[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
U.S. GOVERNMENT PRINTING OFFICE
31-548 WASHINGTON : 2007
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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
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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
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