[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
INSURANCE CLAIMS PAYMENT
PROCESS IN THE GULF COAST
AFTER THE 2005 HURRICANES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 28, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-7
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34-677 PDF WASHINGTON : 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee RICK RENZI, Arizona
ALBIO SIRES, New Jersey JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
RON KLEIN, Florida TOM PRICE, Georgia
TIM MAHONEY, Florida GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut ADAM PUTNAM, Florida
JOE DONNELLY, Indiana MARSHA BLACKBURN, Tennessee
ROBERT WEXLER, Florida MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
MELVIN L. WATT, North Carolina, Chairman
LUIS V. GUTIERREZ, Illinois GARY G. MILLER, California
MAXINE WATERS, California PATRICK T. McHENRY, North Carolina
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
EMANUEL CLEAVER, Missouri RON PAUL, Texas
NYDIA M. VELAZQUEZ, New York STEVEN C. LaTOURETTE, Ohio
MICHAEL E. CAPUANO, Massachusetts J. GRESHAM BARRETT, South Carolina
CAROLYN McCARTHY, New York TOM PRICE, Georgia
RON KLEIN, Florida MICHELE BACHMANN, Minnesota
TIM MAHONEY, Florida PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida
C O N T E N T S
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Page
Hearing held on:
February 28, 2007............................................ 1
Appendix:
February 28, 2007............................................ 53
WITNESSES
Wednesday, February 28, 2007
Hartwig, Robert P., President and Chief Economist, Insurance
Information Institute.......................................... 18
Hood, Hon. Jim, Attorney General, State of Mississippi........... 20
Jefferson, Hon. William J., a Representative in Congress from the
State of Louisiana............................................. 9
Jindal, Hon. Bobby, a Representative in Congress from the State
of Louisiana................................................... 6
Maurstad, David I., Director and Federal Insurance Administrator,
Mitigation Division, Federal Emergency Management Agency, U.S.
Department of Homeland Security................................ 16
Taylor, Hon. Gene, a Representative in Congress from the State of
Mississippi.................................................... 12
APPENDIX
Prepared statements:
Watt, Hon. Melvin............................................ 54
Jindal, Hon. Bobby........................................... 56
Taylor, Hon. Gene............................................ 61
Hartwig, Robert P............................................ 105
Hood, Hon. Jim............................................... 122
Maurstad, David I............................................ 159
Additional Material Submitted for the Record
Watt, Hon. Melvin:
Property/Casualty Insurance in 2007: Overpriced Insurance,
Underpaid Claims, Declining Losses and Unjustified Profits. 169
Memo to Great Lakes Zone Employees........................... 198
New York Times article dated February, 24, 2007, ``A Contract
Is a Contract, Right?''.................................... 200
Statement of the Mortgage Bankers Association................ 204
Statement of the National Association of Realtors............ 260
Statement of Jeffrey H. Rose, from Lakeshore, MS, with
attachments................................................ 268
CRS Report for Congress--Post-Katrina Insurance Issues
Surrounding Water Damage Exclusions in Homeowners'
Insurance Policies, dated February 27, 2007................ 278
INSURANCE CLAIMS PAYMENT
PROCESS IN THE GULF COAST
AFTER THE 2005 HURRICANES
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Wednesday, February 28, 2007
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:33 p.m., in
room 2128, Rayburn House Office Building, Hon. Melvin L. Watt
[chairman of the subcommittee] presiding.
Present: Representatives Watt, Waters, Lynch, McCarthy,
Klein, Mahoney; Miller, McHenry, and Roskam.
Also present: Representatives Melancon, Jefferson, Taylor,
and Thompson.
Chairman Watt. Let me declare this hearing of the
Subcommittee on Oversight and Investigations to order. I want
to thank everybody for being here and apologize to you all that
we were hung up on the Floor with votes.
But that's the bad news; we are starting late. The good
news is that votes are over for the day and we won't be
interrupted again, so we should be able to proceed through all
of our testimony and questioning without delay again.
Without objection, all members' opening statements will be
made a part of the record, and there are some members who have
asked to sit on the dias with us and be able to ask questions,
so I would ask the subcommittee members to consent that the
following members be allowed to participate in today's hearing
after all of the sitting subcommittee members: Representative
Richard Baker; Representative Ginny Brown-Waite; Representative
Bennie Thompson; Representative William Jefferson, who will
testify and then come to sit here; and Representative Charlie
Melancon. And if any of the other witnesses want to join us,
we'll do a supplemental unanimous consent request to make that
appropriate.
Under the rules of the committee and the subcommittee, the
subcommittee chairman and the ranking member will be recognized
for 5 minutes each to make opening statements, and then other
members who wish to speak, up to a total of 15 minutes per
side, will be recognized. So I'm going to recognize myself, but
before I get on the clock, let me just thank the members who
are here. I had planned, if we had had a full complement of
members, to introduce all of them since this is our first
subcommittee hearing since the subcommittee has been completed.
Just for everybody's information, I won't go through a full
introduction, but Representative Luis Gutierrez is on the
subcommittee, as well as Representative Maxine Waters,
Representative Stephen Lynch, Representative Emanuel Cleaver--
although I understand he's going off of the subcommittee to do
another special project--Representative Nydia Velazquez,
Representative Michael Capuano, Representative Carolyn
McCarthy, Representative Ron Klein from Florida, Representative
Mahoney from Florida, and Representative Wexler from Florida.
And, of course, the chairman of the full committee is an ex
officio member of the subcommittee.
I'll yield to Mr. Miller to just go through his list of
members on the Republican side.
Mr. Miller. Thank you, very much. We have with us today
Patrick McHenry. Ed Royce should be joining us shortly. Ron
Paul, Steven LaTourette, Gresham Barrett, Tom Price, Michele
Bachmann, Peter Roskam, and Spencer Bachus, who is the ranking
member of the full committee, will also be attending today.
Chairman Watt. Thank you. I'll now recognize myself for a
5-minute opening statement, which may go a little bit longer,
but I hope not.
Today's hearing will examine the insurance adjustment
process in the Gulf Coast area after the 2005 hurricanes.
Hurricane Katrina was the single most insured disaster in the
United States with privately insured losses of about $40
billion. It resulted in approximately 1.7 million private
insurance claims with the vast majority of those claims coming
from Louisiana, Mississippi, and Alabama. Although the insured
losses from Hurricane Rita were lower than Hurricane Katrina,
Hurricane Rita was also expensive, with privately insured
losses of almost $5 billion from about 381,000 claims, the
seventh most expensive in history.
After this unprecedented destruction, the National Flood
Insurance Program (NFIP) paid out more than $18 billion in
claims. The substantial claims that resulted from Hurricanes
Rita and Katrina far exceeded the premium income to the Flood
Program, and NFIP has borrowed most of the $18 billion paid out
in claims from the U.S. Treasury.
The Federal taxpayer has a financial interest in how the
NFIP operates and specifically how the claims payment process
works. I recognize that insurance matters are generally covered
by the States, but the Financial Services Committee has
jurisdiction over the National Flood Insurance Program, and
Congress acted three times last term to approve additional
borrowing authority for the National Flood Insurance Program to
enable it to pay claims.
Having given that factual backdrop, let me set some ground
rules, address some of the questions that have been addressed
to me by colleagues, interested parties, and the press, and
frame the issues in the following way:
First, what is our subcommittee's role in this process? In
this hearing, and in every hearing or investigation we conduct
this year, let's keep in mind that the Oversight and
Investigations Subcommittee is not a legislating committee. Our
sole purpose is to get the facts and build a factual record. If
we do our jobs thoroughly and fairly, whatever legislation
might be appropriate will be based on the facts, but it will be
done by another subcommittee, the full Financial Services
Committee, or elsewhere.
Second, what do we know already? Well, there are a number
of things that various people will tell you that they know
about this subject but the only thing I'm prepared to say that
we know for sure--and this is where I would like all of our
subcommittee members to start--is that everybody I've talked to
in the process is unhappy.
Our citizens, our constituents, are unhappy. The one thing
that many of them know is that their claims were not paid in a
timely fashion, and they blame private insurers, the National
Flood Insurance Program, or anybody else that they can find.
They know that their claims were not timely paid. The Members
of Congress from the Gulf, our colleagues, are unhappy because
their own experience and their constituents' complaints
indicate that there was not only a breach of the levees that
were designed to protect them, but there was a breach in the
insurance coverage, adjustment, and payment process that was
supposed to compensate them.
Third, private insurers are not happy. They'll tell you
that they were just honoring the provisions of their insurance
contracts. For a better understanding of their position, I
commend to the subcommittee members a thoughtful article from
the February 24, 2007, New York Times, which suggests that a
confluence of acts of God, voters, the press, trial lawyers for
classes of civil litigants, the threat of criminal action,
activist judges, and self-interested politicians at the
Attorney General, U.S. House, and Senate levels conspired or at
least coalesced to make private insurers the victims.
Fourth, the National Flood Insurance Program is unhappy.
There has been some suggestion that they rolled over and paid
claims that shouldn't have been paid by the Program or that
should have been paid by private insurers. Most of the
Program's flood insurance premium dollars are now going to pay
interest on the $18 billion that was used to pay claims.
Finally, taxpayers could end up being very unhappy. If we
can't sort through this, and if it's not fixed, they could be
left footing the bill and, what's more, a similar result could
occur after future disasters. Everybody is unhappy, and I think
that's the case, and why we need to be here today. And
everybody is pointing fingers or blame at someone else.
Our job in this subcommittee is to document the facts, and
today's hearing is the start of that process.
Finally, I've been asked, is this the only hearing we will
have? I think it's clear that there will be other hearings, and
I want to make it clear that those hearings, and the whole
process, will be fair. I don't start with any preconception of
where we'll get to or where we'll end up. I will tell you that
I intend to do as many of these hearings as we need to, to get
a full record for somebody to take action.
