devastating hurricanes, and was able to 
successfully settle most of the Katrina and Rita claims, 
certainly without a significant weakening or disruption of the 
overall financial strength.
    However, not surprisingly, a range of very legitimate 
issues have arisen from wind versus water lawsuits to the 
question of affordability.
    This has caused insurers at both the State and Federal 
regulators to reexamine our current market structure, and I 
know this committee will be very actively engaged in this issue 
in the weeks and months ahead, and we should, but if history is 
our guide, I fear there may be a tendency for the Federal 
Government to overreact and respond simply with new Government 
programs and subsidies that may only make the problem worse, 
and they could certainly do so by distorting pricing mechanisms 
that match premiums to the level of risk being assumed and 
allow realistic capital levels to be accumulated by insurers.
    Compared to private markets, the Federal Government's track 
record in insurance programs is somewhat suspect, and should 
give anyone pause before considering an expanded Federal role 
like a Federal backstop. Certainly, we should note that the 
Federal flood insurance program is broken and insolvent, and 
Congress has had to increase its borrowing authority three 
times.
    The PPGC has just posted a $23 billion deficit and projects 
billions in unfunded liabilities, and I need not talk about the 
future of Social Security.
    Federal insurance programs or taxpayer subsidies do not 
always work well, and moreover, they tend to disrupt the 
private sector markets that are functioning reasonably well.
    Instead of examining ways to shut down or displace the 
private markets, I would hope that we would review existing 
regulatory and tax structures to identify and remove obstacles, 
to strengthen the private insurance markets. We need to look at 
certain State and local policies dealing with building codes, 
code enforcement, land use planning, and certainly risk-based 
pricing is critical.
    So I hope that, as we try to stabilize the market, 
increasing affordability and availability, that we do not 
simply make the problem worse, and I hope that the cure does 
not prove worse than the disease, and with that, I yield back 
the balance of my time.
    Chairman Baker. I thank the gentleman.
    Ms. Hooley?
    Ms. Hooley. Thank you, Mr. Chairman, and Ranking Member 
Kanjorski, for holding this hearing, and I thank our witnesses 
for taking the time to be here today to talk about this really 
important issue.
    At a time when many insurance companies have either stopped 
writing new policies in some areas or withdrawn from the at-
risk markets entirely, homeowners are having an increasingly 
hard time finding insurance, and if they find it, it's not 
always affordable.
    So not only are we facing a greater number of disasters 
each year, but the cost of those disasters is increasing, as 
well, as more people move to high-risk areas and the value of 
their land continues to rise.
    As a result, I have serious concerns about the availability 
of homeowners and catastrophic insurance in high-risk areas, 
and I question if the private market alone can continue to 
sustain the necessary coverage. At the end of the day, 
homeowners need to be able to find and afford adequate 
coverage, and we must take whatever steps are necessary to try 
to achieve that goal.
    In addition to strengthening the insurance market, I also 
believe that we must take a preemptive step to reduce the cost 
of catastrophic disasters and encourage mitigation whenever 
possible.
    I worked to pass language that would reinforce existing 
legislative mandates for FEMA to map the risk of mudslides, 
which happens in my State, in Oregon. It is provisions like 
these that will help the insurance industry, consumers, and 
small businesses to better judge the dangers posed by flooding 
or other risk.
    Strengthening building codes and investing in risk-
mitigation codes are simple ways we can help control the costs 
from the next major disaster.
    The one thing I would urge all of us to remember as we 
continue this discussion is that this is not just an issue that 
concerns the Gulf Coast States, although they have certainly 
been hit the hardest in recent disasters.
    I am looking forward to hearing the testimony from all of 
you, and particularly your suggestions on how to fix the 
catastrophic insurance system throughout the country and 
provide greater access to homeowner's insurance, and I thank 
you for being here today.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentlelady.
    Ms. Kelly?
    Ms. Kelly. No statement.
    Chairman Baker. Mr. Feeney?
    Mr. Feeney. Well, Mr. Chairman, I know we share a great 
interest in natural disasters, and I am really grateful to the 
chairman for having this hearing. I want to thank Commissioner 
McCarthy from Florida ahead of time for his testimony and for 
the great work that he has done in Florida.
    In Florida, obviously, we have a long history of 
hurricanes.
    Representative Brown-Waite, Representative Foley, and I 
were there in the aftermath of a 1993 storm called Andrew, and 
we learned a great deal about the mistakes we made in terms of 
things like lax building codes. We had companies at the time 
that were 80-percent concentrated in market share in two 
counties.
    You know, I came from Philadelphia. Benjamin Franklin 
started the first insurance company, and he knew enough not to 
let three or four wood houses on the same block have the same 
insurer, but somehow, prior to 1993, our insurance regulations 
were lax in that regard. We have come a long way, and by the 
way, there is no State that does disaster preparedness and 
disaster response better than Governor Bush's Florida, and I 
congratulate you as part of that important team.
    I have to tell you that Congressman Shaw has been a leader 
in working Federal tax policy in the aftermath of natural 
disasters, so that people get equitable treatment as they go 
fix their own problem, as opposed to having the Federal 
Government come in and do it for them, and I agree with much of 
what my colleague, Jim Hensarling said, that the only way to do 
this right is to get healthy markets in the insurance industry 
up, and we need an almost exclusive provider of insurance, and 
we have to figure out, at a Federal and State level, although 
with local help with building codes and enforcement, how to do 
that.
    Having said that, regulation of insurance companies is 
something that the government must do. Whether it's done at the 
Federal level or the State level is a little bit of an 
interesting question.
    We have traditionally done it at the State level 
exclusively, but you know, when I go to take out a loan for my 
home, and when the loan company shows up with a check for 
$200,000 so I can do my closing, I do not particularly care at 
that point, once I have my $200,000, about the fiscal health of 
the mortgage company. I do not really care if they go under 
tomorrow. I have my house, and I do not have any loss or threat 
to myself.
    On the other hand, if I pay life insurance premiums for 60 
years, for example, and then die, and the insurance company 
does not have reserves to pay the claims to the heirs that I 
spent a lifetime trying to protect, then I have had a big loss 
there, and especially my heirs have had a big loss. The same 
thing is true in all types of insurance.
    So the government's responsibility is to make sure that 
companies have adequate reserves to pay for the risks and the 
claims that they have assumed, and no other entity--this is not 
something that can be done exclusively by the private sector, 
in my view.
    There are too many companies that would take our premiums 
and run off to Mexico with the money, or be in flight, or just 
simply mismanage it, and that is why we have to have 
regulations, and we can debate about where those regulations 
are best handled.
    I will tell you that I do believe, as the ranking member 
said, that insurance must be a risk-based approach to make this 
successful.
    We do not want people in high and dry safe areas bearing 
enormous subsidies for people who decide to build a stick home 
out in the Keys of Florida for $5- or $6 million. It is just 
fundamentally unfair to have that sort of cross-subsidy, but 
having said that, the whole idea of insurance is to take 
advantage of the law of big numbers and to spread the risk, and 
the further you can spread the risk, whether it is health 
insurance or life insurance or any other policy, including 
property and casualty, the better off we are, and there may be 
an important Federal role in terms of doing that.
    I will end with this: Either tomorrow or the next day--I am 
sure Commissioner McCarthy is going to be there--I understand 
that the Governor, led by Lieutenant Governor Jennings, is 
going to have a statewide summit of all the important parties, 
probably, in the west coast of Florida, as I recall, and the 
policymakers in Florida understand this.
    There are no easy answers, but this is not a partisan 
issue. Democrats and Republicans alike understand the threat, 
and let me describe it very briefly, and then I will end with 
that.
    One of two things will happen, if we do not get this right, 
to the State of Florida, and other States along coastal areas, 
or along the Mississippi, or that are threatened by 
earthquakes.
    Either we will misregulate and companies will pull out of 
the market and people will not be able to get property and 
casualty insurance--by the way, the crisis in Florida is even 
greater, in many respects, in the commercial markets than in 
the homeowners market.
    If that happens in Florida, we will see a job loss for 
virtually all of the Realtors in the State, as well as for the 
people who do surveying; the people who do title insurance; the 
people who write loans; loan officers; and the people who 
provide concrete for sidewalks.
    The entire construction industry, and all of their 
suppliers will literally shut down, and we will have not a 
recession but a depression, and that will affect the national 
economy, since we are about 8 or 10 percent of the national 
economy, and by the way, in things like job growth, the fastest 
growing major State.
    The other thing that we will do is that we will have a 
State that mismanages the risk for political reasons.
    They will put everybody in, as Congresswoman Brown-Waite 
said, a government-based insurance company. Citizens is what we 
call ours.
    That is a perfect policy, because everybody gets insurance, 
and things move along nicely, and it works until you have an 
event, because the reason that State governments have to set up 
JUA's is that no actuary in their right mind would ever let 
private capital take risks that are unnatural.
    We have to de-populate Citizens, and I encourage all States 
that have similar problems, whether it is auto or health or 
whatever, to de-populate the government-backed, because the 
only reason the government is involved is that nobody in their 
right mind would otherwise be doing this.
    Chairman Baker. Can the gentleman begin to sum up?
    Mr. Feeney. Yes, I will.
    If you have a JUA like Citizens that is the major insurer, 
it works great until you have an event, and then we will have 
an economic catastrophe, to include bankrupting an otherwise 
very healthy State, and thank you, Mr. Chairman. As you know, I 
am passionate about some of these issues. I apologize ahead of 
time for being long-winded.
    Chairman Baker. The gentleman's passion is clearly 
understood and appreciated.
    Mr. Lynch?
    Mr. Lynch. Thank you, Chairman Baker, and also, I want to 
thank Ranking Member Kanjorski for the wonderful effort in 
facilitating, really, a bipartisan discussion of this issue.
    We all understand the threats to consumers generally and 
families in our district that are located in coastal 
communities.
    I want to thank the panelists, as well, for coming forward 
and helping the committee with its work.
    I recognize a lot of faces here today that were with us 
back in June when, in the Housing Subcommittee, which I sit on, 
we also had a similar debate about the affordability of 
insurance to those communities generally as a result of natural 
disasters, and especially in the context of Hurricanes Katrina 
and Rita, and since hurricane season is in full bore right now, 
this hearing could not have come at a more opportune time.
    I know in the past decade we have seen the rising toll that 
natural disasters have placed on homeowners insurance markets 
in parts of the country that frequently experience catastrophic 
events.
    Last year alone, there were a total of 27 storms in the 
Atlantic region, which included 14 hurricanes, and not only 
that, but in my State of Massachusetts--and I live in and 
represent a coastal community in Massachusetts, a State that is 
not in the exposed position that many of my colleagues face in 
southern States along the Gulf. In Massachusetts, we actually 
faced four situations, four Federal disaster declarations in 
2005, and I know that the GAO is currently conducting several 
studies to further assess the need for changes in the 
catastrophic insurance market. I look forward to those results 
coming out.
    In the meantime, I realize there are general problems in 
the quality of the adjustment process, overall insurance policy 
coverage, and what is most important to all of our constituents 
is the general affordability of coverage. That is where the 
rubber meets the road for a lot of us. Whether it is commercial 
customers or residential customers, it is simply astounding the 
burden that some of our families are facing in light of these 
natural disasters.
    I look forward to hearing from the distinguished panel and 
exploring various ways in which we in Congress can address the 
problem that is arising and we are currently facing in the 
catastrophe insurance market, and I also have another hearing 
that is going on--I did not schedule this--on national security 
and emerging threats. So I am going to have to shuttle back and 
forth from that hearing, but this is very important, this 
discussion, and I look forward to hearing from the great panel 
that we have here in terms of their suggestions and 
recommendations on how we address this problem.
    Thank you, Mr. Chairman. I yield back.
    Chairman Baker. I thank the gentleman.
    Mr. Campbell?
    Mr. Campbell. Thank you, Mr. Chairman.
    I represent a coastal district of southern California, no 
hurricanes, but we have earthquakes, we have mudslides, we have 
floods, potentially, and theoretically, tsunamis, in addition 
to fires, and other various plagues that hit us now and then.
    Mudslides, which recently hit my district, are uninsurable 
except from Lloyd's, generally. Earthquakes--in California, the 
State law requires that earthquake insurance be offered with 
homeowners insurance. However, today less than 15 percent of 
all homes in California are covered with earthquake insurance. 
A tsunami--you can tell me what would happen if that were to 
occur, and then there is obviously the flood problem that we 
have, and not a lot of people have flood insurance either.
    So I am very interested to hear the testimony, with the 
understanding that the most recent natural disasters that have 
caused great loss of property value and life have been 
hurricanes, but there are others in other parts of the country, 
and the one thing that is constant is that wherever you live in 
this country, you are subject to some natural disaster and not 
to all, and so, I will be interested in your comments on how we 
can look at risk pools that run across the different types of 
natural disasters that can occur in different parts of the 
country.
    Thank you, very much.
    Chairman Baker. I thank the gentleman for his statement.
    I recognize Ms. Wasserman-Schultz, and as all other 
Floridians, want to acknowledge her intense interest in this 
subject and her contributions today.
    Ms. Wasserman-Schultz. Thank you. Thank you very much, Mr. 
Chairman, and Ranking Member Kanjorski, as well, for convening 
this important hearing.
    Mr. Chairman, it is particularly important because we are 
the committee of jurisdiction, and I am really pleased to see 
that we have been able to bring such a distinguished panel 
together.
    We have to come up with a bipartisan solution to this 
growing insurance crisis in our country, and as the gentleman 
from Florida, Mr. Feeney, mentioned, we mostly do things right 
in Florida when it comes to insurance-related disasters, but I 
would not have quite described Florida as Jeb Bush's Florida. I 
think Florida can generally be described as Floridians' 
Florida, just to add that. We were reminded just a few weeks 
ago--and just so you know, Mr. Feeney knows I mean that 
affectionately.
    We were reminded just a few weeks ago, during the one-year 
anniversary of Hurricane Katrina, that we, as a Nation, are 
still ill-prepared to deal with a catastrophe. We have gone 
through planning and mitigation efforts and execution of 
coordinated responses.
    We have a long way to go until we can assure Americans that 
we can keep them safe in the face of a catastrophe, but we are 
here today because the economic resonance from disasters like 
Hurricanes Katrina, Rita, and Wilma have left an indelible 
fingerprint on our Nation.
    Hundreds of thousands of families and small businesses 
across the Gulf coast are struggling to rebuild, and I think 
that is an important point.
    Mr. Campbell just mentioned that he does not suffer from 
hurricanes in his community, but I absolutely agree with you, 
it is a very important point to note, we have natural disasters 
all over this country, and this is a national problem that 
needs a national solution. These catastrophes have reshaped our 
Nation's personal and commercial insurance markets, making it 
even more difficult for affected regions to recover.
    Events of late have led regulators, industry stakeholders, 
and public policymakers to reconsider the efficacy of existing 
models and regulations.
    The market perception of exponential increases in the risk 
affiliated with catastrophic events has resulted in precipitous 
declines in insurance coverage availability, at astronomical 
costs to policyholders, and I am using those really major words 
because there is no other way to describe it.
    This is a significant, significant problem. I could tell 
you story after story of individuals who have had gargantuan 
increases in either their residential property insurance quotes 
or commercial.
    It is just unbelievable, and it is happening most acutely 
in Florida, where the issue is not just price but availability.
    The insurance market is literally drying up in front of our 
eyes, and the economic impact, as Mr. Feeney describes, can 
already be felt. This problem is not endemic to Florida, and it 
is happening across the Nation. It is really obvious that our 
current system is broken. There is no silver bullet. There is a 
patchwork of regulation and state-based risk pooling that is 
not working.
    We were very fortunate to create a State catastrophe fund 
in Florida, but that is not going to help us survive on our 
own.
    I mean we cannot continue down the path that we have been 
traveling without having change, and change in the way that we 
think about managing catastrophes nationally in this country.
    These storms do not recognize State boundaries. They do not 
say, okay, I am going to stop at the Florida border, up in 
north Florida, and I am not going to go any further, because 
there is no CAT fund past this line.
    We have to think about that when we consider mechanisms to 
hedge risk affiliated with these events, and at the end of the 
day, all of America's taxpayers are on the hook, regardless of 
where the disaster strikes. We have already spent more than 
$100 billion in response to Katrina, and the question is, do we 
plan and prepare for events in an effort to minimize cost to 
the American taxpayer, or do we wait around for the next storm 
and throw astronomical sums of money at the problem?
    I mean that is really the question that we have in front of 
us, and I think the lesson learned from Katrina is that the 
wait-and-see approach, the, you know, go like this approach--
that does not work.
    The huge failure of coordination and mismanagement of 
relief funding has resulted in untold losses of hard-earned 
taxpayer dollars.
    It seems especially foolhardy when we know that there are 
policies that we can adopt that minimize cost and stabilize 
markets, and we need a comprehensive national solution to this 
national problem.
    I have introduced a bill with my colleague from Delaware, 
Mr. Castle, H.R. 5891, the Catastrophic Disaster Risk and 
Insurance Commission Act of 2006, and Mr. Chairman, we spent a 
number of years when I was in the Florida legislature--and I 
was elected the year that Andrew hit south Florida, and the 
only way that we were able to finally bring all of the 
stakeholders together around the table to develop our State 
catastrophe fund was when we had a statewide commission that 
our university president sat on, and they came together and 
made objective recommendations to the legislature, and with 
input from all of the stakeholders, and we were able to get 
something accomplished, and I want to thank Mrs. McCarthy, Mr. 
McHenry, Mr. Israel, Mrs. Hooley, Mr. Crowley, and Mr. Hinojosa 
for signing onto that bill.
    I know the chairman is still considering the best approach 
to this problem, and I know that he will agree with me that we 
cannot solve this problem unless we bring all of the 
stakeholders to the table, and I truly appreciate your 
commitment, Mr. Chairman, to roundtable discussions.