There will be an effort to identify possible solutions, but
we need to know the facts first. I thank the witnesses for
being here to start the process. And I now yield 5 minutes to
the gentleman, the ranking member, Mr. Miller.
Mr. Miller. Thank you, Mr. Chairman. I'll try not to repeat
a lot of what you discussed because there's a lot of facts we
have in this that we will be gleaning through this hearing. But
today the subcommittee will consider the performance of our
insurance system in fulfilling it's obligation in the aftermath
of Hurricanes Katrina and Rita in order to provide a factual
foundation from which to legislate or improve the system.
In 2005, hurricanes caused an unprecedented amount of
damage to residential, industrial, and commercial property.
It's important to note that while some insurance claims from
these storms have yet to be resolved, more than 95 percent of
the claims have been settled.
For unresolved claims, the recourse of policyholders is
either mediation or adjudication. Such processes are in place
to ensure that every case can be resolved fairly. From the
initial approval of the insurance policies by the State
insurance commissioner, to the claims settlement process, one
thing is clear. Even during a time of tremendous strain, our
insurance system operates as it was designed.
This is not to say that we are satisfied with the design of
the system. Rather, the problems we have witnessed indicate
that we must improve the system. It is not working the way that
we would want it to work.
I do not believe that this hearing should be used as a
forum to blame private insurers. If we don't agree with the
outcome, then let's change the rules and reform the system. If
we want to assess blame, let's start by looking at the
opportunities that we, as a Congress, have missed in the past
to improve our system.
As many of you know, I have been an advocate for reform of
the insurance system for many years. The system as we know it
is plagued with inefficiencies. If there ever was an impetus to
reform it, it is now, when we have seen the shortfalls of our
system exacerbated during a time of great strain.
I also do not believe that this hearing should be a forum
to reject the benefits of private insurance in favor of
expanded government and increased taxpayer exposure. I have,
along with other members of this committee, participated in
efforts to reform the National Flood Insurance Program and,
importantly, to modernize our National Flood Maps.
While some might think an expansion of the NFIP would be
beneficial in resolving some of the insurance system
deficiencies revealed in the aftermath of the 2005 hurricanes,
I must also refer you back to the last NFIP markup we had in
this committee when some wanted to mandate the purchase of
flood insurance in areas of our country where there was no
basis to require it in order to make the program solvent.
I am here today, as I was at that markup, to tell you that
this is the not way to capitalize an insurance fund. A
fundamental tenant of an insurance is to spread the risk, but
we shouldn't be spreading it to people whose homes will likely
never be flooded.
The NFIP is currently solvent. The program is almost $20
billion in debt to U.S. taxpayers. We shouldn't be mandating
that people pay for flood insurance when they don't need it,
and we shouldn't be asking the taxpayers to foot the bill for a
broken program any more than they already are.
As we move forward, I urge my colleagues to remain mindful
that a vibrant private insurance market will help expedite
recovery in the Gulf area. Recovery cannot take place if there
is no insurance market. We must ensure that we do not
inadvertently drive liquidity and capital out of these
hurricane-prone areas. If we do that, we have only succeeded in
harming the future of the communities that we aim to help in
this hearing.
Thank you. I yield back.
Chairman Watt. Are there any other members who would like
to be recognized for an opening statement for 2 minutes?
Okay. The gentleman is recognized for 2 minutes.
Mr. Roskam. Thank you, Mr. Chairman. I very much appreciate
the opportunity to participate in this hearing today, and I
particularly appreciate you, Mr. Chairman, for laying out the
ground rules on what it is that we're going to be considering:
number one, the subcommittee's role; and number two, the notion
that everybody is unhappy. I accept the premise that everybody
is unhappy, but I want to urge a little bit of caution.
I come from Illinois, which is a good State from an
insurance perspective. Illinois and the regulators there and
the industry is robust, and when insurance companies compete,
consumers do very well.
I think the tone and tenor of the hearing is important
because I think we are in a position where we, in the Congress,
need a robust insurance industry in this particular marketplace
that has so much at risk. We must be careful not to create,
either through harsh language or overly aggressive regulation,
an environment where the insurers say, ``Look, we're going to
walk away; we don't need this hassle.'' We know that capital is
fungible, and capital goes to where capital can excel, so I
think that we need to be very, very careful.
By analogy, we had a situation in Illinois where it became
very difficult in the practice of medicine in southern
Illinois, south of Springfield, Illinois, about half of the
State, to the point at which many physicians said to the
plaintiff's bar, ``You win, we lose, we are leaving'', and it
created a great deal of adversity.
It seems as we move forward we need to put this into
context; 95 percent of these claims have been settled. And
really is there anybody among us in Congress who can claim that
we have that 95 percent success rate in their own districts? I
certainly can't, and I think we need to focus on this 5
percent, or I've heard even the number as low as 2 percent, of
those claims that really need special attention.
So Mr. Chairman, I yield back the balance of my time and
very much appreciate the tone that you've set.
Chairman Watt. Ms. McCarthy, do you care to be recognized
for an opening statement?
Okay. Thank you. Ms. McCarthy has been a long-time opponent
of opening statements. She probably didn't even want us to make
opening statements.
Let me ask your unanimous consent to submit for the record
a copy of the February 24, 2007, article from the New York
Times that I referenced in my opening statement. I think the
members will find it interesting, and it kind of lays out a
whole different perspective on this.
Let me thank our member witnesses for being here and
indicate that in the interests of their time, and in the
interests of preserving the subsequent witnesses' time, we will
have their testimony and not have questions and answers. And
then either of you, or any of you, who wish to join us up here,
we'd be delighted to have you.
So let's see. Who will be going first? Oh, okay. We're
going from the right to the left, okay. Our good friend and
colleague, Representative Bobby Jindal from the great State of
Louisiana, is recognized for 5 minutes.
Mr. Jindal. Thank you very much, Mr. Chairman, Ranking
Member Miller, and the rest of the committee members. Thank you
for providing me the opportunity to testify. I would seek
unanimous consent to submit my longer written comments for the
record.
Chairman Watt. Without objection, we're going to give
unanimous consent to have all of your written statements made a
part of the record.
STATEMENT OF THE HONORABLE BOBBY JINDAL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Jindal. Thank you, Mr. Chairman. Eighteen months ago,
in August and September of 2005, Hurricanes Katrina and Rita
devastated the Gulf Coast region of the United States,
including large land areas in my home State of Louisiana.
In the southern portions of Louisiana, the storm surge
swept across the coastal areas causing extensive property
damage. In my district in the City of New Orleans--you'll hear
from my colleague as well--levees failed, and flood waters
swamped homes and businesses for several weeks before the water
was finally pumped back into Lake Pontchartrain.
Hurricane Katrina was the most significant natural or
manmade disaster to affect the United States. The effects of
the hurricane completely destroyed and made uninhabitable an
estimated 300,000 homes. This far surpasses the residential
damage of Hurricane Andrew. It surpasses the combined damage of
the four major 2004 hurricanes--Charley, Frances, Ivan, and
Jeanne.
The Federal Government aided businesses and individuals
struggling to purchase terrorism insurance after the September
11th terrorism attacks, and we believe the people of Louisiana
deserve the same help. With more than 53 percent of our
country's population living in the 673 coastal counties and
parishes, it is critical that we provide access to affordable
insurance for these areas.
In many coastal areas, insurance prices are a growing
problem because of steadily rising rates. For south Louisiana
and several of our Gulf States, we're in the midst of an
insurance crisis. Louisianans are still haggling with their
companies over settlements and payments a year-and-a-half after
the storms. These problems are normally resolved within 3
months after a natural disaster.
Even further though, however homeowners and businesses are
unable to rebuild because of high premiums and difficulty in
getting insurance altogether. Since the 2005 hurricanes, many
policies in the greater New Orleans area have gone up more than
50 percent, and insurance costs have gone up an average of 12
percent across our entire State.
Obtaining insurance is difficult because only a handful of
companies are writing property insurance in the State. In fact,
10 of the top 25 property insurers do not do business in the
State. Those companies that remain are striving to eliminate
hurricane coverage from their portfolio. There are immediate
reports that insurance companies are attempting to cancel
insurance policies of those who weren't even affected by flood
or wind damage caused by the 2005 hurricanes. In short,
Louisianans are paying more for less insurance, if they can
even get it, which is hampering our recovery from the storms.
A couple of specific examples. State Farm Fire and Casualty
Company, the largest residential insurer in Louisiana, has 32
percent of the market. It has stated that it will not write new
hurricane coverage, also known as wind and hail insurance
policies in south Louisiana.
Allstate accounts for 20 percent of all homeowner's
policies and has been the State's second largest provider of
insurance. It's implementing a Statewide 5 percent deductible
on hurricane coverage. According to news reports, Allstate does
not plan to write new hurricane protection policies in much of
Louisiana. Currently, our State's commissioner of insurance is
investigating allegations that the company is arbitrarily
canceling homeowner policies in the State.
Louisiana Citizens Property Insurance Corporation is the
State-run insurer of last resort. It's currently our third
largest insurer, and it is writing more policies than ever
before. They write 1,000 policies per day, but they expect to
write between 60,000 and 200,000 policies over the next year.
But the premiums, by law, are costly, are priced above the
marketplace. Without competition from the private sector,
market forces are not working to drive down insurance rates.
The bottom line is that extraordinarily high insurance
premiums will put those small mom and pop shops or the young
entrepreneur permanently out of business. People in south
Louisiana will not be able to afford to rebuild.
The insurance crisis is a classic chicken-or-the-egg
problem. If the property owner rebuilds, in accordance with
Federal law, he must obtain property insurance before settling
on the property with a loan from a mortgage company but we, in
south Louisiana, are having difficulty getting the insurance
needed to go to settlement because companies are refusing to
issue new policies in this area.
I have several examples in my testimony, so I won't go
through all of them. There was a recent example. An insurance
saleswoman in New Iberia, Louisiana, left, scrambling to find
insurance within 2 weeks of transferring her policy to a house
she had just finished building. Her wind and hail, hurricane
coverage was canceled. The mortgage company threatened to make
her return the loan money unless she got a new policy.
She was an industry insider, so she was familiar with every
company that writes insurance. She was rejected by all but
Citizens. When she finally was lucky enough to get insurance,
her premiums went from $900 to $3,000 a year for the same
coverage she had bought simply 2 weeks ago, 2 weeks before
then.
We can go through it again. There are several examples. On
the commercial side, HRI Management has a portfolio of
properties worth $200 million. Before Katrina, their coverage
cost $500,000, including a 1 percent deductible, or roughly
$1,000 per property. Two days before the policy's renewal date,
the insurance company told them the new policy would be $2.5
million, including a 5 percent deductible, and would provide
only $50 million in hurricane coverage. Without competition,
the company has limited choices: either put up with absurd
premiums, risk foregoing insurance altogether if they're not
being financed by a bank loan for their properties, or move
their business to another location.
We must ensure that the residents of our State have access
to reasonably priced insurance and are not forced to live
uninsured. Unfortunately, for example, tragically, many of the
residents in St. Martin Parish whose homes were destroyed by a
tornado right after Valentine's Day had recently dropped their
homeowner's insurance due to the rising insurance costs after
the hurricanes.
It was reported in one local paper that a 90-year-old widow
on a fixed income who owned her home outright was faced with
that dilemma. She could pay for food, medicine, and other
needs, or use that money to pay for her increasing insurance
premiums. She chose the former. Now she must rebuild her home
after it was destroyed by the tornado without the help of
insurance. This is completely unacceptable. Something has to
change.
I'd like to the leave the committee with one last thought.
Insurance companies argue that it is too risky to issue
policies in south Louisiana in coastal areas. But I must point
out two things. One, if the levees in southeast Louisiana had
been built to withstand a category three hurricane, as we had
been told they were, the area would not have had the extensive
damage. We would not have had--certainly we would have had
destruction after Hurricanes Katrina and Rita, but it would not
have been nearly as extensive as what we saw.
We're even now having cases of people who didn't have
damage from the storms losing their coverage. There's certainly
an understandable concern on the part of insurance companies to
manage their portfolios. They need to ensure their long-term
solvency and stability; that is certainly in everybody's best
interests. However, in 2006, while insurance companies were
defending their decision and not issuing new policies in
Louisiana because they can't afford to issue this market
according to them, they were also delivering a record $44.8
billion in profits even after accounting for the claims of
policyholders wiped out by Hurricanes Katrina and Rita.
From 1999 through 2005, the industry saw its profits nearly
double from $22 billion in 1999 to $43 billion in 2005, while
adding $100 million to its surplus reserve. It doesn't seem
right that insurance companies are making record profits while
Louisiana residents cannot afford their premiums.
Our residents have been through so much. We cannot rebuild
our State unless our people move back. They cannot do this
while insurance remains either too expensive or simply not
available. We can't reasonably expect people to return home to
rebuild their businesses.
While we cannot go back in time to fix the present, we can
take steps to brighten the future. I applaud this committee,
Mr. Chairman, the members of this panel for undertaking
examination of insurance practices in the Gulf Coast in the
aftermath of Hurricanes Katrina and Rita. Thank you for your
attention to this very serious problem which threatens the
recovery of my State.
[The prepared statement of Mr. Jindal can be found on page
56 of the appendix.]
Chairman Watt. I thank the gentleman for his testimony.
You've set a precedent of doing 5 minutes in 8\1/2\ minutes,
but we're trying to be understanding here.
The gentleman from Louisiana, Mr. Jefferson is recognized
for 5 minutes or 8 minutes, but don't go overboard, now.
STATEMENT OF THE HONORABLE WILLIAM J. JEFFERSON, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA
Mr. Jefferson. Thank you, Mr. Chairman. If it had not been
Bobby Jindal speaking, it would have been 10 minutes to get
that much material in.
Good afternoon, Mr. Chairman, and members of the committee.
I am deeply grateful to you and to the other members here for
the attention you have given to this matter.
The matter before us today regarding insurance claims
payment processes in the Gulf Coast after the 2005 hurricanes
obviously has a great effect on the rebuilding and renewing of
our entire region and, of course, the City of New Orleans and
its surrounding communities.
It is necessary that we hold these insurance companies
responsible and make them pay for the services that they
guarantee their customers. Since the great storm that hit New
Orleans and the Gulf, insurance companies have seemingly done
everything in their power not to be fair and equitable to the
very citizens who need them most, the very citizens who for
decades have been loyal customers.
Bobby has gone through a lot of the numbers about the
disaster costs of the storm: more than half of the New Orleans
population has yet to return; and there have been more than
200,000 deaths, more than 200,000 homes destroyed, and 600,000
jobs disrupted. And Mr. Chairman, you've also noted that the
1.7 million private insurance claims leaves unaccounted 975,000
of them. And you cited the categories, commercial losses, $18
billion, homeowner policy claims, $17 billion, and $5 billion
auto and other claims.
Information gathered from the Louisiana Department of
Insurance shows that 61 percent of the total insurance claims
from Katrina came from homeowners. However, of all the money
that has been paid out thus far, only 39 percent has been to
homeowners.
Bobby has already mentioned the $44.8 billion in record
profits in 2005 even after the storm, an 18.7 percent increase,
and in 2006 the profit margin was even higher, $60 billion.
With all of these profits, the insurance companies still feel
it necessary to deny claims of thousands of our people and not
to insure old and new residents in the region.
Private insurance companies have not covered many damages
that they should have and allowed the Federal Government,
through the National Flood Insurance Program, to handle most of
the claims. Making a distinction between wind-driven damage and
damage from flooding, they have shifted financial risks from
the business community to government and to individual
homeowners.
Courts in Louisiana are flooded with litigation against
insurance companies because most residents feel it is the only
way they can recover anything from insurers. In fact, in the
eastern district of Louisiana, there are 5,175 Katrina-related
lawsuits; 95 percent of those are homeowners against insurance
companies.
Gene Smith, who is the chief deputy clerk of courts for the
eastern district of Louisiana, states that typically the courts
have a docket of about 3,000 cases for the year. Now there are
over 3,900 pending cases dealing with homeowner's insurance
cases alone. This does not include those who filed in State
court, nor does this number reflect every party in the multiple
claim and class action suits.
Many insurance companies in the area have planned to stop
writing new policies for homeowners and commercial businesses
altogether. The Louisiana Insurance Department had to issue
emergency rules to suspend insurance companies from canceling
or not renewing residential policies or commercial policies on
commercial properties, of course. However the emergency rule
expires tomorrow.
Robin Halverson, a Lott & Bloom real estate agent, was
actually living in her by-water home by the end of 2005 and had
completed repairs on her home by December of that same year.
She received a letter from Allstate stating that her policy was
to be canceled because the house was abandoned and in
disrepair.
The Louisiana Department of Insurance has received more
than 100 complaints from customers who are being terminated at
the end of Emergency Rule 23. The complaints all come from one
insurance company and it appears that many other insurance
companies will follow suit. The department is saying that there
is no reason for many of these people to be dropped from their
insurance company records.
Higher premiums are a big strain on the real estate market
back home. Premiums have risen tremendously. Ms. M. Sharpie, a
resident of the West Bank area, of Algiers Insurance says her
premiums have risen 100 percent. Ms. Sharpie had only minor
damage on her home in an area of the City that was not as
damaged as most parts of the City were. Nonetheless, her
insurance company felt it necessary to double her insurance
premiums.
She is also feeling the strain in her career as a real
estate agent. Ms. Sharpie feels that many people want to move
or come back to New Orleans but obtaining insurance makes it
unaffordable. Two popular areas she knows most people want to
move back to are Gentilly and Lakeview, however the only option
potential buyers have now is Louisiana Citizens, which is
already higher than the private market.
The Louisiana Citizens Property Insurance is the State's
insurer of last resort, a non-profit organization that had to
be established by the legislature because applicants were not
able to procure coverage through the market. The rates through
this group are typically 10 percent higher than the private
market and even this is not always available.
And now it appears that since most insurance companies
aren't going to write hurricane policies at all, they'll all
have to be written to Louisiana Citizens, which means
necessarily they'll be higher than the market there was before.
Additionally officials of the Louisiana Realtor's
Association, a State trade association that assists members
with business and real estate matters agrees with Ms. Sharpie.
They state that insurance premiums have risen anywhere from 30
percent to 400 percent. A resident who purchased a $150,000
home before Katrina would pay $1,200 a year typically for
insurance. That same resident today could be expected to spend
$5,000 per year.
The high price of these premiums that extend across the
State looks to cripple the real estate market in the State of
Louisiana. Since it's required for one to get insurance with a
home purchase, and many insurance companies are not writing
policies, the insurance industry is making it doubly impossible
to rebuild the region.
Coupled with the increased difficulty obtaining a home
mortgage--with not only rising but even the unavailability of
insurance providers, it makes building our region back a mere
impossibility. This is not only applicable to the homebuying
market but spills over into the rental market as well, in the
form of higher rent because of the high insurance requirements.
HRI was mentioned by Representative Jindal a minute ago,
but I'll state it a little different way. It's a New Orleans-
based real estate development company and it's not alone. In
building buildings back home before the storm, the cost for
insurance was $400 per unit, more or less, depending on the
size of the unit and so on, but the same unit today of a
certain size that they were referring to would cost $1,800 per
unit if insurance were available to buy. Additionally, this
particular building is not in a flood zone. That's an increase
of 450 percent.