    We need to move forward together on this problem, with all 
of the stakeholders.
    Congress has been too slow to respond.
    It is time we had a comprehensive solution to a national 
problem, and I commend the committee for convening today's 
hearing. I do hope our panelists will focus on solutions to the 
problem, but it is time for us to act on this problem before 
the next big storm hits, and I do want to close by welcoming 
our State's insurance commissioner, Kevin McCarty, who has done 
an absolutely fantastic job on his leadership nationally on 
this issue. Thank you so much.
    I yield back the balance of my time.
    Chairman Baker. I thank the gentlelady.
    I wish to welcome the senior member of Ways and Means to 
our considerations today, Mr. Shaw, who has made his own 
contributions on this subject matter, and recognize that, going 
forward, whatever the remedies that might be considered 
certainly could have Ways and Means jurisdictional reciprocity, 
and I appreciate the gentleman's willingness to participate in 
our hearing today, and look forward to working with him in the 
future. The gentleman is recognized.
    Mr. Shaw. Thank you, Mr. Chairman, and I would ask 
unanimous consent that my full statement be made a part of the 
record.
    Chairman Baker. Without objection.
    Mr. Shaw. Mr. Chairman, Ranking Member Kanjorski, and 
members of the committee, what you are hearing today is a 
distress call coming out of the State of Florida. We are not 
going over the cliff yet, but we are heading toward the cliff, 
and it is an economic cliff that is going to create tremendous 
hardship for the people of Florida.
    You have heard several references today to Hurricane 
Andrew.
    In the aftermath of Hurricane Andrew, I went down to 
Homestead, and I could not believe the devastation. I came back 
to Washington and studied the insurance plan that the Federal 
Government had set up for flood protection, and using it for a 
model, I filed the first windstorm insurance program, which 
recognized the fact that it was going to be a dying market for 
windstorm insurance in the State of Florida.
    What has happened here--I would like to also express to Mr. 
Kanjorski, who made reference to this, as well as my friend 
from the State of Texas, that--reference to the private sector.
    In many parts of the State of Florida, there is no private 
sector when it comes to windstorm insurance. I can assure you 
that you would not be hearing positive things about what we are 
doing from Mr. Feeney if there were, but there is not.
    It is now up to us.
    What we have in the State of Florida is a CAT fund, it is 
called, and many States--I think some eight States have such a 
fund, and what Ms. Brown-Waite and I have developed is a 
program of reinsurance.
    It is a program that backs up the State CAT funds, that is 
paid into by the insurance companies upon the collection of 
their premiums.
    This is not a tax that we are going to be spreading all 
across the country.
    The whole theory of insurance is to take a known risk and 
spread it across as wide an area as you possibly can. That is 
what insurance is, but what has happened here--and I can tell 
you, in my own State of Florida, that there is not one square 
inch of Florida that has not been devastated by some hurricane 
over the last 2 years. Listen to it. We had Wilma, Rita, 
Charlie, Frances, Ivan, and Jenny. I am just talking about 
south Florida here. The whole State has been hit.
    So what happens--that risk that is supposed to be spread 
all across a wide area has all felt its share of devastation.
    Now it is time for us to take a close look at bringing it 
back so that we can spread the risk across this country, and 
what it simply does--we have an insurance program in the State 
of Florida, which has been made reference to already, called 
Citizens Insurance, which sets up reserves and is paid into.
    To give you an example of the economic hardships that so 
many of my constituents are having, for a house which is 
actually under the average house in my district of $250,000, 
the premium is $5,000, and the deductible is not affordable for 
many of the people that I represent. If we can have a 
reinsurance program on the national level--and there is no 
reinsurance program that is affordable at all in the private 
sector, but if you can have that, then the reserves that would 
have to be way up here for any one State, being backed up by a 
reinsurance program, this reserve can come down and make sure 
that this is affordable.
    I can assure you, Mr. Chairman, that in Louisiana and 
Alabama, Mississippi, Georgia, Florida, South Carolina--go all 
around the coast.
    We are going to be facing a crisis where the private sector 
has pulled out of the market.
    In the State of Florida, so many of the insurance 
companies, and maybe all of them, have formed so-and-so 
insurance company of Florida. So they recognize they do not 
even want the risk of loss for their company to be spread 
across the country, even these big national insurance 
companies.
    We are going to have to work together, Mr. Chairman, and I 
look forward to--I know Mr. Foley has a bill that he wants to 
speak about which also is not incompatible with the bill that 
we are talking about, which will also do us a great deal of 
good, and I will leave it to Mr. Foley to explain exactly what 
that bill does, but it would have jurisdiction in front of the 
Ways and Means Committee.
    Mr. Chairman, I can assure you that, if I have anything to 
do with it next year--and I simply hope--I hope that I do--if I 
am chairman of the Ways and Means Committee, you will have no 
problem with turf battles with my committee, and I hope the 
same would apply here.
    We are going to work together in partnerships next year to 
see that this happens and that windstorm insurance, which is 
required, together with--I would say to my friend from 
California, it also includes earthquake insurance, which you 
cannot even buy in your area--that we will come back with a 
bill that will be good for the whole coastal nation and other 
areas, the coast of our Nation, together with other areas which 
are prone to other disasters, even earthquakes, and I think 
even volcanoes are in there, so we can say aloha to our friends 
in Hawaii, and I am hopeful that we can come back--and I can 
assure you you will have my every cooperation in putting this 
bill together for Louisiana and Florida and all of the other 
States that are affected by this.
    I yield back, and I appreciate your allowing me these few 
minutes.
    Chairman Baker. I thank the gentleman for his fine 
statement and assure him of my appreciation for his assistance 
and my pledge to be of assistance to him and the committee 
going forward in the next session and seeking an appropriate 
resolution.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Chairman Baker. I want to thank 
you and Ranking Member Kanjorski.
    I would like to ask unanimous consent that the following 
materials from the Texas Department of Insurance be submitted 
for the hearing record.
    Chairman Baker. Without objection.
    Mr. Hinojosa. They include summaries of the Texas sea coast 
insurance market for residential property and commercial 
property and lists of the following. One is a list of casualty 
companies, fire and casualty companies, risk and retention 
groups, and title companies licensed in Texas since January 
2005 through August 2006.
    It also includes a list of withdrawal plans filed in Texas 
since Hurricane Rita.
    It includes a list of property and casualty carriers 
operating in Texas from the 2005 year-end available data.
    Mr. Chairman, I am very concerned that certain insurance 
companies have decided not to issue new property and casualty 
insurance policies in certain areas of my district. I am 
particularly concerned about the insurance industry's approach 
to issuing property and casualty insurance in what are known as 
tier one and tier two areas. According to the Texas Department 
of Insurance, the following counties in my Congressional 
district fall in tier one areas: Refugio and San Patricio 
County. In tier two areas, they include Lee County, Brooks, 
Goliad, Hidalgo, Jim Wells, and Live Oak Counties.
    I respectfully request of each witness to provide in 
writing an explanation of their understanding of the definition 
of tier one and tier two areas. I also request an explanation 
as to why the counties I have mentioned fall in either tier one 
or tier two category, and also, I ask for an explanation of the 
impact this designation will have on the constituents in my 
district, both financially and in terms of insurance coverage.
    That information is very important to me, as I am sure my 
friends in Florida, Louisiana, and Mississippi are searching 
for answers to those questions.
    Mr. Chairman, my goal here is not to punish the companies 
that have decided either not to issue new policies in certain 
areas of my district, nor is it to punish them for deciding to 
restrict the issuance of new policies in Texas Congressional 
District No. 15.
    I merely seek an explanation for their decision. I seek a 
better understanding of the impact Hurricanes Katrina and Rita 
have had on their bottom line.
    I want to ensure that the insurance companies operating in 
Texas have the ways and means to provide property and casualty 
insurance to all my constituents.
    Thank you very much, Chairman Baker, and Ranking Member 
Kanjorski. I appreciate the opportunity to make these comments.
    I yield back the remainder of my time.
    Chairman Baker. I thank the gentleman.
    I also welcome today a visiting member from the Ways and 
Means Committee who has made his own contribution in the debate 
with this proposal.
    Mr. Foley is recognized.
    Mr. Foley. Thank you very much, Mr. Chairman. I think 
everything has been said, but not everyone has said it. So let 
me at least belabor what is a very, very important point, and I 
think what you have heard from many of the panelists or the 
Members of Congress, virtually every State has been, to some 
degree, impacted by natural disaster.
    Mr. Israel mentioned what would happen off of Long Island.
    Max Mayfield showed us drawings this year that indicated 
the northeast may become a victim of a hurricane this year much 
to the same potential and degree of devastation as has hit 
Florida.
    We had nine hurricanes in the last 2 years, 4 of them back 
to back, causing $22 billion of losses.
    My sister received her insurance premium today. It was 
$8,500 for a home that my parents bought in 1957 for, I 
believe, $7,500.
    The insurance is now more than the original purchase price 
of the home.
    Insurance is causing fiscal calamity in Florida, affecting 
every level of society.
    Homeowners who are in condos will see assessments to the 
degree that they will simply be unable to continue living in 
our Sunshine State.
    It is no longer an option of scraping together a few 
additional dollars to pay a premium. It is becoming a sense of 
urgency that I have not witnessed in my entire adult life.
    No question the insurance companies were ravaged. We know 
that.
    When you have had the kind of exposure and experiences in 
the last couple of years, it is impossible to assume an 
insurance company, under its traditional methods, would be able 
to weather those storms, excuse the pun.
    I think you have also heard from many members that there 
are a lot of collective ideas that have been proposed, a 
multitude of bills that all have merit, which is what this 
committee and this Congress needs to undertake, is to 
collaborate in a bipartisan fashion to figure out the answers.
    I agree with the gentleman from Texas. I do not want the 
Federal Government to be the financial backstop for 
catastrophic problems. We have to find a way for a private 
sector initiative.
    Since Hurricane Andrew, we have seen so many companies 
become subsidiaries of themselves--Allstate Florida, State Farm 
Florida--because if something happens there, then they are able 
to bankrupt that company and not affect the parent, and I am 
not using those two companies pejoratively. It is just examples 
of the latest trend in trying to abrogate a loss to the parent 
company.
    Yet we will also see mudslides, earthquakes, and tornados. 
In fact, an earthquake occurred off the Gulf of Mexico just the 
other day, an extraordinarily rare occurrence for Florida, but 
it portends calamity for other States, as well.
    My proposal, the Policy Disaster Protection Act, would work 
to correct that.
    It would give insurance companies the option of building up 
reserves over a 20-year period on a tax-deferred basis, much 
like an IRA account, where the insurance companies can place in 
this account pre-tax dollars that can be used for disaster 
mitigation alone. If they take it out for any other purpose, it 
is taxed like it would be your IRA, accordingly with a penalty. 
It would take years to build, which is why Ginny Brown-Waite 
and Clay Shaw's bill is important as an adjunct to this.
    I thank our State insurance commissioner, because I know he 
has spoken about this bill, both bills, in forums throughout 
the Nation, but the bottom line for all of us who serve in the 
Congress, the 455 Members of the House, and 100 Members of the 
U.S. Senate, you may not think this is a problem for you.
    Your insurance companies may be not raising premiums triple 
and quadruple digits, but if you experience what Florida has, 
and New Orleans has, and California has, and Texas has, and the 
wildfires and all the other unanticipated disasters, you, too, 
will be facing this difficult, difficult problem. You cannot 
buy a house without insurance.
    First thing they say is, go get a binder, get a policy, 
then we will insure your mortgage, or we will give you a 
mortgage. So it will set in motion the end, if you will, of 
Paradise Lost in our State if we cannot grapple with this.
    So I appreciate the attention the chairman has placed on 
this issue.
    I appreciate all of the individual members who are 
grappling with solutions, and I just hope we can take pieces of 
each of these proposals and weld together a solution that will 
help bring down this urgent crisis.
    Chairman Baker. I thank the gentleman for his statement and 
participation.
    Mr. Kanjorski for a unanimous consent request.
    Mr. Kanjorski. Mr. Chairman, I ask unanimous consent that 
the statement of Congressman Delahunt be included in the record 
at this time.
    Chairman Baker. Without objection.
    Mr. Clay, did you have a statement?
    Mr. Clay. Yes. Thank you, Mr. Chairman. Let me thank 
Ranking Member Kanjorski and the other members of the 
committee, as well as the witnesses.
    Mr. Chairman, I am concerned about the limitations of 
insurance policies and the pay-outs that are left for the 
government to make because of the shortfall in insurance 
coverage from the private industry.
    These shortfalls could be for various reasons: denial of 
claims, lack of coverage offered, or no insurance coverage, to 
name a few.
    I am especially concerned by the dismissal of claims by 
companies because of disagreements of whether the property was 
damaged by wind or water.
    We have catastrophic losses because of hurricane-force 
winds and the accompanying rains and floods. Yet, families have 
problems getting insurance settlements, although they have 
insurance for these occurrences.
    I am deeply concerned with the methods of reducing losses 
employed by the insurance industry. We have policies that are 
being issued that settle the water damage versus wind damage 
dispute by stating that if the property was damaged by both, 
the losses are not covered, even if there was wind damage as 
well as flooding, and even if the wind damage occurred prior to 
the flooding.
    However, I guess that I should feel better about this type 
of policy, because families are told up front that they will be 
left up the creek.
    I guess we need to ask the proverbial question: Do we need 
this insurance at all?
    If you are not going to cover the losses, do we need it at 
all?
    Mr. Chairman, I will stop there, and ask unanimous consent 
to insert my statement in the record.
    Chairman Baker. Without objection.
    Mr. Baca, did you have a statement, sir?
    Mr. Baca. Yes. Thank you very much, Mr. Chairman.
    Today's hearing is especially important given the impact of 
last year's hurricane both on our consumers and insurance 
market.
    About $23 billion, or about 25 percent, of the Federal 
assistance following Hurricanes Rita, Wilma, and Katrina is 
going to compensate persons who did not have insurance coverage 
for catastrophic events, but many victims are still waiting on 
their checks.
    I hope this hearing helps us better understand the scope of 
the problem that insurance claims need to be facing. For 
instance, it has been seen and reported that despite being hit 
with catastrophic losses, insurers have been record prices that 
can handle catastrophic losses in the future, so it still 
impacts them.
    Yet, we are seeing a trend among insurance to reduce their 
exposure to losses, with some insurance, like Allstate, 
reducing the coverage in everyday drastic ways. I am concerned 
that if this trend continues, it will have a serious impact on 
availability and affordability. Higher rates, declining 
coverage, and periodic non-renewal on large scales will have a 
negative impact, particularly on low-income consumers in 
underserved communities.
    I think the discussion today will help us get a better 
understanding and a handle on these issues and what we can 
figure out for the best course of Federal involvement, and I 
look forward to hearing from the witnesses, especially as it 
pertain to those that cannot, and I know that it was mentioned 
about wildfires, especially in our area, where those 
individuals are not covered in the San Bernardino and 
surrounding areas that have been impacted a lot in our area.
    So thank you very much, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Scott, do you have a statement?
    Mr. Scott. Yes. Thank you, Mr. Chairman. I appreciate this 
very timely and important hearing. It is important, especially 
given the fact that hurricane risks are expected to increase 
over the coming decade, and would have repeats of hurricanes or 
the level of Katrina and Rita that we had back to back last 
year.
    There is an economic problem.
    As risk increases, losses increase, which will cause rates 
to increase.
    Natural disasters affect different regions of the country 
and cause a collapse of insurance coverage at the local level, 
and since the States regulate insurance products, it is 
controversial to create Federal regulation of insurance.
    However, it may be necessary to create some form of Federal 
reinsurance to help States create stronger insurance markets, 
and Congress must improve disaster preparedness.
    We have to find ways to expand the insurance market to 
cover more people, and the Federal and State Governments must 
coordinate to expand coverage protections, and there are many 
good ideas proposed on how to help provide catastrophic 
insurance, and I am certainly open to discussing them, but I 
think it is very important that I raise some major concerns and 
some questions that certainly give rise here.
    For example, are there regulatory or legal barriers to 
allowing more foreign reinsurers to enter the U.S. market?
    Are American insurance companies at a tax disadvantage when 
compared to foreign reinsurance companies?
    What would be the estimated cost to the Treasury of 
eliminating the current tax on premium reserves, and is there 
general agreement that there should be incentives to build 
premium reserves to pay for future catastrophes, or has there 
been any problem with credit rating agencies affecting the 
ability of insurers to finance new bonds, very complex, 
complicated issues here that we must resolve.
    One other important question is why does the Federal 
Government need to be involved with this issue when many 
reinsurers and insurers have opposed these proposals and stated 
that the private market can handle natural disaster risks, and 
then this important one: Is there enough insurance capacity to 
cover the Nation's homeowners in the event of a major natural 
disaster, and has the national market been tested sufficiently 
to give lawmakers here in Congress an adequate indication that 
the market is prepared, serious questions, serious issues that 
will be brought to the forefront. It is important that we make 
sure that we have all of insurance capable to expand, to cover.
    Are we prepared to do this?
    A very interesting hearing. I'm looking forward to it. I 
yield back my time.
    Chairman Baker. I thank the gentleman for yielding.
    I believe that concludes all members' statements.
    Appearing as a witness today and enduring opening 
statements is a bit like being in Louisiana and waiting on the 
hurricane.
    You do not know when or where, but you know it is coming.
    Well, we finally got to it.
    I wish to welcome each of our witnesses and to thank them 
for their patience in participating today.
    As is the usual practice, your formal statement will be 
made a part of the official record. We ask that, if possible, 
you limit your remarks to 5 minutes, to enable member questions 
to follow, and as you can see from the statement participation, 
there is broad interest in this matter and a deep and abiding 
concern, and we appreciate each of you bringing your 
perspective.
    Our first witness today will be Mr. Kevin M. McCarty, 
commissioner for the State of Florida but appearing here today 
on behalf of the National Association of Insurance 
commissioners.
    Please proceed at your leisure.