Some of the best-case-scenario estimates did not do much
better. The increase there would be about 300 percent. However,
these numbers did not include higher and new deductibles on
storms and the base deductibles. A representative from HRI also
states that this story is typical amongst developers.
There are countless examples of Gulf Coast citizens who
were literally and figuratively left in the lurch by their
providers. In order to rebuild and renew the great City of New
Orleans, the Gulf Coast region, and most importantly, its
people, it is vital that we make that transition back to their
homes as seamless and as easy as possible.
I'd like to once again thank Chairman Watt and the members
of this subcommittee for their continuing efforts and their
service. It will be necessary for all of us to continue to work
together to require a better response by the insurance industry
and to make our people who have faithfully paid their premiums
over the years whole again.
The largest impediment to the rebuilding of our region, I
will repeat, is not going to be FEMA or any of these other
things we've talked about so much. It is going to be the
availability and the high price of insurance coverage.
Thank you, Mr. Chairman.
Chairman Watt. Thank you for your testimony. Representative
Gene Taylor from Mississippi is recognized for 5 minutes.
STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSISSIPPI
Mr. Taylor. Mr. Chairman, I'd like to call you and the
committee's attention to the home of Corky and Molly Hadden.
This is what it looked like on August 28, 2005. This is what it
looked like the afternoon of Monday, the day after. Corky and
Molly had $650,000 worth of homeowner's insurance on that home,
but 17 months after the event of that storm, they've been paid
nothing.
This is the home of Jody and Betty Benvenutti. It is about
180 years old, and had survived who knows how many hurricanes
in its life. This is what it looked like the day before the
storm. This is what it looked like the day after.
Jody is in the insurance business, so he wisely bought a
lot of insurance for that home. He had $586,000, which he
thought was the full replacement value, but 17 months after the
storm, he's been paid nothing.
What do they have in common with a U.S. Congressman, a
United States Senator, a Federal judge, and thousands of other
people, the people who built their houses to spec, who paid
their Federal flood insurance policy, and had a homeowner's
policy, because in hurricane country you don't know whether
it's going to be the wind or the water that gets you so you
hedge your bets with both. And like thousands of other people
in the weeks after the storm, one after another were told by
their private insurers, ``We're not going to pay you.''
See, I think that contributed to a massive fraud against
folks like Corky, against folks like Jody, but against the
taxpayers, too, to Mr. Miller's point. See, under the Federal,
``Write Your Own Program'', we allow the Federal insurance
companies to write the policy. That saves the Nation the
trouble of having people to write that policy. We pay them a
premium for that.
The problem is that we also allow them to adjudicate the
claims. We let State Farm, Nationwide, USAA, and others go out
to a piece of property like the Benvenutti's, and like the
Hadden's, and determine how the house was destroyed. Now in
some instances, in very limited instances, people stayed behind
and actually lived to tell about it. And in those limited
instances where a person could give a sworn testimony that they
saw their house blow away before the water got here, they were
paid, but not very many people lived to tell that story; most
people got the heck out of there.
So for the people like Corky, and for the people like Jody,
who got out of there as they were instructed, they got nothing.
The insurance companies conspired to defraud them. They
conspired to defraud the taxpayer. And let me tell you how.
Within weeks of the storm, State Farm and others issued
memoranda to their claims adjusters that whenever they could
see wind and water had been there, to blame all of the damage
on water. That creates two problems. Number one, for those
people with homeowner's policies, the wind damage that
obviously occurred in the 5 hours of hurricane-force winds that
hit their houses before the storm surge got there is being
totally ignored.
To Mr. Miller's point, they have a responsibility under the
law for a fair adjudication of that claim. So when a company
issues a memorandum to their inspectors to ignore wind damage,
and blame it all on the water, they are by their own admission
sticking the taxpayers with bills that State Farm, Allstate,
Nationwide, and others should have paid. That's where the fraud
against the taxpayers comes in.
So, Mr. Chairman, what I'm going to ask your committee to
do is--there are claims adjusters who walked away from quarter-
of-a-million-dollar-a-year jobs, which in south Mississippi is
a lot of money.
There are actually two sisters by the name of Rigsby, and
they walked away from their jobs because they were so
disgusted, on a day-after-day basis, with having to go tell
people that they knew had houses that were damaged by wind--
they'd blame it all on the water so that they only got the
flood insurance policy and none of the wind policy. They were
so disgusted with that action done by their employer, E. A.
Renfro & Company, which did work for State Farm, that they
walked away from their jobs and said, ``We're not going to do
this anymore.''
I'd like you subpoena the Rigsby sisters. I'd like you to
subpoena the people from State Farm and Allstate and
Nationwide. How can they pass out a memorandum? After already
promising our Nation that they would have a fair adjudication
of the claims, how can they send out a memorandum to their own
employees saying, ``Blame it all on the water and that way the
taxpayer has to pay.''
I'd like you to look into the antitrust. Again, they are
exempt from the antitrust laws, so is it really fair that State
Farm can call up Allstate and call up Nationwide and call up
USAA and say, ``You know what, if you don't pay claims, and you
don't pay claims, then I won't have to pay claims.'' Under the
existing law, that is allowed. It's wrong as all get out, and
it should be illegal.
So Mr. Chairman, lastly I would like our Nation to look
into all perils insurance. To Mr. Miller's point, if you've
checked in California, you'll notice that 53 percent of all
Americans live in coastal America. So what happened in
Mississippi could happen in Maine, has already happened in New
York, and has already happened in North Carolina. It happened
four times in Florida in 2004, so it really could come to
California one day. And is this how you want your constituents
to be treated? Is this how you want the taxpayers of the whole
Nation to be treated? If they're going to pull out of coastal
America on a State-by-State basis and say, ``We're not going to
protect homeowners anymore from anything other than theft or
fire'', then maybe there is a vacuum that our Nation ought to
fill, just like in the 1960's when our Nation stepped in to
provide Federal flood insurance because the private sector
didn't want that job anymore. Since half of all Americans are
affected by this, isn't it time for this Congress to look into
it?
Mr. Jindal and Mr. Jefferson did an excellent job of
talking about how much the rates have gone up just for people
who still want to get fire insurance, still for people who want
to get theft insurance.
And think about the irony here. We, as a Nation, tell
people you have to have insurance if you have a federally
backed mortgage, and yet we're saying on the flip side that we,
as a Nation, are incapable of regulating insurance, so we're
going to let the States do it. Therefore, there are 50
different standards for what's right and wrong, plus when you
throw in the territories.
There's a lot that needs to be changed with this. I would
ask you to put yourself in the shoes of these folks who after
17 months haven't gotten a dime, who built their houses the way
they should have, who paid their premiums, who, when the Nation
said, you need to get the heck out of here, got out of there,
and because they weren't there to witness the destruction of
their homes, didn't get a dime.
Mr. Chairman, I've laid a lot on your plate, but I know
you're more than capable of making all this happen. Thank you
for this hearing.
Chairman Watt. Well, we thank you. We thank all three of
you for your testimony, and I think we're more than capable of
documenting what has occurred. Then hopefully, we'll have some
ideas for the other committees and subcommittees about some
responses that need to be taken also. And we assure you that we
will do our best to document and to get all sides of what has
occurred.
So we thank you so much. As indicated earlier, we are not
going to subject the Congressional Member witnesses to
questions and answers. We feel like we have access to them on
the Floor of the House, in the halls, and we can get questions
answered from them. And so we will use that off-the-record
access to them to get them to address this.
Mr. Taylor. Mr. Chairman, I do have a more thorough
statement that I'd like to include for the record.
Chairman Watt. Without objection your written statement,
all of the written statements of all three of the witnesses
will be submitted for the record, the full written statements.
[The prepared statement of Mr. Taylor can be found on page
61 of the appendix.]
Chairman Watt. Thank you so much. And we'll now call up our
second panel.
Let me once again thank the member panel for their
testimony, and thank the second panel for being here with us
today. I apologize once again for the late start, but some
things we don't have control over. There are a lot of things we
don't have control over, and votes are certainly one of those
things.
Allow me now to introduce the second panel, and I will make
one introduction and ask my colleague, the ranking member, to
make an introduction, and then allow Mr. Taylor to introduce
his Attorney General from Mississippi.
So our first witness will be David I. Maurstad, am I
pronouncing that correctly?
Mr. Maurstad. Yes, sir.
Chairman Watt. Maurstad, who was appointed Director of
FEMA's Mitigation Division and Federal Insurance Administrator
in April of 2006, and previously held both positions in an
acting role beginning in June 2004. In this position, Mr.
Maurstad provides leadership for some of the Nation's leading
multi-hazard risk reduction programs, which seek to secure the
homeland from natural hazards. These areas of oversight include
the National Flood Insurance Program, the National Earthquake
Hazards Reduction Program, the National Dam Safety Program, and
the National Hurricane Program.
In his position, he has worked closely with public and
private risk managers as well as leaders in government,
industry, research, and academia. Previously, he served as
Regional Director of FEMA Region Eight beginning in October of
2001, where he coordinated FEMA's prevention, preparedness, and
disaster response and recovery activities in Colorado, Montana,
North and South Dakota, Utah, and Wyoming. And prior to that he
was the lieutenant governor of Nebraska, a position in which he
was elected in 1998, and previously served in the Nebraska
unicameral legislature.
He has nearly 25 years of experience as an insurance agent
in Nebraska, was mayor of Beatrice, Nebraska, is the first
locally elected official and insurance agent to head the
National Flood Insurance Program, and holds a bachelor of
science degree in business administration and an MBA degree
from the University of Nebraska in Lincoln, Nebraska.
I now recognize the ranking member for an introduction of
our second witness.
Mr. Miller. Thank you, Mr. Chairman. I am going to try to
make a very lengthy bio very short because it is extremely
lengthy and the man is extremely qualified.
Robert P. Hartwig is president and chief economist of the
Insurance Information Institute. Since joining the III in 1998
as an economist, Dr. Hartwig has focused his work on improving
the understanding of key insurance issues across all industry
stockholders, including media, consumers, insurers, producers,
regulators, legislators, and investors. As president of the
III, he provides assistance to thousands of stories annually
and covers all aspects of print, television, radio, and news
media, while also responding to thousands of requests for III
member companies and other constituents.
The institute is generally recognized to be the most
credible and frequently used single source of information and
referral for the widely diverse insurance industry. Its board
represents companies from all areas of the industry, including
life insurers. In addition, some 20 other insurance
organizations contract with III for media services.
Dr. Hartwig previously served as director of economic
research and senior economist with the National Council of
Compensation Insurance, NCCI, in Boca Raton, Florida, where he
performed rate and return in costs of capital modeling and
testified at worker's compensation rates hearings in many
States. He also worked as a senior economist for the Swiss
Reinsurance Group in New York and is senior statistician for
the United States Consumer Product Safety Commission in
Washington, D.C.
He is a member of the American Economic Association, the
American Risk and Insurance Association, and the National
Association of Business Economics and CPU Society, and serves
on the board of directors of the Independent Insurance Agents
and Brokers Association of New York.
In 2005 to 2006, Dr. Hartwig served on the State of
Florida's Task Force for Long-Term Homeowner's Insurance
Solutions, and that's about a third of the bio, so I will stop
at that for the sake of time.
Chairman Watt. And Mr. Taylor is recognized to introduce
the Attorney General.
Mr. Taylor. Mr. Chairman, I'd like to introduce our State's
Attorney General, Jim Hood, who, among his many accomplishments
most recently did, I think, a phenomenal job of looking into
the allegations against the insurance industry that I just laid
out, the fraud against individuals, and the fraud against
corporations.
His work has resulted in at least one of the companies
trying to reach a settlement with the people who were left with
nothing. And to give you some idea of how well he did his job,
part of that settlement was that the company asked that
whatever criminal investigation against that company would have
to be dropped as a part of that.
So I very much applaud him for doing what our U.S.
attorneys should have been doing. I think he's done an
excellent job of protecting the consumer, and protecting the
taxpayer, and we're honored to have him here today.
Chairman Watt. Without objection, the written statements of
all three of these witnesses will be made a part of the record.
And we will recognize Mr. Maurstad for 5 minutes for his
testimony.
STATEMENT OF DAVID I. MAURSTAD, DIRECTOR AND FEDERAL INSURANCE
ADMINISTRATOR, MITIGATION DIVISION, FEDERAL EMERGENCY
MANAGEMENT AGENCY, U.S. DEPARTMENT OF HOMELAND SECURITY
Mr. Maurstad. Good afternoon, Chairman Watts, Ranking
Member Miller, and members of the subcommittee. I am David
Maursted, Mitigation Division Director and Federal Insurance
Administrator for the Federal Emergency Management Agency.
The large number of claims and severity of flood losses
from the 2004 and 2005 hurricane seasons are unprecedented in
the history of the NFIP. The challenges these storms have
presented to the Mitigation Division, particularly the 2005
hurricane season's, have never been encountered on this scale
before. Today I'll address the NFIP's financial status, mention
some accomplishments, and point out some opportunities to
strengthen the program.
The NFIP makes affordable flood insurance available in
communities that adopt and enforce measures to reduce their
vulnerability to flooding. From 1968 to 2004, the NFIP paid out
$15 billion to cover over 1.3 million claims. Hurricane Katrina
alone resulted in claims totaling $16.3 billion to date.
It is likely that the 2005 flood insurance costs will
exceed $20 billion, including interest already paid on
borrowing from the U.S. Treasury. Congress has increased this
borrowing authority three times since Katrina to the present
limit of $20.775 billion, allowing nearly all of the 2005 flood
claims to be paid.
That's more than 180,000 Gulf Coast residents on the road
to recovery due to our private sector partners, our Write Your
Own insurance companies, as well as claims adjusters and agents
who fulfilled their responsibility to help NFIP policyholders
begin rebuilding their lives.
With over 5.4 million policies insuring more than $1
trillion in assets, the NFIP collects more than $2 billion
annually, yet we expect interest on our borrowed funds to reach
$720 million this year. If future claims meet historical
averages, the program will need new loans every 6 months just
to cover semi-annual interest payments.
Needless to say, under current loan arrangements, it's
unlikely the NFIP will ever be able to retire this debt.
Financial matters aside, I'm proud of how the NFIP and the
insurance industry worked together after Katrina, using new
information and innovative approaches to help Gulf Coast flood
policyholders when they needed it most.
The NFIP Summary of Coverage and the Flood Insurance Claims
Handbook helped them through the claims process. We quickly
resolved Katrina and Rita claims with streamlined adjustment
and claims processes, but not at the expense of quality
control.
From the beginning, FEMA general adjustors and claims staff
were in the field conducting random and on-demand reinspection
of damaged structures. We also reviewed sample sets of claims
filed to ensure the integrity of the process. This is in
addition to the regular adjustor monitoring we perform, to
operation reviews, biennial audits and audits for cause.
The GAO and the DHS Inspector General are investigating the
quality of our flood claims handling, and we are cooperating
fully.
We learned from Katrina and we are sharing this knowledge
with States as we help them educate and train agents who sell
flood insurance.
We're also working with affected communities to make sure
they rebuild wisely. For instance, FEMA provided affected areas
with updated flood hazard data to help guide reconstruction.
This guidance must be used for all rebuilding activities
involving FEMA hazard mitigation and public assistance grant
programs because it doesn't make sense to spend tax dollars to
rebuild to outdated standards only to face similar damage when
the next storm comes along.
And it will come. That's why we must continue to strengthen
the program by protecting the program's integrity, improving
citizens' understanding of flood risks, and reducing risks with
proven mitigation practices. We should enhance these principles
by eliminating discounts on pre-furn structures, strengthening
mandatory purchase requirements, and improving data on flood
maps.
Levee failure vastly increased New Orleans' flood claims.
Improper flood map depiction of areas behind levees is one of
our primary concerns. My written testimony offers
recommendations on how to improve the program, and I look
forward to working with this committee and others in this
regard.
However there is no quick solution that will allow the
program to absorb catastrophic loss years like 2005, and we're
concerned about more than financial matters. Increasing risk
awareness among homeowners and consumers with improved,
succinct information is one of the NFIP's basic principles and
is an important element of the 2004 Flood Insurance Reform Act.
As citizens learn more about the risks they face, they'll
be more likely to reduce their vulnerability, making the
Nation's communities safer places to live, work, and do
business.
I'll be happy to answer any questions that the committee
and other members might have, and thank you for the opportunity
to testify.
[The prepared statement of Mr. Maurstad can be found on
page 159 of the appendix.]
Chairman Watt. Thank you for your testimony. Mr. Maurstad
has set a tough act for you all to follow, having finished
right on the 5-minute mark, and we appreciate that.
Dr. Hartwig is recognized for 5 minutes.
STATEMENT OF ROBERT P. HARTWIG, PRESIDENT AND CHIEF ECONOMIST,
INSURANCE INFORMATION INSTITUTE
Dr. Hartwig. Thank you. Good afternoon, Mr. Chairman,
Ranking Member Miller, and members of the committee. Thank you
for the opportunity to discuss the important and vital role
played by the insurance industry in the response, rebuilding,
and recovery effort following Hurricane Katrina.
My name is Robert Hartwig, and I'm president and chief
economist for the Insurance Information Institute, an insurance
trade association based in New York City whose primary mission
is to improve the public's understanding of insurance, what it
does, and how it works.
Hurricane Katrina was the largest and most expensive
disaster in the history of insurance. Claims payments to
restore homes, businesses, and vehicle losses totaled $41
billion on some 1.7 million claims filed by policyholders
across six States. For all of 2005, hurricane losses topped $57
billion on some 3.3 million claims.
As we know, the devastation wrought by these catastrophic
hurricanes was unprecedented and so, too, was the industry's
response. Some 15,000 adjusters were called in from across the
country. These men and women worked tirelessly, day and night,
for months, often in difficult and dangerous conditions.
For many property owners, insurance adjusters and the
checks they cut on the spot where the first tangible signs of
relief they had seen. Millions of American families and
businesses devastated by the storms of 2004 and 2005 are back
on their feet today because of the more than $80 billion paid
to them by their insurance companies.
Insurers are justifiably proud of their performance. As of
the first anniversary of Katrina in August of last year, more
than 95 percent of the 1.1 million homeowner's claims in
Mississippi and Louisiana had been settled with fewer than 2
percent of claims in dispute. Approximately half of these
entered no-cost mediation programs established by insurance
departments in both States where some 80 percent of claims are
successfully resolved.
Throughout the Gulf, only a tiny fraction, well under 1
percent of homeowner's claims have been litigated. Claims
adjustment is a highly systematic process. Adjusters work
diligently to accurately assess the extent and cause of loss
associated with each individual claim. If some damage is the
result of an excluded cause of loss, such as flooding, the
adjuster will apportion the loss accordingly.
It is important to recognize, as Mr. Maurstad has already
said, that FEMA routinely conducts audits of flood claims,
including claims practices, and has the authority to review any
claim at any time. Consumers are also protected in every State
by unfair claims practices statutes that grant State insurance
regulators the authority to investigate and penalize insurance
companies that refuse to pay valid claims.
The lessons of Katrina and the unparalleled destruction of
the 2004, 2005 hurricane seasons include a very stark reminder
that living along the hurricane exposed coast line of the
United States is an increasingly risky proposition. Indeed, 7
of the 10 most expensive hurricanes ever to strike the United
States occurred in the 14-month span from August 2004 through
October 2005.