STATEMENT OF KEVIN M. McCARTY, COMMISSIONER, STATE OF FLORIDA, 
      ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                         COMMISSIONERS

    Mr. McCarty. Chairman Baker, Ranking Member Kanjorski, and 
members of the subcommittee, I really want to thank you for the 
opportunity to be here today to testify on the role of the 
insurance departments and insurance commissioners in helping to 
stabilize the coastal insurance market in view of the 
catastrophes we have recently experienced.
    My name is Kevin McCarty, and I am the insurance 
commissioner of the State of Florida. I am here today 
representing the National Association of Insurance 
Commissioners, as the chair of their property committee, and as 
the chair of the committee on catastrophe insurance working 
group.
    As the chairman has already stated, we are not here merely 
because of the natural disasters of 2004-2005, or because of 
Hurricane Katrina.
    As I testified in June, catastrophe events are a great 
equalizer, and the hurricanes, earthquakes, floods, and 
tsunamis do not discriminate against inland people or coastal 
people, rich people or poor people or Republicans or Democrats. 
The issues in the marketplace today will affect all Americans, 
regardless of their status in life or their political 
affiliation.
    That is why we need to concentrate on a bipartisan 
solution.
    I am very proud of the Florida delegation and the number of 
meetings that we have had and the number of bills that have 
been sponsored which I think deal with a very complicated issue 
that has no simple solution. If it were simple, we would have 
done it by now.
    Today, I would like to provide a perspective on some of the 
things we should consider on a national and local and State 
level when we consider managing national catastrophes.
    What I would like to talk about is what mechanisms are in 
the States that have been used that perhaps have helped 
alleviate the problem and, in other cases, have potentially 
exacerbated the problem.
    We need to look at a number of the things that you have 
already mentioned for pre-catastrophe planning, like tax-
deferred catastrophe reserves, allowing insurance companies to 
accumulate capital to pay, and maximizing the use of the 
private sector.
    We need to look at mitigation. If you look across the 
table, everyone at this table will agree that mitigation is a 
very powerful tool for reducing future losses and minimizing 
cost increases for consumers.
    We need to look at consumer savings accounts and empowering 
consumers so that they can make decisions and save money and 
hopefully mitigate against future losses.
    We need to look at a myriad of State and Federal programs 
that are out there, and once we look at all of these other 
things, at what point do we need to have, if at all, a Federal 
catastrophe plan?
    The markets have spoken to us over the last couple of years 
very loud and clear.
    The cost of CAT insurance had undergone unprecedented rate 
increases.
    The cost drivers in the system include many things.
    We have underestimated our losses with our computer models.
    We have increased capital requirements because of changes 
in A.M. Best requirements and stress tests in our insurance 
marketplace, and quite frankly, our markets are attracted to go 
other places where they can get better rates of return.
    Much has been written and has testified to about the role 
of regulation, and has actually been referred to as price 
controls that have been widely used as an impediment to the 
marketplace.
    In actuality, very few States exercise price controls. That 
does not mean that States do not have a role in the review of 
the cost of insurance. As a matter of fact, we have a 
responsibility to ensure not only that the rates are not 
excessive but they are not inadequate or unfairly 
discriminatory.
    The goal here is to tell insurance companies what they 
charge is within the laws of the State, which means that it 
fits within that State's statutory guidelines.
    I am very proud to have today, sharing some time with me, 
my colleague from South Carolina, Director Eleanor Kitzman.
    She is here from a State that was not directly impacted by 
the storms of 2004 or 2005.
    As a matter of fact, it has been several decades since her 
State has been hit with storms, but she is seeing in her State 
some of the very things that we are seeing in Louisiana, Texas, 
and Florida, and this is very, very significant rate increases, 
but more importantly, we are seeing a contraction in the 
marketplace, and another contraction in the marketplace in what 
is called the surplus lines. We simply have no more capacity in 
certain areas of our country, including the State of Florida.
    I recently concluded a trade mission with Governor Bush to 
visit the folks in the Lloyd's syndicate, and they said Florida 
is a great market, you are doing a lot of good things, but we 
do not have anymore capacity for your State.
    Eleanor has suffered similar situations in her State, and 
she has a State that is widely viewed as a free market State, 
and despite the fact that it is a free market State, there is a 
very limited amount of capacity through those increases in 
rates, both in the primary market as well as in the secondary 
market.
    The markets have told us they have taken about all the 
catastrophic risk they can in certain areas. That does not mean 
there is not reinsurance widely available in other places, but 
in the places that need it the most, in the aftermath of these 
storms, they are having grave difficulty securing that 
coverage.
    While the average cost of reinsurance in the United States 
rose about 76 percent in 2006, most of this catastrophe 
coverage has not gone to the coastal States.
    Price increases in Florida, in South Carolina, and in other 
parts of the Gulf Region have increased 300, and 400, and up to 
1,000 percent, as already been testified to by Members of 
Congress who have experienced that in their own districts.
    As a long-term response, empowering consumers will mean 
that the State and local governments will need to adopt better 
building codes, enforce building codes, and use proper land 
management plans that hopefully will reduce catastrophic 
exposure.
    We all agree that mitigation techniques will work. Florida 
has embarked on a novel mitigation program which we hope will 
do a lot to reduce the frequency and severity of losses in our 
States.
    These efforts will take time, and these efforts will 
require a lot of money and resources.
    Unfortunately, we need to do more, and one of the things we 
need to do, I believe, is not necessarily embark on a large 
Federal program.
    I have been a major proponent of Ginny Brown-Waite's bill, 
Representative Brown-Waite's bill, and there have been other 
bills out there looking at a Federal backstop. We looked at--
PCI had suggested some funding mechanisms for State pools.
    We also have seen auction programs that have been put out 
there to help private and public partnerships, but we can do 
some other things, like, under the current system, we could 
look to creating some catastrophe reserves, as been proposed by 
Representative Foley.
    I think that will go a long way toward augmenting the 
capital development within the private sector for a private 
sector solution.
    Also is to allow consumers to accumulate capital through 
the catastrophe savings account, as has been proposed by 
Representative Feeney.
    This will allow consumers to accommodate capital, protect 
them from the higher deductibles, but also could be used for 
them to invest in mitigation devices, which will ultimately 
save consumers money not only on their insurance but on their 
deductibles.
    Given the wide variety and complexity of the concept of 
these various programs, I would strongly endorse the concept 
presented by Congresswoman Wasserman-Schultz on the creation of 
a national commission on catastrophe preparation, to look at 
and weigh the myriad of programs and how they can interrelate.
    Clearly, there are a number of forward-thinking ideas we 
need to consider, but they should be framed with the answer 
with one thing in mind: What will it do for the affordability 
and availability of coverage? Ultimately, this is not just an 
insurance issue; this is an economic recovery issue.
    Without the ability for working people in the Gulf Region 
and the Atlantic Region to secure homeowner coverage and 
business coverage, our economic development in this region is 
in peril, and this will dramatically increase costs for all 
States, even though those do not believe they have a 
catastrophe exposure.
    The lessons of recent CAT's have only been the warning that 
we have to start making some serious decisions, because it is 
not a matter of if, but when, the next disaster will be here, 
and the question is, did we learn the lessons of 2004 and 2005, 
and are we willing to have the vision and the patience and the 
wherewithal to prevent these economic catastrophes in the 
future?
    Thank you for your time.
    [The prepared statement of Kevin McCarty can be found on 
page 89 of the appendix.]
    Chairman Baker. I thank the gentleman for his statement.
    Our next witness is Ms. Wendy Baker, the president of 
Lloyd's of America.
    Welcome.

   STATEMENT OF WENDY BAKER, PRESIDENT LLOYD'S AMERICA, INC.

    Ms. Baker. Good morning, Mr. Chairman, and members of the 
subcommittee. Thank you for inviting me to testify here today 
on behalf of Lloyd's of London, the world's leading specialist 
insurance market.
    Last year's record-breaking storm season presented 
significant challenges to the global insurance market. Although 
the first half of this year's Atlantic storm season has not 
proven as deadly nor as costly as the early part of the 2005 
season, it is nevertheless important to continue the dialogue 
on protecting the United States economy from large-scale 
catastrophic losses.
    Lloyd's is very pleased to participate in today's hearing, 
and commends the subcommittee for recognizing the continuing 
need for stability in the coastal markets.
    The United States is the largest overseas market for 
Lloyd's underwriters.
    In Florida and the Gulf States, Lloyd's functions as an 
eligible surplus lines insurer and a reinsurer.
    In this region, Lloyd's is a significant direct insurer of 
industrial and utility property, particularly in the offshore 
oil and gas sectors.
    Lloyd's also insures many other businesses and high-value 
residential properties.
    Accordingly, we thank the members of this subcommittee, as 
well as the other members of the House Financial Services 
Committee, for leading the way in promoting serious analysis 
and dialogue on the tough issues, such as catastrophe 
mitigation and regulatory efficient and uniformity, which 
necessarily impact the stability of both the U.S. economy and 
our global industry.
    Our responsibility to our U.S. policyholders going forward 
is to avoid complacency.
    We realize that we must ensure that we can continue to meet 
the future challenges that the marketplace and Mother Nature 
will present.
    We commend you, Mr. Chairman and the members of the 
subcommittee, for recognizing that, although markets have 
recently responded to large-scale disasters, the Federal 
Government must also avoid complacency and anticipate future 
challenges.
    Specifically, I recognize that the Federal Government's 
role is broader than simply providing immediate relief for 
losses and that policy initiatives and mitigation measures play 
a crucial role in stabilizing the markets.
    Regulatory and litigation reform for the underlying direct 
market can have a material beneficial impact on the 
availability of reinsurance capacity.
    Likewise, land use planning and public policies which 
affect the changing concentration of exposed values in coastal 
States may be an important component of long-term stability.
    While the insurance and reinsurance markets tend to adjust 
to dislocations on their own in time, public policy can and 
should play a role in improving that market response.
    For example, most of the natural disaster bills which have 
been introduced by members of the Financial Services Committee 
over the past year have included mitigation measures such as 
encouraging the development of mitigation programs by States, 
as well as standards for the construction and maintenance of 
buildings, to protect against future disasters.
    Reinsurers and direct insurers alike are interested in the 
efficacy of these measures.
    As a major U.S. income tax payer, Lloyd's also notes the 
dialogue initiated by this subcommittee and in the tax writing 
committees regarding the use of tax policy to encourage 
expansion of natural catastrophe risk capacity.
    At Lloyd's, we have our own initiatives to meet future 
challenges. We continue to refine our realistic disaster 
scenarios, which help us anticipate potential losses and ensure 
that both syndicate level and market level exposures will 
permit us to handle catastrophic losses.
    The severity and frequency of catastrophic events is 
increasing, and we must make sure that we stay ahead of them.
    This year, Lloyd's will add two scenarios with losses of up 
to $100 billion.
    Also, while the role global climate change plays in recent 
or future losses may be subject to debate, Lloyd's is 
contributing to worldwide efforts to find some answers.
    As we consider our responsibility to our policyholders here 
and how to continue meeting them, U.S. lawmakers and regulators 
might also consider their responsibilities to help ensure that 
the global insurance market is well positioned to handle 
increasingly severe and costly natural disasters in the United 
States.
    In this regard, we would like to raise two specific issues 
with you today.
    First, we believe it to be important to create greater 
uniformity, simplicity, and efficiency in State regulation of 
the surplus lines insurance to streamline placements for large 
commercial policyholders and to modernize State regulation of 
reinsurance.
    We, therefore, commend your leadership, Chairman Baker, and 
that of Mrs. Brown-Waite, and all cosponsors and supporters of 
H.R. 5637, the Non-Admitted and Reinsurance Reform Act of 2006.
    We were gratified to see the Financial Services Committee 
take such a strong bipartisan stand in favor of these goals, 
with invaluable leadership from you all and Chairman Oxley.
    We pledge to continue to work with you and your colleagues 
on both sides of the aisle, State insurance regulators, and 
other interested stakeholders to continue to build consensus 
for greater uniformity in surplus lines and reinsurance 
regulation, as well in all aspects of insurance regulation.
    We also recognize the efforts of Representatives Shaw and 
Foley and other members of the Ways and Means Committee to 
examine how tax policy might be used to address capacity 
issues.
    Second, it is important to recognize that most of the 
reinsurance protection provided to the United States market 
comes from reinsurers based outside of the United States. It is 
altogether appropriate to use global capacity, as this provides 
a buffering effect to a blow that would otherwise have to be 
sustained entirely by the local economy.
    Data from the Insurance Information Institute demonstrates 
the significance of the foreign reinsurance market to economic 
recovery in the Gulf and southeast coast.
    In 2005, some primary insurers with exposure in those 
regions had up to 60 percent of their gross losses covered by 
reinsurance. Approximately one-third of the insurance 
industry's $60 billion loss from last year's three hurricanes 
was paid by reinsurers based outside of the United States, 
including Lloyd's.
    One way to address the capacity issues before us today is 
to maximize the participation of the world's strongest and most 
stable reinsurers in the U.S. catastrophe risk market. This can 
be accomplished by reorienting U.S. credit for reinsurance 
rules to focus on soundness and security. Specifically, the 
rules should focus on the financial quality of reinsurers and 
the security that they provide, rather than the geographic 
location of their headquarters. Appropriate weight should be 
given to external valuators, such as the financial ratings 
assigned to reinsurers by third-party rating services, and the 
actual claims paying records of those reinsurers.
    Once again, we thank you for your leadership. We also urge 
you to continue efforts to ensure that the global reinsurance 
market, as a whole, is in the best position to meet the 
insurance needs of the United States consumers, especially in 
high-risk coastal areas, where specialist overseas insurers 
such as Lloyd's provide a critical source of insurance and 
reinsurance capacity.
    I thank you for your attention.
    [The prepared statement of Ms. Baker can be found on page 
65 of the appendix.]
    Chairman Baker. I thank the gentlelady for her statement.
    I take pleasure in introducing a Baton Rouge constituent.
    Mr. David Daniel is a principal in Daniel & Eustis, who 
appears here today as a representative of the Independent 
Insurance Agents and Brokers.
    Welcome, sir.

 STATEMENT OF DAVID DANIEL, DANIEL & EUSTIS, ON BEHALF OF THE 
      INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA

    Mr. Daniel. Thank you, Mr. Chairman, and members of the 
committee.
    My name is David Daniel, and I am pleased to be here on 
behalf of the Independent Insurance Agents and Brokers of 
America to provide my association's perspective on the issue of 
natural disasters. I currently serve on our national 
association's executive committee.
    I am also the head of Daniel & Eustis Insurance Agency in 
Baton Rouge, and am partnered with the Eustis Insurance Agency 
in New Orleans.
    As a Louisianian, I first want to thank you, Chairman 
Baker, and Members of Congress, for the assistance that has 
been given to the Gulf Coast, and for holding this important 
hearing.
    This issue has impacted my own family, friends, and 
coworkers, not to mention millions of Americans and many other 
communities across the country.
    The Big I is extremely grateful for your continued work on 
this issue and for the opportunity to share its views on what 
we feel is a matter of critical importance.
    I could not be more proud of the members of our association 
for their efforts after Katrina.
    Many of our members had their own homes and businesses 
destroyed, but they set up makeshift offices in order to serve 
consumers and ensure that their claims were being properly 
handled.
    Employees from my own partner agency in New Orleans had to 
move to my office in Baton Rouge, where we set up a double-wide 
office trailer with 42 work-stations. Employees arrived at my 
office one by one, often in tears, with no home and no 
possessions, but they went right to work to serve the 
customers.
    Now, more than a year later, there are many employees in my 
own agency who are still displaced and living in trailers.
    My point is that independent insurance agents are truly on 
the front lines, and that we offer a unique and balanced 
perspective on the issue of natural disasters.
    We understand the capabilities and challenges of the 
insurance market that both insurers and consumers face when it 
comes to insuring against catastrophic risks.
    Our approach to the issue of natural disaster insurance 
comes from a very simple perspective. We are here to serve 
consumers' needs.
    We strongly believe that our industry must come together 
with policy makers to find a common solution that will 
encourage insurer participation in at-risk markets. In short, 
we welcome all proposals and will consider all reasonable ideas 
that lead us to a healthy and competitive insurance 
marketplace.
    Recently, substantial insured losses from natural disasters 
have diminished insurers' capacity and, more importantly, their 
appetite for catastrophic losses in general.
    The cost of coverage has greatly increased. Wind 
deductibles have skyrocketed, and adequate limits of coverage 
are not always available.
    The Big I believes it is no longer enough to say that the 
private market can handle catastrophic risks when coverage is 
not sufficiently available at affordable rates.
    In fact, it is our experience that private market coverage 
is scarcely available at any rate in some areas. This is fact 
becoming an availability problem, rather than an affordability 
problem.
    The reality is that many insurers have stopped writing 
homeowners and other property coverages in at-risk markets. 
With another difficult hurricane season upon us, something 
needs to be done to ensure that residents of these areas can 
find adequate insurance coverage.
    With these experiences in mind, I would like to stress that 
this issue is not simply a Gulf Coast problem, it is a national 
problem, as Chairman Baker and several of you have already 
recognized.
    Thank you for that recognition, and we strongly agree.
    Regardless of our exposure to natural disasters, we are all 
impacted as taxpayers, and history has proven that more tax 
dollars are going to be spent by the Federal Government in ad 
hoc post-disaster funding if there is not a structure in place 
to encourage the private sector to take on additional risk.
    Only a program that is national in scope will be able to 
generate enough capacity to cover the most devastating events.
    The Big I believes the best solution is for a Federal role 
to be in place before the events happen, to have a clear, well-
structured mechanism that encourages the private sector to 
handle as much of the risk as possible, and to only trigger 
Federal involvement as a last resort upon private marketplace 
failure.
    Specifically, the Big I supports a Federal catastrophe 
reinsurance program to serve consumers and protect taxpayers 
living in all areas across the country. We are also open to a 
number of potential solutions, with limited Federal 
involvement, including tax-free reserving and catastrophe 
savings accounts, among others.
    Further, Big I supports efforts to reduce the cost of 
disasters, whether it is through mitigation, enhanced building 
codes, or financial incentives to mitigate risks.
    Finally, we support the creation of a national commission 
to study all of these proposals and make recommendations to 
Congress. In conclusion, I commend you, Mr. Chairman, for 
convening today's hearing.
    We also thank the Members of Congress who have displayed 
leadership and initiative by proposing legislative solutions to 
these difficult issues.
    Achieving a consensus within the insurance industry for a 
solution to this growing problem has been elusive, but we hope 
your continued focus on this issue will encourage the public 
and private sector to develop new and innovative solutions.
    We stand ready to assist you in any way we can, and we urge 
you to see this fight through to the finish.
    Thank you.
    [The prepared statement of Mr. Daniel can be found on page 
76 of the appendix.]
    Chairman Baker. Thank you for your statement and your 
participation here today.
    Our next witness is Mr. Franklin W. Nutter, president of 
the Reinsurance Association of America.
    Welcome, sir.

    STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                     ASSOCIATION OF AMERICA

    Mr. Nutter. Mr. Chairman, thank you very much, and thanks 
to the members of this committee, many of whom have been active 
in this discussion and have offered very creative ideas for 
addressing this issue. We look forward to working with the 
committee in the form of the roundtable discussions you 
mentioned, or in the form of a commission, if that's what the 
Congress should do, in addressing the various ideas and trying 
to solve this problem.
    The Reinsurance Association is a national trade association 
representing property and casualty insurers that specialize in 
reinsurance.
    All of our member companies are either domiciled here in 
the United States or are the U.S. subsidiaries of foreign 
companies.
    The concept and role of reinsurance is well understood by 
this committee and has been mentioned several times by members 
of the committee and by other witnesses. Reinsurers have 
participated in assisting the recovery from natural 
catastrophes for well over a century in this country.
    Typically, reinsurers will ultimately bear about one-third 
of the cost of natural disasters. In the case of the events of 
September 11th, two-thirds of those losses ultimately were 
absorbed by the reinsurance industry.
    The role that reinsurance plays in this risk transfer 
mechanism was highlighted in a report issued in August 2006 by 
A.M. Best, the rating organization, that stated several factors 
contributed to the insurance industry's stability in 2004-2005, 
noting the transfer of risk to the global reinsurance market 
and greater use of capital market solutions.
    It is quite clear from the information presented to this 
committee that 2004 was a dramatic year of hurricane activity 
and insured losses in this country.
    In that year, the global reinsurance market paid about a 
third of the losses that were ultimately borne by the insurance 
industry.
    As is also well-documented, 2005 was an unprecedented year 
for losses.
    Again, the reinsurance industry played a critical role. 
Estimates are that 60 percent of these losses from 2005's 
hurricane season in the United States will ultimately be borne 
by reinsurers.
    It is therefore clear that the reinsurance market served to 
supply global reinsurance capacity to the United States.
    Estimates are that insurers and reinsurers in Bermuda will 
bear $11 billion of the losses from 2005 alone; U.S. 
reinsurers, $7 billion of losses; London and the Lloyd's 
market, $6 billion; and European reinsurers, $6 billion.
    The 2004-2005 hurricane seasons are clearly indicative of 
the risk transfer that exists between insurers and reinsurers 
in the country.
    Despite these heavy losses, estimates are that reinsurance 
capacity committed and in place in the United States in 2006 
has increased by 30 percent. As in 1993, after Hurricane 
Andrew, and in 2001, after the terrorism losses of 9/11, the 
capital markets promptly provided new reinsurance capital and 
capacity. The same dynamic appears to have happened after 2005.
    Since Hurricane Katrina, approximately $24 billion in new 
capital has been raised to support underwriting needs, notably 
for U.S. catastrophe risk. Of that, nearly $8 billion was 
invested in new, start-up reinsurance companies. The remainder 
was replenishment of capital positions of existing reinsurers.
    An additional $4 billion has been invested in special 
purpose reinsurance vehicles, whose investors collaborate to 
provide extra underwriting capacity to existing reinsurers. 
Market reports are that nearly $4- to $6 billion of catastrophe 
bonds were invested in U.S. catastrophe exposure since 
Hurricane Katrina.
    Despite this new capacity, there are still insurance market 
dislocations in Florida and in some areas of the Gulf coast.
    Demand for reinsurance increased in these peak zones in 
2006 at a greater rate than the reinsurance supply was able to 
meet.
    The reasons for this should be highlighted.
    Certainly the rating agencies--notably, Standard & Poor's 
and A.M. Best--have made additional capital requirements 
associated with insurance companies to support their 
catastrophe exposure.
    In addition, the insurance catastrophe models, which are 
widely used by State officials, as well as by insurance 
companies, have been revised for the hurricane season in 2006. 
Based upon new data, an assessment of increased frequency and 
severity was added to these models.
    Reports are that the Florida catastrophe models--and by 
that, I do not mean the State of Florida but models associated 
with Florida risk--increased 60 percent for frequency of 
hurricanes and 40 percent for severity of those hurricanes.
    In the Gulf Coast, those catastrophe models were revised 
for an additional 20 percent increase in frequency and 15 
percent for severity. Insurance company managements obviously 
reacted to the increased perception of risk in these areas, as 
well.
    This confluence of development has resulted in demand for 
catastrophe protection in peak catastrophe zones greater than 
supply.
    The RAA believes that this imbalance will be temporary, 
however.
    It has been typical in the insurance and reinsurance cycles 
that, following major cases, spikes in reinsurance rates are 
followed by new market participants, leading to increased 
competition and price moderation. Ultimately, free markets will 
create a more diversified insurance and reinsurance market that 
will spread risk widely, increasing capacity and price 
competition.
    We recognize that reinsurance plays a critical role in this 
debate, and we look forward to working with the committee and 
the members who have offered ideas to solve this problem in 
finding an appropriate solution.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Nutter can be found on page 
104 of the appendix.]
    Chairman Baker. I thank the gentleman for his statement.
    Our next witness is Mr. Gregory W. Heidrich, senior vice 
president, policy development and research, representing the 
Property Casualty Insurers Association of America.
    Welcome.