Risk-related lessons revealed in the aftermath of Katrina
include the following. Many, if not most, coastal structures in
the United States today are insufficiently well constructed to
withstand the forces of a major hurricane. Homes built to
stronger, industry supported standards however, have fared much
better.
Flood insurance penetration rates are woefully inadequate.
In parts of coastal Mississippi, for example, fewer than 20
percent of dwellings were insured against flood. The cost
associated with offering insurance in hurricane prone areas
will continue to escalate as coastal populations soar.
Florida's population, for example, has increased by 80
percent since 1980 with the value of insured coastal property
now exceeding $2 trillion. Hurricane Katrina made clear another
important lesson, that only a financially strong insurance
industry can deliver the relief necessary to help communities
recover from major catastrophic events.
Hurricane Katrina and the other storms of 2004 and 2005
provided insurers with valuable insights into loss reduction
and catastrophe response. Since Katrina insurers have
complemented their existing investments in catastrophe response
with a variety of new and enhanced capabilities that speed
response times while also partnering with government officials
to cut bureaucratic red tape that slows those response times.
Insurance markets in most States are highly resilient and
competitive. Unfortunately the operating environment that
allows insurers to pay sudden and extreme losses like Katrina
is now under siege in several States. Punitive, burdensome
legislation and regulation accompanied by a surge in litigation
is driving up costs and reducing consumer choice.
Insurance rating agency A.M. Best suggested just last week
that recent legislative changes in Florida could even lead to
ratings downgrades for some insurers. In Mississippi, a small
number of lawsuits relative to the total number of claims filed
is having an inordinate impact on the health of the
marketplace. The litigation in Mississippi, initiated just 17
days after Katrina by the Attorney General's office, followed
by civil actions from trial lawyers, may have accomplished what
Katrina did not, delivery of a potentially lethal blow of
uncertainty to the viability of a private homeowner's insurance
market in the State.
To summarize, the record $80 billion paid to 5\1/2\ million
policyholders over the course of the 2004, 2005 hurricane
seasons is a vivid demonstration of the vital role played by
insurers in helping families, businesses, and entire
communities recover from the devastation wrought by major
disasters.
Unfortunately, in some States, misguided legislation and a
surge of litigation have increased uncertainty to intolerable
levels, leaving insurers with few options other than to reduce
their exposures to these States.
To conclude, the insurance industry is committed to working
in partnership with public policymakers, consumers, and
businesses in developing fact-based solutions to the formidable
challenge posed by Hurricane Katrina and other disasters and
continuing our tradition of helping families, businesses, and
communities wherever and whenever disaster strikes.
Thank you for the opportunity to address the committee
today, and I'd be happy to answer any questions you may have.
[The prepared statement of Dr. Hartwig can be found on page
105 of the appendix.]
Chairman Watt. Thank you for your testimony. Attorney
General Hood is recognized for 5 minutes for his testimony.
STATEMENT OF THE HONORABLE JIM HOOD, ATTORNEY GENERAL, STATE OF
MISSISSIPPI
Mr. Hood. Thank you, Mr. Chairman. I'm honored to be here
today representing the State of Mississippi as Attorney
General.
I'm here to tell you that there were three storms that have
occurred as a result of Hurricane Katrina. One was Katrina
itself. The other was the failure of the insurance industry to
pay what it owed. And now we're facing incredible escalation in
cost to reinsure to try to rebuild. This is the third storm
that we're presently facing.
There is a great misconception out there that somehow we're
trying to force insurance companies to pay for something that
they didn't insure. Their public relations machine has done a
wonderful job, including the Wall Street Journal, as the
chairman mentioned.
We're trying to make them pay for what they did insure.
They were supposed to insure for wind. As one of my assistants
pointed out, a saying that came up during the initial Clinton
Administration's campaign was, ``It's the wind, stupid.''
They're not even paying for what they insured, and they
used several methods by which they have accomplished that. Let
me give you an example. People down the coast--there were about
140 mile-per-hour winds. My home in Jackson, Mississippi, at
that capital is about 180 miles north of the coast, and it blew
the shingles off of my roof.
State Farm was my insurer. They didn't have the excuse not
to pay in areas such as where I live. It blew shingles off the
roof; I had my roof replaced; no problem. That's part of that
85 percent of those that they say that they have paid the
claims on. They didn't have the excuse of the anti-concurrent
cause provision that they have in their insurance policies, nor
did they have the exclusionary provision.
Now where the dollars become involved are those people who
were hit by storm surge, which is a relatively small strip
along the coastal area of the State of Mississippi. For
example, State Farm has one-third of the policies along our
coastal area.
They had approximately 9,000 homes that they had insured
that were hit by storm surge. About 1,200 of those 9,000 wound
up being just what we call slabs, nothing left, so those claims
have not been settled. And when they use the term that they've
been settled, that just means that they paid on them. That
doesn't mean that the homeowner is satisfied with the
percentage of payment that they may have given them.
So the misconception that we're trying to rewrite an
insurance policy--as Attorney General of the State of
Mississippi, I fired a lawsuit within a couple of weeks because
I saw where they were abusing their policy provisions, one
being this anti-concurrent cause provision. What that provision
provides, and let me point out to you that a very independent
Federal judge, who is a senior status judge, been on the bench
for years, from my area of North Mississippi, had no ties to
the coast, is the only Federal judge on our coast handling
these cases, a very learned judge, well respected by the Fifth
Circuit.
Judge Senter, in handling these cases, struck the anti-
concurrent cause provision. What that provision does is it says
that, well, during the testimony of the case that was mentioned
about the punitive damages occurring, what the insurance
companies did was they used satellite figures and determined
where the storm surge reached and in essence said that, ``We
don't know exactly what took your house out, but we do know
this from our studies, that storm surge would have taken it out
anyway.''
So during that trial there wasn't a Mississippi jury that
decided that part of the case as far as liability. A Federal
judge took it away from the jury and made a decision that the
duty of an insurance company is to prove the percentage of the
damage caused by the excluded peril, meaning the water
exclusion. So they couldn't even prove what percentage of it
was done by water through their own studies, much less what the
wind did, so the Federal judge directed a verdict and put a bad
faith instruction before the jury, and that's where they came
down with the punitive damages. Therein lies the problem.
People on the coast got hit with 140 mile-per-hour winds; you
know it knocked shingles off their houses, at least, when it
did 180 miles north at 100 mile-per-hour winds. Yet, when
people filed the claim, they got zero; they got nothing, as
Congressman Taylor pointed out, nothing.
A Federal judge with a $500,000 home gets a letter saying,
``We owe you nothing.'' That's because of the abuse of that
anti-concurrent cause provision that the Federal judge struck
as being, in essence, a bait and switch. You sell someone
something and then you take it all away because you know water
will be part of a hurricane.
That was the reason that we filed that litigation, to get a
quick answer, so it's not about the water; it's about the wind.
It's about making them pay what they owe.
How did they get around paying what they owed? They have
established a program called ACE. That's a handling program
adopted by State Farm, and what they did with this program is
to hide the double engineering reports that they had. One
person even had three particular reports on one property,
engineering reports, one saying water, one saying wind and
water, and another one saying wind.
So they hid these engineering reports and didn't disclose
it to the people. They established this wind and water protocol
September 13, 2005, shortly after the storm, which requires
that they--the protocol, it's a letter that went out to all
their claims people. It says that if water got in the way, in
essence the anti-concurrent cause provision, then you make the
National Flood Insurance Program pay it off; we don't owe any.
That's what happened to the taxpayers of America. They got
dumped on by the insurance companies because their adjusters
were out there saying, ``We're not paying for any of the wind
because water was involved.'' And so they didn't even try to
estimate a percentage that was done by wind that they owed. The
National Flood Insurance Program is owed money by the private
insurance industry.
I'll give you a quick example, and I'm not sure--it shows
stop, but I think I have 3 more minutes.
Chairman Watt. You're over, but we're being generous with
all the witnesses today, so I haven't gavelled you yet. Just
wrap up as quickly as you feasibly can.
Mr. Hood. I will finish briefly. In our remarks, we set
forth some examples of people who had double engineering
reports and weren't told. Those have been in the news media. I
have to be careful about giving examples that--none of this
information came from our grand jury investigation, which is
still ongoing as far as other companies that are involved. And
perhaps in this case if the settlement doesn't go through, we
may be dealing with that in the future.
One last point I would like to make is how the industry--
and this is why we need Congress to get involved. The industry
threatens States, particularly one with 2.8 million people like
the people of the State of Mississippi. State Farm, I reached a
settlement with them. They indicated they were going to stay in
Mississippi, that's the whole reason to reach a settlement; if
I'd indicted them, they'd have left the State completely, every
office shut down, and one-third of our insurance market gone.
I settled it to keep them there, but what did they do? They
turned around later and left the State to threaten a Federal
judge, intimidate our legislature, and to intimidate the
justice system in Mississippi. And I suspect that that's what
they will attempt to do here as well. They've done it in New
Jersey and other States, threatened to leave. And I think their
antitrust provisions need to be revoked and some regulatory
authority placed over them at the Federal level.
Thank you for indulging me, and I'll try to answer any
questions I can.
[The prepared statement of Mr. Hood can be found on page
122 of the appendix.]
Chairman Watt. Thank you so much. I thank all three
witnesses, and we will now recognize Members of Congress,
subcommittee members first, for 5 minutes of questions each.
Mr. Maurstad--I recognize myself for 5 minutes--how does
this adjustment process actually work? If you have a private
insurance carrier and a flood insurance policy also, who does
the adjustment? And just talk us through how you work that.
Mr. Maurstad. If the company is the State wind pool and
covers the wind, and the flood program covers the flood, then
we have an agreement with the State of Mississippi, the State
of Alabama, the State of Florida, and other States, a single-
adjuster program where one adjuster goes out and determines
what the appropriate responsibility, the appropriate liability
for both the State interest in the wind pool and the Federal
interest in the flood pool, and there is an agreement that we
will recognize that adjuster's work.
Chairman Watt. To whom does that adjuster report? Who is he
answerable to?
Mr. Maurstad. He is answerable to both programs, but I
would say he is most answerable to the policyholder to make
sure that the policyholder is treated fairly and promptly.
Chairman Watt. Well, that would be in an ideal world, but
who is he answerable to other than the policyholder?
Mr. Maurstad. There is a preassigned, independent adjuster
company in Mississippi. I'll just use Mississippi as the
example. There's a preassigned, independent, adjusting firm
that the State has acknowledged is going to handle these types
of cases where it's the State wind pool and the National Flood
Insurance Program. And so the State reimburses them, we
reimburse them, but I would say that there would be joint
responsibility for the actions of the adjuster.
Chairman Watt. Maybe I should get to the question a little
bit more directly. Is your testimony that it's your belief that
the National Flood Insurance Program didn't pay any claims that
should have been paid by private insurance carriers?
Mr. Maurstad. I have no knowledge at this point that there
have been any claims that have been paid by the Flood Insurance
Program that were wind claims that should have been paid for by
the private sector, so we have a rigorous program of oversight
to make sure that the Federal interest doesn't go beyond its
responsibility to the individual policyholders.
Chairman Watt. The distinction between this wind pool and
private companies--
Mr. Maurstad. Well, there is a distinction.
Chairman Watt. Okay. Well, tell us what that distinction
is. We're trying to get to the bottom of this so I can
understand it.
Mr. Maurstad. Yes, sir. The wind pool, as was indicated
before, is the market of last resort. When a homeowner or
business owner is not able to secure coverage in the private
market, they go to the State wind pool to get their wind
coverage, so that's a State-run program.
You will have other circumstances where you will have a
policyholder, a homeowner who has a homeowner policy or a wind
policy with one of the private insurance companies, that
private insurance company is also a Write Your Own insurance
company, and the Flood Program.
Now in our arrangement that we have with the Write Your Own
companies, they are responsible for going out and adjusting the
claim with a single adjuster so the consumer doesn't have to
deal with multiple adjusters. And again that Write Your Own
insurance company is responsible for making sure that they
allocate to the Flood Program only damages associated with
flooding.
Chairman Watt. Let me ask the question a slightly different
way. Are there any of the insurers in this class that the Flood
Insurance Program paid?
Mr. Maurstad. Mr. Chairman, I'm not sure if I understand
your question. Are there any of the Write Your Own companies
that were part of the class action lawsuit?
Chairman Watt. No, I'm asking you--there's a group of
people whose cases were settled--I mean still in process. Did
any of those people receive flood insurance payments?
Mr. Maurstad. I think it's very safe to say that certainly
there were a number of them who had a National Flood Insurance
policy. Our responsibility--
Chairman Watt. Did the National Flood Insurance policy pay?
Mr. Maurstad. Yes.
Chairman Watt. Okay. That's the question I was asking.
Mr. Hood, Attorney General, maybe you can talk to us about
how the actual process works when one has both flood insurance
and private insurance.
Mr. Hood. To directly answer your question, about 630 cases
were actually settled on the part of some private plaintiffs.
Many of them had slabs on which they got no payment for the
insurance company for wind--zero. That's some of the people who
were zeroed out. We know that there was damage from wind. The
National Flood Insirance Program paid 100 percent, you know,
$150,000 on the structure, and $100,000 on the contents of
those homes. So yes, there was damage that was caused by wind
that was not paid and the percentages, we don't know the
answers because of that private settlement.
Chairman Watt. Okay. I'm out of time, but is there a point
at which--for those individuals where you paid a claim and it
was subsequently determined either through litigation,
settlement, or otherwise--the Flood Insurance Program will be
reimbursed for any part of what it paid?
Mr. Maurstad. Our obligation under the policies--
Chairman Watt. I just asked you a simple question--will the
Flood Insurance Program be reimbursed for any part of what is
paid in those circumstances?
Mr. Maurstad. No, I would say no, because again, it's my
belief that the Flood Insurance Program only paid for the
damage that was associated by flood or the policy limits.
Chairman Watt. Notwithstanding a determination by a court
and/or a settlement, you're saying it's your belief that you
didn't pay any claims that you shouldn't have paid?
Mr. Maurstad. None have come to my attention.
Chairman Watt. All right. Mr. Miller is recognized for 5
minutes.
Mr. Miller. Following up on that question, I guess the
thing that I'm a little bit confused about is that when you pay
a claim associated with a flood, and the house is wiped off the
foundation, you obviously turn policy limits. I'm assuming it's
how you settle it. Would part of those policy limits include
something that might have been damaged by wind that you didn't
know about, like--I mean your policy limit has to include the
roof, it has to include windows, it has to include siding, and
it has to include whatever else might normally be damaged
during a hurricane or a wind storm. How do you differentiate
what might have been damaged and back that off of your
settlement versus what was damaged by flood?
Mr. Maurstad. Mr. Miller, that's a very good question, and
you're right on target. But I would start out by saying that
storm surge is a part of the flood, so if the storm surge
caused damage to the roof for example, that you wouldn't
normally think--
Mr. Miller. Well, if the house is wiped out, it did damage
the roof.
Mr. Maurstad. That's correct. And that's part of the
covered responsibility of the flood insurance program. But what
we did was go through and do a calculation, number one, to make
sure that the damage to the home in fact didn't exceed the
policy limits because we're only going to pay what the damage
was or the policy limits.
But in most cases with the underwriting information that
was available, with either physical observation or knowing that
all that there is is a slab, you can do a calculation and come
to a good estimate that--
Mr. Miller. Mr. Taylor's comments were very, very good and
I appreciated those, when he talked about the roof being blown
off and that wasn't handled by the casualty company, you know,
that it was just passed. Was there some deduction made on flood
because you figured part of it could be attributed to wind
damage?
Mr. Maurstad. No. Again, in the case of the flood policy,
we would pay for all damage caused by the storm surge
regardless--it could be the roof, and we can't differentiate
that it could be and the policy doesn't differentiate that it
could be covered elsewhere. The responsibility of the policy is
to pay for the damage caused by the flooding or the storm
surge.
Mr. Miller. Thank you for that. And Mr. Hood, Attorney
General Hood, your comment--and I guess when I made my
statement, maybe some people misunderstood what I was trying to
say. I think there are some deficiencies within the insurance
industry, as far as how the States handle it and how the
Federal Government looks at it. And there's some crossover, and
there's something missing because what we had in your case was
a Federal judge reversing a State approved policy because your
State approved policy had anti-concurrent clause in it. Is that
not correct? And that sounded like that was what you said that
the policy had in it and that's what the insurance industry
used as a basis for not settling on a claim and passed it on to
flood. Is that an accurate statement on my part?
Mr. Hood. Yes, sir. But the policy violated hundred year
State law on proximate cause.
Mr. Miller. But did your State insurance commission approve
insurance policies?
Mr. Hood. Yes.
Mr. Miller. That's what I was trying to make a point of in
my statement, that we have two things occurring here. You have
a Federal judge ruling that something might not be appropriate
or was improperly included within a policy, which I'm certain
you had a reason for doing that. Yet you have a State insurance
agency saying, yes, that's part of the policy.
Now whether the insurance industry bases their assessment
against the homeowner for insurance based on that, I mean I've
been in the building industry for 35 years, longer than that,
I'm getting older now that I think about it. But my liability
policy has all these exclusions, and when an insurance company
writes me that policy, they base that assessment against me,
how much I'm going to pay them, based on what they're covering.
And in California, I'll tell you, if you have a liability
policy as a builder, they don't cover town homes and
condominiums and they don't cover hillsides, they don't cover
subsides. They don't cover all those things. They write me that
policy knowing that, and I guess my concern, and Mr. Watt, what
we need to look at--and I've been arguing for 8 years in
Congress about options that we might have as a Federal
Government in oversight of the insurance agency considering all
the different regulations, all the different States have, and
they're all applied differently, is that we have States writing
policies that include anti-concurrent clauses, which the
insurance companies obviously are basing their rates on that
clause because they're considering what their liability might
be when this happens with a major hurricane.
But I'm not saying who's right, I'm not saying who's wrong,
but it looks like there's a problem and that a Federal judge
has to overturn a State insurance agency for writing a policy
that some insurance company based their risk on.
Now Mr. Hartwig, you said some interesting things, and one
thing that was brought up was profit by the insurance
industries, and I don't know what's excessive, and I don't know
what's not excessive. But I know that States, the way they
allow their insurance companies to assess premiums to people,
in California, they're not going to allow the Gulf Coast risks
to be assessed against California, nor is--I'm assuming
Mississippi or other States are going to allow an earthquake
risk, a fire hazard risk in California being assessed against
them and their policies.
So I'm just curious how the insurance companies do in the
States that had the hurricane. I mean was there a profit in
those States when this thing was said and done?
Mr. Hartwig. It's a very good question, Mr. Miller. In
States where hurricane activity occurred in 2004 and 2005, let
me give an example of the State of Louisiana. In Louisiana,
Hurricane Katrina wiped out 25 years worth of homeowners
premium and every dime of profit ever earned in the history of
the State. In Mississippi, 17 years worth of premium were wiped
out, along with every dime of premium ever earned in the State.
By law in all 50 States, and as we've already discussed,
insurance is regulated at the State level, fundamentally the
rates in each State must reflect the experience of that State
and that State only. So as you've rightly pointed out there can
be no subsidy for homeowners in Mississippi or Louisiana from,
say, homeowners or drivers or worker's compensation policies in
the State of California. That would certainly be patently
unfair. And in the same way, we wouldn't expect in some other
part of country that there would be a subsidy coming from the
States of Florida or Louisiana.