STATEMENT OF GREGORY W. HEIDRICH, SENIOR VICE PRESIDENT, POLICY 
     DEVELOPMENT AND RESEARCH, PROPERTY CASUALTY INSURERS 
                     ASSOCIATION OF AMERICA

    Mr. Heidrich. Thank you, Mr. Chairman, Ranking Member 
Kanjorski, and members of the committee, for the opportunity to 
present our views and to address the issues of this hearing.
    I am here representing the 1,000-plus members of PCI who 
write some 40 percent of the Nation's homeowner's insurance. 
Because of that business, our members are deeply interested in 
the work you are doing.
    Our members commend you and your colleagues for examining 
this issue, not just for the hearing today but in the work you 
are doing every day.
    There are a number of interesting and important proposals 
that many of your colleagues have offered to address the 
catastrophe issue: Homeowner's Insurance Protection Act, 
Policyholder Disaster Protection Act, Catastrophe Savings 
Account Act, Catastrophic Disaster Risk and Insurance 
Commission Act, and many others.
    These proposals deserve discussion and debate, but we 
commend you most of all for offering concrete ideas and for 
being willing to hear our views.
    From our standpoint, the problem we face is 
straightforward: more hurricanes of greater intensity and no 
less exposure to other natural disasters, more development and 
population growth and much higher property values in 
catastrophe-prone areas, more Americans with more of their net 
worth exposed, building codes and code enforcement that are not 
strong enough, and we are still letting people build in areas 
that are at even more risk.
    As insurers, we strongly prefer to use market solutions to 
the problem, but as you know, we do not operate in a free 
market for rates, for product development, or many other 
aspects of our business, and obviously, people already live in 
catastrophe-prone areas, so we have to deal with that, as well.
    Our members have identified a number of ideas that we would 
like to offer for your consideration.
    First, State and local governments need to review and, 
where necessary, strengthen building codes, code enforcement, 
and land use policies.
    To help with this process, our organization will suggest 
and support legislation, wherever we can, to strengthen 
existing codes or adopt new ones.
    The solution should be tailored to local needs, in some 
areas perhaps strengthening the wind-borne debris requirements 
in an existing code, in other area perhaps new statewide 
minimum building standards.
    Second, new investments in loss prevention and mitigation 
are important.
    To help with that, we will support new Federal funding for 
community loss prevention and mitigation projects or training 
new code inspectors.
    Third, we think more should be done to expand private 
market capacity.
    We will suggest and support a variety of ideas to reduce 
market restrictions, including unnecessary controls on prices, 
product design, or other measures. We know change of this type 
is hard, but we also know it is the only way this problem can 
be solved in the long term.
    We understand some have concerns about this approach, but 
we've seen great success from market reforms in solving other 
serious availability and affordability problems.
    Most notable recently are the reports from New Jersey, 
where car insurance reform has made a tremendous difference, 
and we think the same can happen in property markets over time.
    Fourth, we are looking carefully at the idea of letting 
insurers create voluntary tax-deferred catastrophe reserves in 
advance of an event. As has been mentioned this morning, 
Representative Foley has a bill that would do that, and our 
member tax committee is discussing his proposal right now. In 
concept, many of our members like the idea a lot, and we hope 
to give him constructive feedback very soon.
    Finally, we have also looked at the role of the State and 
Federal Governments in financing catastrophe risk.
    We see the inevitability of extraordinarily large natural 
disasters or mega-catastrophes, and that is why we have looked 
at possible financing roles for both the State and Federal 
Governments.
    With respect to the States, we think some States may 
ultimately need catastrophe funds for additional access to 
reinsurance.
    We will look very carefully at proposals on a State-by-
State basis to decide if we will support them. We will look at 
whether private markets have freedom to respond, the effects of 
a catastrophe fund on the private market, and whether there are 
cross-subsidies involved.
    With respect to the Federal Government, we are looking at a 
different approach.
    Again, we think there are potential natural disasters so 
large and so damaging that they may require some Federal 
involvement, although we believe markets should address events 
below the level of true mega-catastrophes.
    We think there could be benefits in offering well-managed 
State catastrophe funds the opportunity to borrow from a 
Federal facility to meet immediate liquidity needs after a very 
severe event.
    We think a line of credit for State catastrophe funds could 
be set up in advance, would need to be based on sound credit 
standards, and would need to be the obligation of the citizens 
in the State borrowing the money. In addition, we think a line 
of credit should be tied to a demonstration that a State is 
doing everything it can to free up its markets and attract as 
much private capital as possible so this does not become a 
permanent solution.
    In conclusion, I would like to express again our members' 
appreciation to you, Mr. Chairman, and your colleagues, for the 
opportunity to discuss our ideas with you, and finally, if you 
will indulge me one personal observation, I wanted to add that 
your subcommittee and your subcommittee staff, with whom I have 
worked personally, have been the leaders in Congress on these 
issues. Your committee staff is known personally by me and by 
our member companies. We deeply respect their knowledge of our 
industry and the issues we face, and we look forward to 
continuing to work with them.
    Thank you.
    [The prepared statement of Mr. Heidrich can be found on 
page 82 of the appendix.]
    Chairman Baker. I appreciate the gentleman's kind 
compliments.
    I would represent to him there is extreme division of 
opinion on that observation, however.
    Our next witness is the Honorable Marc Racicot, appearing 
here today as president of the American Insurance Association.
    Welcome, sir.

 STATEMENT OF HON. MARC RACICOT, PRESIDENT, AMERICAN INSURANCE 
                          ASSOCIATION

    Mr. Racicot. Thank you, Mr. Chairman, and members of the 
committee.
    AIA represents major property and casualty insurers doing 
business across the country and around the world, and we 
appreciate very much the opportunity to testify this morning on 
a matter of extraordinary importance to our members, and to the 
Nation as a whole, namely insuring natural catastrophic risk, 
and I commend the committee and its members and your 
leadership, Mr. Chairman, in examining proactive approaches to 
the management of this risk.
    The first anniversary, of course, all of us know, of 
Hurricane Katrina devastating the Gulf Coast was just 2 weeks 
ago, and during the past year, we have seen firsthand the 
terrible destruction this unprecedented storm inflicted, and it 
has been both breathtaking and heartbreaking, at the same time, 
for us to witness all of the calamity that has visited people 
along the Gulf coast.
    Today, I would like to briefly address how AIA believes we 
can and must both rebuild the Gulf coast safely and take steps 
to prevent future catastrophic loss in communities from Texas 
to Maine.
    The Gulf and Atlantic coasts are beautiful places to visit 
and to live, unquestionably, but they also present undeniable 
dangers. Contrary to what some insurance critics believe, the 
threat to coastal populations and property is not insurance; 
it's hurricanes. Mother Nature is the problem, and she is 
relentless. We should be honest about those risks.
    Insurance is one mechanism that helps us be honest about 
those risks. It provides consumers an alert to the relative 
risk and cost of coastal development. Insurance also is a 
critical tool to protect and restore some of what Mother Nature 
takes away.
    The historic devastation from the 2005 hurricanes was met 
with an unprecedented deployment of insurance industry 
resources. The good news is that well over 90 percent of the 
Katrina-related claims in Louisiana and Mississippi have been 
settled.
    AIA member companies will not be satisfied, however, until 
every single claim is resolved. Insurers to committed to paying 
all damages that fall within their insurance contracts with 
customers.
    In the wake of Katrina, our members have set about to work 
very hard with State and Federal officials to strengthen the 
financial safety net for both homeowners and businesses. We 
believe that we must expand these efforts, both in scope and 
depth. We have arrived, we believe, at a historic moment for 
the U.S. property protection system and that we must examine 
all of the interdependent elements of this system to make sure 
they support rather than undercut each other.
    To that end, AIA has developed a holistic national 
hurricane preparation and response agenda. The goal is to keep 
our integrated, multi-faceted, risk-bearing financial 
mechanisms working for the benefit of all Americans.
    The AIA natural catastrophe agenda includes proposals 
designed to have immediate positive effects on the market, as 
well as proposals for longer-term benefits. The agenda 
includes, first, protective measures to keep people out of 
harm's way, and to strengthen their ability to resist future 
hurricanes; second, regulatory and legal reforms to improve the 
stability of insurers' operating environments; third, tax 
incentives that encourage individuals to take more 
responsibility for hurricane preparation and response; and 
finally, national flood insurance program reforms to ensure 
that the NFIP continues its vital role in protecting homes and 
businesses.
    I would like to take a moment to highlight the importance 
of loss prevention and reduction.
    Mitigation works. The evidence is in. It is absolutely true 
that mitigation works. Strong and well-administered building 
codes, policies to encourage retro-fitting of existing 
structures, like the new program in Florida, and sensible land 
use planning are effective.
    These and other loss prevention tools can make the 
difference between a community recovering relatively quickly 
from disaster, with citizens returning to homes and jobs, and a 
community remaining devastated and an economy remaining 
stagnant for many months or longer.
    I would also like to highlight the role of regulatory and 
legal reforms in improving the stability of insurers' operating 
environments.
    Too often, State regulation of insurance has become captive 
to political pressures that hold down premiums in risk coastal 
areas. True risk-based pricing encourages responsible behavior 
and discourages dangerous behavior among consumers. It also 
meets the test of basic fairness.
    Mr. Chairman, we have heard many good ideas presented here 
this morning for further inspection and review and scrutiny, 
and we very much look forward to participating in that 
opportunity for discussion with our colleagues, our friends and 
neighbors, and our fellow citizens across the country to 
address the problems that confront all Americans and the U.S. 
property protection system, and we thank you very much for 
allowing us this opportunity to participate in today's hearing.
    [The prepared statement of Mr. Racicot can be found on page 
110 of the appendix.]
    Chairman Baker. I thank the gentleman for his statement.
    Our next witness is Mr. Charles Chamness, president and CEO 
of the National Association of Mutual Insurance Companies.
    Welcome.

  STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CEO, NATIONAL 
           ASSOCIATION OF MUTUAL INSURANCE COMPANIES

    Mr. Chamness. Good morning, Chairman Baker, Ranking Member 
Kanjorski, and members of the committee.
    My name is Chuck Chamness, and I am the president of the 
National Association of Mutual Insurance Companies. NAMIC's 
members underwrite more than 40 percent of the property 
casualty insurance premium in the United States.
    NAMIC is pleased that you, Mr. Chairman, and the members of 
this committee, are making a serious effort to understand the 
nature of catastrophic risk and the role the insurance industry 
and the Federal Government can and should play to better 
prepare for and manage future large-scale natural disasters.
    With respect to the subject of this hearing, which is 
contained in its title, ``Stabilizing insurance markets for 
coastal consumers,'' I have good news and bad news.
    The good news is that, despite the enormous challenges 
property insurers have faced in the wake of last year's 
hurricanes, I can report that almost all claims have been paid.
    Take-up rates for the flood insurance program have 
increased significantly.
    People in the affected regions are rebuilding at record 
rates, and a recent study found that nearly 90 percent of those 
who filed claims in Mississippi and Louisiana are satisfied 
with their insurance company.
    As we all know, 2005 was one of the worst years for natural 
disasters in American history. Hurricane Katrina alone caused 
approximately $40.6 billion in insured losses and 1.7 million 
claims.
    Yet, one year later, roughly 95 percent of homeowners' 
claims and 99 percent of auto insurance claims have been 
settled.
    As a result, while residential building permits decline 
nationwide, Louisiana and Mississippi actually saw building 
permits increase.
    Despite the magnitude of insurers' losses in 2005, their 
prudent risk-management strategies have enabled them to stand 
ready to respond to future catastrophes.
    While the insurance industry has done a good job weathering 
the 2005 storms, the bad news is that most forecasters predict 
the 2005 storm cycle will be the norm for the next several 
years.
    It was recently estimated that a level five hurricane 
hitting Miami could cause over $130 billion in insured losses.
    It also is estimated that there is a 20-percent chance that 
a $100 billion event will occur within the next 10 years.
    Despite these dire forecasts, NAMIC believes that the 
private insurance market is well equipped to provide coverage 
for most types of natural disaster under most circumstances. 
That said, we also recognize that a true mega-catastrophe such 
as a high category hurricane striking heavily populated areas 
could potential exceed private market capacity.
    While NAMIC supports several Federal proposals that could 
help stabilize the market, we must be careful not to create 
government programs that disrupt the private insurance market.
    With that cautionary note about the use of government 
interventions, I will offer a few observations.
    First, it is an unfortunate fact that rate suppression 
forces low-risk property owners to subsidize the insurance 
costs of high-risk buyers by paying inflated premiums. In 
addition, heavy regulation of pricing inevitably reduces 
supply.
    Second, government-sponsored or government-imposed rate 
suppression can have the effect of distorting public 
perceptions of risk.
    Federal and State Governments bear the cost of the 
economically irrational decisions that result by paying for 
disaster aid to repair of properties that should not have been 
built in the first place.
    Third, it is important for lawmakers, judges, and the 
general public to understand the cyclical nature of property 
insurer profits, how profits relate to surplus, and the role of 
surplus in ensuring that insurers are able to meet their 
contractual obligations to policyholders.
    Finally, the Nation's courts must preserve the sanctity of 
contracts, and with respect to insurance contracts, this often 
means deferring to the authority of State insurance regulators 
that approved the contract language as part of the rigorous 
form-filing process that insurers must follow. If trial lawyers 
or others succeed in retroactively rewriting insurance 
contracts that were approved by insurance regulators, they will 
undermine the predictability upon which the healthy insurance 
system is based.
    These observations aside, we believe there are several 
measures that Congress should consider.
    First, NAMIC supports financial incentives to encourage 
States to adopt and enforce strong statewide building codes.
    Second, we support the concept of amending the Federal tax 
code to allow insurers to set aside a portion of premium tax in 
tax-exempt policyholder disaster protection funds. We also 
support the concept of allowing homeowners to create tax-free 
catastrophic savings accounts which could be used to pay 
hurricane deductibles and costs associated with retro-fitting 
properties.
    Third, we believe that the national flood insurance program 
should be reformed. This is an area in which NAMIC strongly 
praises the work of this committee and all the work that you 
have accomplished in this area.
    We believe that H.R. 4973 goes a long way in addressing 
some of the shortcomings that currently exist within the NFIP.
    Specifically, we strongly support moving all second homes 
to actuarial rates and stronger enforcement measures in the 
bill.
    In conclusion, NAMIC realizes that those who live and do 
business in catastrophe-prone areas will face serious 
challenges in the years ahead. We believe the most effective 
mechanism for addressing these challenges is a private 
insurance market whose defining characteristics are open 
competition and pricing freedom.
    Congress can play a constructive role by reforming the 
national food insurance program, offering tax incentives for 
companies to reserve funds for future disasters, and providing 
incentives for States to enact and enforce effective statewide 
building codes.
    Thank you for giving me the opportunity to testify on this 
issue of vital importance to NAMIC member companies and the 
U.S. economy.
    I look forward to working with you and to helping consumers 
in coastal areas meet the challenges involved in effectively 
managing the risk of natural catastrophes.
    [The prepared statement of Mr. Chamness can be found on 
page 71 of the appendix.]
    Chairman Baker. Thank you for your statement. Thanks to 
each of you.
    I would like to engage in fairly extensive questioning 
today, but the schedule is not going to permit that. Therefore, 
I am just going to make a statement before Ms. Brown-Waite 
takes the chair in my absence, leaving you at the mercy of the 
Florida delegation.
    I wish to make clear that this committee will work very 
diligently, that this is--the announcement of our intended 
roundtable discussion process will only be a supplement to the 
committee's formal inquiries.
    Accordingly, to each of you who have testified, and to the 
broader audience who are interested in this matter, I would 
request that any statements, papers, studies, findings, 
recommendations, or observations that you would choose to 
forward to the committee in the coming days and weeks--between 
now and our return next year, there will be a lot of staff work 
preceding members' return to engage in the meaningful 
discussion.
    I do not wish to have an environment in which any 
stakeholder feels their perspectives have not been very 
carefully considered.
    Mr. Nutter, with regard to the reinsurance matters and the 
data which you provided to the committee today, I would like to 
have more extensive analysis of that role of the industry in 
meeting the identified need. I do believe that we should 
observe whatever needed reforms that may be considered that it 
is in the backdrop of the broader insurance regulatory world 
that natural catastrophe responses are, indeed, a critical and 
pivotal State, but in order to seek an appropriate remedy, we 
should examine the broader elements that constraint investment, 
whether it be Lloyd's global investment in the United States or 
whether it be a regional firm trying to reach across the 
Louisiana boundary to Mississippi.
    Accordingly, I have strong interest in seeing uniformity of 
building code.
    Perhaps there should be a Federal minimum standard beyond 
which locals can exceed or choose to do as they see fit. There 
should be some Federal leadership with regard to pricing. When 
I understand a State reviews a rate application, they look only 
to the jurisdiction over which they have responsibility.
    If the company works in 12 States, how does that relate to 
the overall company solvency and risk profile in the remaining 
10 or 11 States in which they operate?
    We need to have a much better risk analysis of where 
companies are highly concentrated in unique lines of business 
and to understand the make-up of the industry's risk profile at 
this window of opportunity.
    Hence, I see this as a significant problem, but I also see 
it as the first real opportunity in my entirety of service in 
the Congress where we can get everybody in a room, talk about 
this, and perhaps come together with some conclusion, realizing 
that not everybody is going to be happy, but this has to get 
done, and I, as would not be a surprise to anyone, am a very 
free-market supporter and have the strongest of beliefs that 
this can be reconciled without draconian Federal intervention.
    However, it may be necessary, under some set of very 
difficult triggers that get pulled, much like our terrorism 
reinsurance matter, for that to be a remedy that should be 
properly contemplated.
    I haven't reached any conclusion at all.
    What I do know is we need a great deal more information to 
get to a studied, defensible resolution that does not aggravate 
an already difficult circumstance, and so, I make a sincere 
request of each of you, and those who may be listening who have 
an interest in helping to educate this committee, because I do 
not intend to let the committee's jurisdiction be farmed away.
    We are going to do this work, we are going to come up with 
a recommendation, and we are going to get it to the House floor 
next year for the House's consideration, and this is far too 
important for us not to fully understand the full range and 
scope of our problem and all the potential remedies that might 
be available to us, and I appreciate your courtesy in 
participating here, and Ms. Brown-Waite will assume the chair.
    Thank you.
    Ms. Brown-Waite. [presiding] I think everyone heard the 
chairman say that we are going to be acting next year on a 
proposal.
    It may be a combination of many of the ideas that have been 
put forth by so many Members of Congress whose States are 
impacted.
    We have heard terms such as risk-based pricing and 
catastrophic prone areas. I would venture to guess that there 
are probably only one or two States that are not in 
catastrophic-prone areas.
    I would like to--because we have so--so many of our members 
had other committees to go to, and I have one later and might 
not be able to ask the questions that--I have several 
questions, but I would only like to ask just one, and that 
would be to Mr. Nutter and also Ms. Baker.
    I have met with various groups and been told that there is 
capacity out there to cover a large-scale natural catastrophe, 
but you know, there is more to this crisis than just capacity 
issues. I am hearing more and more from primary insurers that 
reinsurance rates are just becoming unaffordable, and of 
course, we all know that those rates are passed on to the 
consumers, be it a business owner with property and casualty or 
whether it be a homeowner.
    So what actually do you believe can be done to make the 
reinsurance market more affordable, and I would ask either Mr. 
Nutter or Ms. Baker.
    Mr. Nutter. I would be glad to answer first. I assume that 
Ms. Baker would also join me in this. The spikes in reinsurance 
rates are clearly driven by a variety of things. As has been 
discussed by the committee, the losses of the last 2 years, 
particularly in Florida but in the Gulf Coast, as well, have 
fallen across the insurance sector but largely into the 
reinsurance community. Indeed, the last 2 years in the global 
reinsurance market have been an unprofitable market as far as 
catastrophe losses are concerned.
    One of the things that took place following 2005 is that 
the catastrophe modeling firms have revised their assessment of 
both frequency and severity in Florida and in the Gulf Coast. 
This has caused companies to reassess what their catastrophe 
exposure is.
    In addition, the rating agencies, notably A.M. Best and 
Standard & Poor's, revised the capital charges that they apply 
to these companies, insurance and reinsurance companies, for 
the catastrophe risks that they face. This confluence of 
factors has spiked reinsurance rates, even at a time when there 
is increased capacity being committed into the United States by 
U.S. and non-U.S. reinsurance companies.
    One of the things that clearly needs to take place, as 
several of the witnesses have mentioned, is a recognition that 
it is not insurance companies or reinsurance companies that pay 
losses; it is consumers, and in the case of some States, 
taxpayers and policyholders who have not had these losses.
    The funding mechanism into the system clearly needs a 
period of adjustment.
    We would encourage the committee, as you do look at this 
over time, not to take a snapshot of July 1, 2006, and look at 
the reinsurance market but to look at it through this hurricane 
season and to look at the historical pattern of some spike in 
pricing followed by new capital coming in, and tend to be 
moderation in pricing.
    That is what I would expect to take place. That is the 
historical trend in the market.
    Ms. Brown-Waite. Ms. Baker?
    Ms. Baker. Yes. I would certainly agree with what Mr. 
Nutter has said.
    In terms of Lloyd's specifically, I could make a few 
comments.
    Mr. McCarty mentioned earlier that he had been in London 
and was told that, in terms of Florida, basically, we're full-
up.
    What we have seen over the last few years--and you can call 
it global warming, climate change, or whatever--is certainly an 
increased severity and increased frequency, and we looked at 
our RDS, our realistic disaster scenarios, about 2 years ago, 
certainly pre-Katrina, and we thought there could be something 
that was a $6 billion Gulf coast storm, and, you know, in fact, 
we came pretty close to that.
    We then looked at other coastal areas. We looked at 
Florida. We, as I had mentioned earlier, have a scenario for a 
$100 billion loss; for instance, a category four into Miami.
    We then, as a marketplace, have to look at ourselves and 
make sure that we can pay those claims. So we have to stress-
test our market on a syndicate level to make sure that our 
individual syndicates that write reinsurance--and not just the 
United States. I mean we write worldwide, so we have to protect 
a lot of policyholders.
    We looked at that and said if we have $100 billion in a 
loss, what do we need to do to be able to make sure that the 
market can bear that loss, and in some cases, that would mean 
that a syndicate that at some point might write $500 million of 
business in Florida may then have to only write $400 million, 
so that, as a whole, the market can bear the losses.
    So in short, I would say we have an issue with capital, we 
have an issue with frequency and severity of the hurricanes 
certainly in the last few years, and maybe it is climate 
change, but it could be one of these, you know, current trends 
that you get every 40 years, that you have a sort of change in 
surface temperature of the Atlantic.
    So we could maybe hope it might be that, but those are a 
lot of the other, I think, issues that come to bear when you 
deal with Gulf Coast exposures.
    Ms. Brown-Waite. Just a follow-up question. While, so far, 
we are at the--almost the middle of September, the projected 
hurricanes have not struck. How long does the market take to 
adjust? I know you do certainly more than one-year forecasting.
    How long does it take to adjust, and if there are no major 
hits hit year, what sort of price adjustment will there be, or 
will the reinsurance rates still remain high and continue to 
severely affect our constituents, not just in Florida?
    Ms. Baker. I am sure that Mr. Nutter will have a comment on 
this, as well, but I would venture to say that the rates 
probably will not climb, but they will become static if we do 
not have another hurricane. We have 2\1/2\ months to go, and we 
certainly have, as I said, other exposures around this 
continent.
    I mean we could have an earthquake in California tomorrow, 
but barring any large catastrophic loss, I would venture to say 
that the rates on catastrophe reinsurance business would 
probably start to flatten out in the next year or so.
    Mr. Nutter. Madam Chairwoman, I would add that if you 
looked at Hurricane Andrew in 1991 and asked that question, 
looking in retrospect, what you would see is new capital coming 
into the reinsurance market, and the spike that occurred in 
pricing after Hurricane Andrew moderated.
    Admittedly, we had quite a few years without any 
significant hurricane activity, which would affect that, but 
the prices, the rate on-line, if you will, moderated 
dramatically, really, until this year. There was no spike in 
rates, not even after 2004, notwithstanding the losses.
    The other thing to keep in mind about reinsurance pricing 
is that it is a factor in insurance rates, but it is not passed 
through directly in the rates.
    So numbers that sound extraordinarily high in the 
reinsurance pricing become a consideration in the rate filings 
that insurance companies do. It is not the only driver of 
consumer prices.
    There are clearly other considerations, many of which have 
been mentioned here, about increased perception of risk and 
increased assessment of risk and severity and frequency.
    Ms. Brown-Waite. David?
    Mr. Daniel. I would just like to add that, of course, we 
are not just talking about regional hurricanes here. We are 
talking about anywhere in the country, and no place is immune.
    Everyone has skin in the game, whether you are an insured 
in Florida or Louisiana, or you are a taxpayer in a central 
State.
    You either pay your insurance premium or you pay billions 
out in tax dollars, and we just continue to suggest that it is 
far better to have a mechanism in place to encourage the 
voluntary marketplace to provide as much coverage as possible 
rather than to have the taxpayers pay much more on the back 
end.
    Ms. Brown-Waite. Mr. McCarty.
    Mr. McCarty. I just have a little different perspective on 
the potential in terms of the long-term rates.
    I believe we are in for a--this is a long-term transitory 
period of upward pricing in rates. Even after Hurricane Andrew, 
when we had millions, billions of dollars recapitalized, we had 
the creation of the Bermuda market, we did not see prices go 
down in Florida. Prices continually have gone up to Florida, 
even though we had enjoyed a relative period of calm in terms 
of storms. Coupled with that, we had, actually, in some cases, 
if you talk individually with the reinsurance underwriters, 
there was an excess of capital in the marketplace, so they 
actually were providing quota share reinsurance which would 
allow participation through the primary writers and the 
reinsurers, so that there was additional capacity, for sure, 
but that did not reduce prices.
    When I was visiting in Bermuda and in London, it was made 
very clear to me that the expectation in Florida is that you 
are a very good writer, you are a very good market for us, you 
have--your insurers have probably the best detailed 
information, you have the best data collection. The problem is 
you continue to have exposure that outstrips their ability to 
have capacity.
    The other thing you have to remember--we are $1 trillion of 
exposure.
    They can only take so much of that. When you have increased 
capacity in the world--and they do--that is great for 
hurricanes in Hawaii, because there is additional capacity 
there, but because of the exposure of a Florida, of a New York, 
my belief is, with increased frequency and severity of storms, 
with increased seismic activities--we witnessed a earthquake in 
the Gulf of Mexico. I mean there is an increased potential of 
economic disasters around the world that is going to continue 
to cause strain in the marketplace.
    Even though we have additional capacity in Florida, we will 
not see those rates go down. I think that is going to be 
generally true of the Gulf States and generally true of the 
Atlantic States.
    Now, that may not--that is what I have been told by 
individual writers who write 85 percent of the market in 
Florida.
    Ms. Brown-Waite. If you could provide to my office, and the 
other Florida members' offices, the various company rate 
increases and what percentage of that rate increase you believe 
is due to the escalating cost of reinsurance, then we will also 
have it entered into the record, if you would be so kind.
    Mr. McCarty. I think that is a very important point, Madam 
Chairwoman, because if an insurance company has to pay ``X'' 
million dollars in premium for risk transfer and I do not 
provide that with that rate relief, then they are not going to 
collect enough premium to pay their reinsurance bill. So I am 
jeopardizing the solvency of an insurance company.
    Obviously, one of my responsibilities as the insurance 
commissioner is to ensure that insurance companies have capital 
reserves and risk transfer mechanisms to ensure that they have 
the wherewithal to pay claims, and if a company has a 80-to-90-
percent rate increase with regard to that, they do pass that 
on.
    Suppressing that rate would only put Florida in a position 
of rendering its insurance companies insolvent, and that is not 
an option.
    Ms. Brown-Waite. Ms. Wasserman-Schultz, I believe you have 
some questions.
    Ms. Wasserman-Schultz. Thank you, Madam Chairwoman.
    Commissioner McCarty, I know you referred in your testimony 
to the situation in South Carolina, and in spite of the fact 
that that it is a State that has what is viewed in the industry 
as a relatively good regulatory market, in spite of that fact, 
even with the competitive rating that they have, they still 
have significant increases in their property insurance and 
availability issues.
    So why, in spite of the regulatory environment there being 
at least favorable to the industry, are they still experiencing 
the same problems?
    Mr. McCarty. You know, first of all, I think Director 
Kitzman and myself would agree that we need to have risk-based 
premiums. It should not be people who have--live in higher-risk 
areas should not be subsidized by people--having said that, we 
believe that there is a balance that you need to strike.
    South Carolina is simply evidence to the fact that the 
exposure or risk of exposure--there is a limit in the capacity 
of worldwide insurance.
    They have surplus lines companies--those are companies that 
are unregulated, they get to charge whatever premium they 
want--are telling the director of South Carolina they do not 
have any additional capacity for her State at this time.
    That may change over time. I do not question that. More 
capital markets are wonderful things, but I think what I am 
suggesting is that we used kind of politically charged terms 
sometimes, like price controls, when, in fact, what we have is 
a regulatory regime that reviews those rates to ensure that 
those rates are not excessive but also not inadequate.
    I mean we want to make sure the company is charging enough 
premium, buying reinsurance. I had to encourage five or six 
companies in Florida to raise their rates, much to the chagrin 
of constituents of Florida, because I wanted them to purchase 
the reinsurance.
    So that is what we do. That is part of our job.
    The point I was trying to make with Eleanor, and why she is 
here, because they do have a very--what is considered favorable 
to the insurance industry, so that they get the kind of rate 
relief that they want.
    I am going to tell you, I have sat down privately with 
insurance companies, and so has the director of South Carolina, 
and said, frankly, it does not matter what the rate is. I 
cannot buy the coverage, or I am a large company, large 
companies that we know that make up 20, 30 percent of the 
market share, cannot take anymore exposure at any price.
    So while we want to be sensitive to pricing and ensure that 
there is price adequacy and ensure that they are going to be 
able to collect the premium for--to purchase the reinsurance or 
other alternative reinsurance mechanisms that are coming into 
the marketplace from the venture capital markets, which is 
great, but I just do not want us to believe that somehow the 
regulatory framework, in and of itself, which in most States, 
32 States, is use and file, which means they charge the rate 
first and then justify it 30 days later, and they still have 
the regulatory--an administrative procedure system where we 
have to demonstrate that the rate is not excessive.
    So I think that we sometimes put a disproportionate amount 
of emphasis on the regulatory framework.
    I think we all should work towards modernizing our 
regulatory frameworks to provide incentives for companies to 
come into our States.
    At the same time, I think our consumers, when they get a 
90-percent--I know people in your districts have gotten 400 and 
500 percent rate increases, and they want to know that somebody 
is looking at this, and I think there was a case that you will 
recall after Hurricane Andrew, an internal memorandum from a 
company that said we just had a huge devastating hurricane in 
Florida, this is a great time for us to take advantage of this 
situation, and I think you might recall that situation, and 
those kinds of things really cause consumers to be very 
frustrated and angry, and they want to have some sense that 
there is some regulatory framework there that ensures that 
consumers, understanding they have to pay more for premiums, 
understanding, to the extent we can explain it, the costs of 
global reinsurance, want to make sure that somebody is looking 
out that they are not being gouged.
    Ms. Wasserman-Schultz. Madam Chairwoman, you know this--we 
were both in the legislature when Andrew hit, and one of the 
most frustrating aspects of the issue of rating was that, for 
years and years before Andrew hit, the insurance industry was 
low-balling rates.
    I mean they were competing down here, so that they were not 
adequately charging their customers, so that they could build 
more of a customer base, and when we lost, I think, seven 
insurance companies after Andrew, it became very clear that 
they were not capitalized enough, that they did not have enough 
reinsurance.
    There were a host of problems, and those have been 
addressed, and I agree, a regulatory environment that might be 
different could be helpful, but Governor Racicot, you mentioned 
in your testimony, which is part of the reason I asked 
Commissioner McCarty this question, that tougher and more 
uniform building codes, greater enforcement of those codes, 
more rating freedom, mitigation, that those are things that 
would be part of a solution for you and your industry 
representatives for the Gulf Coast insurance crisis, and I 
assume on down to Florida as well, but what I want to know from 
you, because I do not think you are being disingenuous, but I 
have a hard time believing that if all of those things 
happened, that at that point--what I want to know from you is 
could you represent that your industry would offer both 
residential and commercial property insurance at reasonable 
rates if the things that you say need to happen actually 
happened?
    Mr. Racicot. I can tell you that our companies would offer 
coverage at rates that were actuarially sound and that 
reflected the real cost.
    I mean the fact of the matter is that--
    Ms. Wasserman-Schultz. Well, let me just interrupt you for 
one second, because I just got over my Blackberry that 
Nationwide Insurance in Florida just asked for a 106-percent 
increase in residential property insurance.
    I mean I do not know anyone that would define that as a 
reasonable--
    Mr. Racicot. I do not think that you can isolate one single 
thing that we are recommending and say that it would be the 
solution all by itself.
    There needs to be protective and mitigation methods that 
are employed and undertaken. There needs to be regulatory 
reform. There needs to be legal reform.
    Ms. Wasserman-Schultz. Let us say that all of those things 
happened.
    Mr. Racicot. At the end of the day, it is our belief that 
is where you should proceed first.
    Now, the fact of the matter--other solutions have been 
proposed, but free market principles have served this country 
particularly well with its insurance and private property 
protection system over the course of the last 150 years, and 
when you think about the fact that we are talking about an 
industry, a private industry that makes claims payments in the 
neighborhood of about $300 billion a year to its consumers or 
customers, you have to recognize that it is a vital and 
critical part of the fabric of our American existence, and to 
preserve it and to keep it strong and not to compromise its 
infrastructure, its architecture, is extremely important, 
because I do not think the government at any level is inclined 
or is in a posture to be able to take over that responsibility.
    So what we are saying is that obviously there are 
situations that may require bridge mechanisms that have been 
undertaken in the past and may need to be explored by this 
particular committee, but there is no panacea that is available 
here, and at the end of the day, risk-based pricing, regulatory 
control--
    Ms. Wasserman-Schultz. Governor, what I am not hearing you 
say is that the answer is not yes.
    So you say that you need these elements in order to be able 
to make insurance, commercial and residential, available and 
affordable, but you are not saying unequivocally that if those 
things occurred--
    Mr. Racicot. If all of the things that we are recommending 
to you occur, then it is our belief and we can say confidently 
that, at the end of the day, if there is a risk-based system in 
place and actuarially sound method and formula of determining 
premium, that that coverage will be available.
    Ms. Wasserman-Schultz. Who determines that? The industry?
    I mean it is a moving target.
    Mr. Racicot. Nothing subject to our human affairs is 
capable of absolute definition, but what I am telling you is 
that, based upon 150 years of doing business and 
representations that we are able to confidentially make before 
the committee, that other scenario I described, we can address 
the issues, the private property protection issues that are 
existing in this country.
    Ms. Brown-Waite. I appreciate the gentlelady's questions, 
and we will be able to come back to you, but we have other 
members who also have meetings to go to. So what I would like 
to do is, you know, come back to you, because your time is up.
    I would like to recognize the gentlelady from New York, Ms. 
Kelly.
    Ms. Kelly?
    Ms. Kelly. Thank you, Madam Chairwoman.
    I request unanimous consent to insert in the record this 
article from Carl Hiaasen, ``Just say no to stronger building 
code.'' It is from the Miami Herald.
    Ms. Brown-Waite. Without objection, so ordered.
    Ms. Kelly. Thank you very much.
    Commissioner McCarty, it has been noted that part of the 
problem in Florida's insurance market is that the 
capitalization requirements are less than in States like New 
York, even though the risk of catastrophic loss is so much 
higher.
    What steps has Florida been taking to encourage higher 
capital requirements among Florida insurers and a greater 
ability to withstand the risks of your market?
    Mr. McCarty. Florida has a minimum capital surplus 
requirement for a property market to be $5 million, which, 
frankly, is less than some States and is greater than others, 
and is within the national standards for the National 
Association of Insurance Commissioners.
    $5 million for some property coverage is adequate.
    Clearly, in a State with $1.9 trillion of property 
exposure, $5 million capital in surplus does not provide much 
in the area of coverage.
    Part of the regulatory process that we go through is that a 
company is required to demonstrate through their business plan 
that they have adequate reserves or adequate capital to--
adequate risk transfer mechanisms.
    As I testified earlier before, before the hurricane season 
2004, quota share insurance was readily available, which would 
allow that $5 million to be leveraged. With $5 million, you 
cannot write very much coverage, many policies in Florida.
    One of the other things that the legislature has done is 
provided a surplus build-up program so that they provided 
matching funds of up to a half-a-billion dollars, so that we 
would raise the capital of some of these small surplus 
companies from $5- to $10 million to about $50 million, which 
puts them in, of course, a much better position to purchase 
reinsurance and leverage across the State.
    We would, as part of our regulatory framework and our 
solvency surveillance--most companies would not be able to 
write very many policies with $5 million.
    Additionally, I would like to see the standard for that to 
go to $20 million.
    Unfortunately, the signal that sends to the investment 
market is that Florida already has a difficult time attracting 
capital; certainly attracting $5 million, $10 million, when you 
leverage that against writing ratios with reinsurance, now they 
are setting this bar at $20 million, but I certainly would 
agree with you that higher minimum capital surplus standards 
would be beneficial, particularly since those very small cap 
companies write such a de minimis amount of coverage in 
Florida, it really does not have much of an impact on the 
capacity problem we have.
    Ms. Kelly. Mr. McCarty, why should Florida try to exempt 
itself from the rules that help prevent insurance loss?
    Other States, like my State, New York, are shoring up their 
building codes.
    So why should Florida exempt itself from that? Does that 
make any sense to you?
    Mr. McCarty. Florida has the strongest building code in the 
country, by far.
    We have a small exception that was made in the panhandle of 
Florida, from Franklin County to Alabama, that was--that 
building code is stronger than the building code that was in 
there before.
    My guess is when they conclude the study that is expected 
to be completed at the end of this year, that they will go up 
to the international standard.
    Florida has the strongest building codes overall. A very 
small portion of our population lives in that panhandle.
    Florida has the strongest building code. Dade County and 
Broward County have an advanced building code, above the 
international standard, and--
    Ms. Kelly. Excuse me, but we are talking not about those 
counties. I am focused, really, on the issue here, which is the 
panhandle.
    Mr. McCarty. I fully agree with you. I am embarrassed by 
the fact that that the Florida Building Commission, after I 
testified on two occasions--all of the insurance trade 
associations at this table were participating in that 
discussion, and they opted to do something. My guess, ma'am, I 
believe, in the next couple of months, the Florida legislature 
will overturn that decision and those building codes will be 
strengthened.
    Ms. Kelly. Mr. Nutter, I would like to ask you a question, 
because your testimony suggests that, for hurricane risk, there 
is sufficient reinsurance available at market rates, but many 
people have commented that those companies have reduced 
coverage in areas--reduced coverage in areas that--what I am 
essentially focusing on is the fact that Allstate has dropped 
out of the hurricane insurance market in my home county, and 
what we have done is--people have commented--other people here 
have commented about the fact that companies are reducing 
coverages--the ones that are reducing the coverages the most 
are those that refused to buy reinsurance in the past, and they 
have kept all the risk for themselves, rather than hedging 
against the risk.
    I would like to know if you could explain to the committee 
how the low hurricane decades of the 1980's and most of the 
1990's encouraged that kind of behavior and the role that 
insurance should have been playing for those companies--it is 
puzzling that they would have pulled out, and I know that is 
kind of a disjointed question, but I hope you can figure out 
what I am asking, which is basically, can you explain how that 
happened and perhaps offer a correction?
    Mr. Nutter. Mrs. Kelly, I do not represent Allstate, and I 
would not presume to speak on behalf of that company. Let me 
try to answer your question without any specific reference to 
Allstate or any other company.
    Clearly, insurance companies assess the risk that they are 
willing to retain.
    They look at their capital base. They look at their own 
internal analysis of their catastrophe exposure, and then they 
choose whether or not to engage in buying reinsurance and 
transfer that risk into other markets.
    In periods of low activity, hurricane or earthquake 
activity, those companies are likely to determine that they can 
retain risk and not pay the cost of reinsurance to transfer the 
risk.
    Some companies, particularly major personal lines 
companies, are very large in terms of their capital base and 
their ability to absorb risk. They may have made determinations 
that they would retain risk; a business judgement that may or 
may not have been right in any given year.
    Certainly, Allstate is now a major buyer of reinsurance in 
2006 relative to their prior position, as reported in the 
marketplace.
    I mentioned in the testimony that, in fact--
    Ms. Brown-Waite. If you could please sum up--
    Mr. Nutter.--rating organizations, in particular--Standard 
& Poor's, A.M. Best--have put these companies under greater 
scrutiny to assess their risk, as have the insurance 
departments. You see a greater demand for reinsurance than in 
the past. Just to clarify something you said; in peak zones, it 
is fairly clear that the reinsurance marketplace, while having 
added capacity this year, is still inadequate for the demands 
that are being made.
    Ms. Kelly. Thank you.
    Ms. Brown-Waite. Mr. Clay Shaw, you are recognized.
    Mr. Shaw. Mr. Nutter, I would like to follow up on Ms. 
Kelly's line of questioning, talking about the reinsurance is 
available now.
    We are only talking about windstorm here.
    In the coast of south Florida, the reinsurance is available 
in all parts of that area?
    Mr. Nutter. I cannot speak about individual companies in 
south Florida, but what I can say is that every insurance 
company in the State of Florida is required by law to purchase 
reinsurance from the Florida Hurricane Catastrophe Fund.
    So they certainly are reinsured through the Florida CAT 
fund, as we call it. They may have purchased reinsurance in the 
private--
    Mr. Shaw. I am talking about the private sector.
    Mr. Nutter. They may have purchased reinsurance in the 
private market if they deemed that their catastrophe exposure 
exceeds what the CAT fund can provide them.
    I do not have access to the individual reinsurance programs 
of companies, so I cannot answer your question directly.
    Mr. Shaw. Is that a common practice?
    Mr. Nutter. A common practice to--
    Mr. Shaw. Can it be bought at competitive rates? I am 
talking about the reinsurance, because that is what we are here 
to talk about.
    Mr. Nutter. Well, the reinsurance market is a competitive 
global market.
    Other than the catastrophe fund in Florida, which sets its 
own rates, the reinsurance market is globally competitive.
    So yes, it is a competitive rating environment.
    Mr. Shaw. Do you see a need for a national catastrophic 
fund?
    Mr. Nutter. The private market, both insurance and 
reinsurance, have, to date, handled the catastrophes we have 
had, including the events of 9/11 and certainly the events of 
2004 and 2005.
    I just want to emphasize something I said a couple of 
times.
    We recognize that the market--the reinsurance market 
probably is not meeting the demands for reinsurance in peak 
zones--south Florida--
    Mr. Shaw. Mr. Nutter, the Florida legislature just had to 
put over a billion dollars into the CAT fund in order to keep 
Citizens afloat.
    That is not the marketplace working, believe me, and 
Citizens is not part of the free market system. It is an 
insurance of last resort that was the creation of the Florida 
legislature, and we have huge problems.
    Now, I am sure you can insure anything if you are willing 
to pay enough for it, but the problem is that the premiums have 
actually gone through the roof.
    The private markets have failed us in regard to windstorm 
insurance.
    If it had not, we would not have Citizens. We have no need 
for even being here at this particular hearing, but the people 
at home are suffering. It is like getting an unwanted second 
mortgage on their house, and we have to get some results, and 
we have to get some relief, because I can tell you right now, 
the rates that we are experiencing throughout the State of 
Florida and throughout the Gulf coast are going to exceed our 
ability to pay, and when that happens, the economy starts to 
fall through, people start walking away, the insurance--the 
real estate market will fall through the floor.
    It is a question of whether or not the mortgages are going 
to continue to require catastrophic insurance or windstorm 
insurance, which has been viewed now as a catastrophic 
insurance.
    Insurance companies have limited their exposure on a State-
by-State basis.
    That is not what insurance is about. That is not what we 
want. That is not the free enterprise system working. This is 
wrong. Mr. McCarty, can I talk to you a little bit about that? 
How did that happen?
    How did it happen that the insurance companies were able to 
form subsidiaries of such-and-such insurance company of 
Florida? We all see it on our premium notices. How did that 
happen?
    Mr. McCarty. Well, sir, that occurred before my time.
    Mr. Shaw. I know it did, but you know how it happened.
    Mr. McCarty. Well, the insurance industry was under a 
tremendous amount of pressure after Hurricane Andrew, 
particularly those that were stock traded companies.
    In order for them to maintain their A.M. Best ratings, 
which we readily admit is a driving force in a lot of decisions 
made in the industry, they had to limit their exposure in 
Florida.
    So large companies set up subsidiary--we refer to them as 
pup companies--so that they could limit their exposure in 
Florida.
    When I was educated on my trade mission to London, one of 
the underwriters said, you know, if you were purchasing this on 
a national basis, you could leverage this against a national 
account and would be in a better position to purchase it.
    Now, it may not reduce it, but it would have put them in a 
better position to purchase it.
    So in some ways, having this separation of these companies 
and limiting their exposure--it is a benefit to the company, to 
the stockholders of the company. There is no question about it. 
Was it a prudent business decision to make? Absolutely. Was it 
helpful to Florida? Not generally.
    Mr. Shaw. Yes, sir.
    Ms. Brown-Waite. The gentleman's time is up, but I will 
allow Mr. Daniel to have one minute.
    Mr. Daniel. Thank you.
    Just to support your point that there is a void in the free 
market, in Louisiana, we are insuring many companies with--many 
insureds with unaffordable deductibles that could put them out 
of business if a storm came along, inadequate coverage, because 
it is not available. Just this week, I renewed a policy in a 
surplus lines company for a small business, happens to be a 
sausage manufacturer in Lafayette, Louisiana.
    They have no wind coverage. We could not find anything that 
was affordable to them. That was in the surplus lines market. 
It is unregulated for rates, and it is, as I recall, a concrete 
block building.
    So mitigation is great, rate flexibility is great, we 
support those things, but it is not the only answer.
    Thank you.
    Mr. Shaw. Thank you, Madam Chairwoman, and I thank the 
committee for allowing some of our interlopers here to take 
part in today's hearing. This is terribly important to the 
people of the State of Florida.
    Ms. Brown-Waite. You are very welcome, Mr. Shaw.
    Before I recognize Representative Mark Foley, I would like 
to ask Kevin McCarty a question.
    Kevin, you were not the insurance commissioner at the 
time--it was an elected post--when the Florida legislature--and 
Mr. Foley was in the legislature at the time, as was 
Representative Wasserman-Schultz.
    When the pup companies were created, it was at a time after 
Hurricane Andrew, when the companies were fleeing the State.
    So it almost was a way--a stop-gap measure, by creating the 
pup companies. First of all, many of us had the opportunity to 
vote on it.
    It was something done by the then-insurance commissioner, 
but I had been told at the time that there was an implied 
consideration, an implied--I do not want to use the word 
``promise,'' but some language that was given to the insurance 
commissioner that the parent companies would serve as the 
guarantor, even though these pup companies were created.
    May I have your comments on that, first of all, and again, 
I would request that we be informed how much of the insurance 
rate increase--and by the way, Mr. McCarty just told me that 
the company I am insured with just asked for a sizeable rate 
increase, also.
    You know, every Member of Congress is hearing from their 
constituents on it, but if you would just answer the question 
about any consideration of parent company guarantor, and also, 
have any other States set up these pup companies?
    Mr. McCarty. I will just backtrack just a little bit.
    In the immediate aftermath of Hurricane Andrew, as you 
know, the insurance commissioner, Tom Gallagher, at the time, 
implement a moratorium to prevent the cancellation of non-
renewable policies, in particularly preventing the shedding of 
the policies through creation of a subsidiary. That was 
subsequently codified by the Florida legislature, allowing for 
a run-off of the moratorium over time, so that we can build 
some stability in the marketplace as we were ramping up some of 
the other programs, including the Florida Hurricane Catastrophe 
Fund and the creation of a residual market so that we could 
continue to have land sale contracts and bank could issue 
loans, etc., because it was critical to the stability of 
Florida to do that.
    It was subsequent to that that the insurance industry 
argued, these companies, that in order to--particularly those 
that are traded in the stock market--that they needed to limit 
their exposure.
    I was not privy to any conversations about the guarantees 
or any guarantees by those companies.
    Legally, you set up a separate legal entity through 
corporate law to limit your exposure. That is the purpose of 
setting up a corporation, is to limit your exposure.
    Ms. Brown-Waite. I would like the record to reflect that 
when you say ``you'' set it up, you did not mean the Florida 
legislature.
    Mr. McCarty. Oh, no, the Florida legislature--
    Ms. Brown-Waite. Okay.
    Mr. McCarty. The Florida legislature--
    Ms. Brown-Waite. I just want the record to clearly 
indicate--
    Mr. McCarty. This was done through petitioning, through the 
department of insurance, at that time, and creation of those 
companies were licensed, then, by the insurance department at 
that time, and they were granted through a consent order, which 
is generally a mechanism for the agreements of the terms and 
conditions for establishing of these pup companies.
    Ms. Brown-Waite. Do any other States have them? Yes or no?
    Mr. McCarty. Yes, they do. Other States have had them.
    Louisiana has subsequently had them. New York has 
historically had separate companies, separate entities.
    It was because of the different regulatory framework that 
New York had that was separate and distinct for limitation of 
their exposure.
    Ms. Brown-Waite. I thank the gentleman.
    The gentleman from south Florida, Representative Foley, you 
are recognized.
    Mr. Foley. Thank you very much.
    Maybe if FEMA had not given away so many generators in 
Florida and so many gift cards, we probably could have created 
a reinsurance market.
    Let me first thank Mr. Daniel for the comment about 
employees, because despite all of the tragedies we experienced 
in hurricanes, the one thing that became apparent, whether it 
was your agents, firefighters, police officers, linesmen for 
utility companies, who had their own damage at home, left their 
families to be of aid and assistance to fellow Floridians, and 
that is important to be noted. We all can complain.
    There are a lot of reasons to be upset, but in our bleakest 
times, it was the average citizen who strode to the front of 
the line to say how can I help, and that is something I think 
is commendable.
    As Mr. Shaw said, insurance rates are completely and 
totally out of control, and it is going to start having a 
dramatic impact on the economy of Florida.
    I cannot underscore it enough, why the urgency of the 
situation is now, and I cannot underscore enough that it has to 
be a solution-based free market concept with some Federal 
entity.
    Mr. Kanjorski mentioned a multi-peril--because that is the 
one oddity of the insurance business that I do not quite 
understand, because you know, flood and wind and this and 
that--everything is different. You have to buy a separate 
policy.
    It is like going to a cafeteria to select from menu items, 
because you cannot buy a universal policy to cover, and a lot 
of people are finding out, well, the policy they have even 
spent a lot of money on does not cover it, because it came in 
through the wind--no, does not work. If it came up by flood, we 
can cover you.
    If it is a flood resulting from the wind coming through 
your window, well, that is a flood that is not covered, because 
that is wind, and you did not have wind.
    Even though there is 4 feet of water in your house, which 
would be typically thought of as a flood, the fact remains it 
came sideways through wind and is no longer coverable.
    So we have to figure out some of these dynamics of the 
insurance markets, so there is a universality of coverage. I 
agree there has to be more competition. How do you bring it in?
    $22 billion of losses in Florida alone makes it very 
untenable for an entity to say let us keep going through this 
based on projections that show for the next 20 years our 
exposure and experience may be comparable. So it is a difficult 
thing.
    Mr. Heidrich, you mentioned this great miracle of New 
Jersey car insurance. How would that relate to homeowners 
insurance in Florida?
    Mr. Heidrich. My point there is that, in New Jersey, you 
had a long history of highly regulated markets. You had a very 
difficult auto insurance market that was recognized generally 
across the Nation as one of the more difficult places to do 
business, and for years and years and years, the legislature 
was reluctant to try deregulation of that market and opening up 
that market.
    That was done 3 years ago by Governor McGreevey and the 
legislature at the time, and the early results are very 
promising in terms of companies that previously were unwilling 
to commit capital being now willing to commit capital, insureds 
getting coverage that was not available to them before, in a 
number of cases at lower prices.
    So my point simply is that these can be very difficult 
transitions. People in New Jersey certainly feared that it 
would be a very difficult transition, but we have seen 
successes, and so, it was really a point to say that we--that 
is among the policy prescriptions we ought to be looking at for 
Florida and other catastrophe-prone areas.
    Mr. Foley. Do you see Florida as heavily regulated in the 
context of what New Jersey was?
    Mr. Heidrich. Our members have told us that, historically, 
it has been heavily regulated. I want to comment on what 
Commissioner McCarty has done. We certainly passed rate relief 
last year, with the flex rating bill. Florida has taken very 
aggressive steps to improve its mitigation environment.
    They are doing many, many things well, but historically, it 
has been a very difficult market to do business in, according 
to our member companies.
    Mr. Foley. Can't that be, to some degree, some of the maybe 
fly-by-night insurance companies that set up, collect premiums, 
then do not pay, where the regulations have had to be strict in 
order to ensure fulfillment of obligation?
    Mr. Heidrich. Let me be clear. We are not arguing for no 
regulation. We are arguing for not being very, very careful 
about the capital position of insurance companies, and I would 
certainly endorse Commissioner McCarty's comments earlier about 
the need for insurance regulators to always assure that the 
capital is available to pay the claims that are owed down the 
road.
    So please do not misunderstand my comments to be arguing 
for no regulation.
    We believe in solid, good, safe, sound regulation of 
insurance companies, but we also know that the answer to some 
of the more difficult availability and affordability problems 
are more free market solutions.
    As I indicated in my testimony, not the only solution, but 
one of the solutions.
    Mr. Foley. Let me make the final observation, because I 
think it is important relative to construction standards. 
Andrew proved to us that if building officials do not look for 
compliance with building codes, it does not matter, because the 
storm will blow down the house, and that seems to have been the 
huge casualty loss in Dade County, was that no one was 
watching.
    Our roofs were strapped. You know, it was just a fly-by-
night operation, and those were the areas of deep devastation.
    When Governor Jeb Bush and I flew over Charlotte County, it 
was interesting to see almost pre-1970 construction that 
remained fairly intact, post-1994 construction after the new 
south Florida building codes took effect after Andrew, 1994-
1996.
    I mean the difference in how they weathered the storm was 
dramatic, and so, that has to be part of the equation.
    It cannot be putting the onus all on insurance. It has to 
be both about building inspections that are significant and 
secure in the knowledge that they will achieve a thorough 
inspection and not allow for shoddy workmanship, but also the 
difference is the methodology that happened in the growth of 
Florida during those mid-years seemed to create homes that 
clearly would not withstand--never mind 150-mile-an-hour storm 
but possibly not even 40.
    So that is something I think we also have to digest as we 
do a look at insurance opportunities. We have to look at the 
methodology by which construction takes place, and there is 
also give and take--what we find in Florida, because there are 
no longer overhangs allowed, because that allows the wind to 
come up and rip off the roof. That has created some energy 
efficiency issues.
    So it is trade-offs and a lot of obvious different things 
that place us in a conundrum, but I am anxious to work with all 
of you to come up with some solutions, but it is the urgency 
that I cannot underscore enough, and not just for this election 
year. I have been working on this bill since 1999, I believe.
    So it is not something I deduced in a hysteria of the 
moment. It is something that I knew was coming, a long time 
coming, and it is developing at a critical, critical pace.
    Madam Chairwoman, thank you.
    Ms. Brown-Waite. I appreciate your comments, and I 
certainly want to thank all of the witnesses who are here 
today, who contributed to make this a very successful hearing.
    As the chairman said, we are going to be taking action next 
year. It cannot come a day too soon for so many homeowners and 
businesses who are really struggling to pay those increased 
costs, and today, if nothing else, we saw that from the 
testimony of the various members here today, and statements 
that are being submitted, that this is not just a Florida 
problem, and I look forward to working with each and every one 
of you to come up with a solution that helps everyone and helps 
to make insurance, a necessary component, more affordable.
    With that, this meeting is adjourned. Thank you.
    [Whereupon, at 12:49 p.m., the hearing was adjourned.]

                            A P P E N D I X



                          Septemberr 13, 2006


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