Mr. Miller. I know my time has expired, and I thank you.
There are so many questions to ask and so little time to do it.
Chairman Watt. We may do a second round, so we may come
back to you. The gentlewoman from California is recognized.
Ms. Waters. Thank you very much, Mr. Chairman. Quickly, Mr.
Maurstad, I think you made the statement that the Flood
Insurance Program does not deduct for wind, and I think I heard
that the private wind insurers deduct for water. What did you
mean by that? Do you--
Mr. Maurstad. What I meant--thank you for letting me
clarify. What I meant to say is our obligation is for the
damage caused by floods and/or storm surge in the case on the
Coast. And we can't--so whatever damage was assessed that was
caused by those two perils, that's what we have to pay, or the
policy limits. And so we don't really get beyond determining
what was damaged, other than what was damaged by the flood or
the storm surge.
Ms. Waters. Well, I know. That's what I thought you meant.
If you knew, or if there was some indication that some of that
damage was caused by wind, you would not be paying that
portion?
Mr. Maurstad. Well, we couldn't pay for that, because the
policy doesn't allow for damage caused solely by wind to be
picked up by the Flood Insurance Program.
Ms. Waters. But as I understand it, you could have damage
that occurred by both--some by water and some by wind. Are you
telling me you do the assessment, you have the information, you
just pay the water, you don't pay the wind, or you don't take
any of that into consideration? If you have some coverage
there, you pay everything?
Mr. Maurstad. If we--if there is damage that's caused by
both flood and wind, we are obligated to pay for that damage.
Ms. Waters. Oh, so they do. Okay. Thank you. That clarifies
that. Let me just ask Mr. Hartwig, as I understand it, company
officials talked with each other. There was instruction to
adjusters, and that basically what the insurance companies did
is what we don't allow others to do. We normally call that
collusion. But since the insurance companies are exempted from
the antitrust laws, they can talk to each other. Are you aware,
or do you know if it is common practice for insurance companies
to talk with each other, and particularly in the case of
Katrina and Rita, was there conversation? Were there any
meetings? Did people get together? Did they talk about how they
were going to handle this?
Mr. Hartwig. Absolutely not.
Ms. Waters. I didn't hear you.
Mr. Hartwig. Absolutely not. There is no law in the land
that allows insurance companies to get together and conspire to
not pay claims or to fix rates. There's a misconception out
there about the so-called McCarran Ferguson Act, a 62-year-old
piece of legislation that provides a very, very narrow
exemption from antitrust laws. What that Act does is it allows
insurers to pool historical loss information and then project
that information for the purposes of setting rates at some
point in the future.
The impact of this is basically to allow smaller insurers,
which on their own don't have the same size database as the big
national companies in order to develop statistically
actuarially sound rates. It allows them then to compete with
the larger companies.
So, to give you an example, in the State of Mississippi,
you have, for instance, in the area of auto insurance, I
believe 46 out of the 47 auto insurers in that State have less
than a 2 percent market share. It's exactly those types of
companies that benefit from that very narrow--
Ms. Waters. All right. I just want to make sure that I
understand what you're saying, because Representative Taylor
has taken a very close look at all of this. But if you're
telling this committee that you are absolutely sure--and you
said absolutely not, that there was no discussion among
insurance companies about how they were going to handle these
claims, that there was no--and I'm not even calling it
collusion--no discussion, no sharing of information, no coming
together, no instruction at all by a combination of two or
more, then I'm going to put that in the record.
Mr. Hartwig. Ma'am, I am absolutely unaware of any such
conversations having ever occurred. Insurers do not--
Ms. Waters. Okay. That's different. You're not aware of it.
You don't know that it didn't take place?
Mr. Hartwig. I'm not aware of it.
Ms. Waters. All right. That's good. What do you think about
the repeal of the exemptions from--what is it? McCarran
Ferguson? Senator Lott says that perhaps we should all be
taking a look at that.
Mr. Hartwig. Well, as I just mentioned earlier on, McCarran
Ferguson is a very narrow exemption under the antitrust law,
which again allows basically one thing to happen and that is
the pooling of historical information.
Ms. Waters. So you think that it should not be interfered
with, it should be left as it is?
Mr. Hartwig. That's correct.
Ms. Waters. It should not be repealed?
Mr. Hartwig. It would have a negative impact on
competitive--
Ms. Waters. Okay. Quickly, on the 92 percent claims that
have been settled, would you explain to us what ``settled''
means? Does that mean that there were some claims that were
closed that didn't get a dime? Does that mean that there were
claims that were closed where people are very unhappy? Does
that mean that everybody got something? What does that 92
percent settlement that you talked about mean?
Mr. Hartwig. For the record, as of the first anniversary of
Katrina, the number is 95 percent.
Ms. Waters. Oh, excuse me. Ninety-five percent.
Mr. Hartwig. And I believe the number is even higher now.
Ms. Waters. All right.
Mr. Hartwig. But the term ``settlement'' essentially means
this. That the insurer and the insured, the policyholder, have
reached an agreement as to what will be paid. A sum has been
paid. It means that the insurer--
Ms. Waters. So none of them did not get anything? None of
them were zero payments?
Mr. Hartwig. A claim that was completely excluded, for
example, because it wasn't covered under the policy to begin
with wouldn't be in these statistics to begin with.
Ms. Waters. But you talked about the agreement between the
insurer and the claimant. And you're saying that there was an
agreement that nothing was owed. Is that right? Zero in some
cases?
Mr. Hartwig. A claim that is not compensable under the
policy to begin with never rises to the definition of a claim.
When a claim is--
Ms. Waters. But a claim in our--my humble opinion, whether
we beat the strict definition, if someone said, I've been
paying my premiums for 10 years. My house was damaged, and I
think you owe me something. We consider that a claim. Now you
don't, evidently.
Mr. Hartwig. We consider it a claim when there is some
damage that is compensable under the insurance policy.
Ms. Waters. My time is up.
Chairman Watt. The gentlelady's time is up, but we'll do a
second round, so--
Ms. Waters. Thank you.
Chairman Watt. Okay. The gentleman from Illinois, Mr.
Roskam.
Mr. Roskam. Thank you, Mr. Chairman. I want to just follow
up briefly on Mr. Miller's point, because I think that really,
as I'm listening, is sort of the main point. What we have here
is a disputed insurance contract essentially, and Mr. Hood, I'm
directing this towards you. So the pending litigation
essentially is regarding the use of the--what is the term of
art that we've talked about? The nonexclusionary?
Mr. Hood. Anti-concurrent clause.
Mr. Roskam. Anti-concurrent clause. And so, the--Mr.
Miller's point was that that has been--that was approved by the
State. It was allowed to be offered, and now you're challenging
it based on--it's not a fraud theory, is it? What's your
theory?
Mr. Hood. There are several consumer protection laws
applicable. All States would apply to this issue as well, I
would think. Consumer protection, ambiguous provisions, void as
against public policy, it violates State law.
Mr. Roskam. Okay. So then as we're moving--and that's
really an open claim. I mean, the Federal judge is going to
make a decision, or the circuit court judge--the district court
judge has made a decision, and I assume it's on appeal?
Mr. Hood. Yes, sir, that's correct.
Mr. Roskam. Okay. And then the larger question is, how do
you create the environment where companies want to come in and
do business in your State? That's really the rub of it. And
you're not suggesting that State Farm, for example, has an
obligation to do business in your State or that they somehow
violated the settlement agreement, are you?
Mr. Hood. As far as the settlement agreement in Federal
district court--
Mr. Roskam. Well, I assume the settlement agreement that
you structured?
Mr. Hood. They entered into a State court order in State
court agreeing to go establish a class and have it approved by
the Federal court. There's a hearing going on right now in
Federal court about that, so it's not--we're unsure at this
point whether they're going to be able to get it approved on
their terms.
But as far as the anti-concurrent clause provision goes, I
suspect, you know, you only challenge laws when you have such
catastrophic events as this. The California earthquake, you
probably wouldn't have an anti-concurrent clause provision
because you don't have water in that situation.
But were it to be challenged in other States just simply on
the consumer protection laws, I suspect in all 50 States it may
very well fail. Because what you're doing is you're selling
someone something and you're giving them nothing. Because in a
hurricane, storm surge causes 85 percent of the damage, and if
you try to put in the fine print--and nowhere in these
policies--nowhere--do they ever say the words ``storm surge.''
If you try to take that away without notifying the consumer
and take away 85 percent of the damage from a hurricane, it's
sort of akin to a bait-and-switch, so I suppose that consumer
protection laws in all States may apply.
And, Mr. Miller, that goes back to your question of how do
they assume risk in those States. I think most companies in
Mississippi other than State Farm didn't abuse that provision.
They didn't push it. They didn't zero people out. Some paid
something to stay away from bad faith jury instructions. And so
others did not necessarily use that, as did State Farm.
Mr. Roskam. Let's assume for the sake of argument that the
appellate court upholds the district court ruling, and I assume
the order reads, you know, essentially void--you know, voids
the contracts under a public policy argument, which is
essentially what you're suggesting--then, how do you move
forward and create an environment where carriers want to come
in and insure your insureds? See, I don't have this problem.
And I mentioned this in my opening statement. I come from a
State where people want to do a lot of business and where
insurance companies are--they're kept on a short regulatory
leash, but it's not ridiculous.
And I've been involved in my previous--before I came here,
in terms of litigation, and have had some of these battles as
it relates to, you know, how an insurance policy is
interpreted, and I've been very aggressive in how those have
been construed, and you win some and you lose some.
But it strikes me that what will end up happening here, if
you're successful all the way up the food chain, is that you're
going to get to the point where Mr. Miller suggested, okay,
they just rewrite all the policies. And you win in the short
run. Claimants win this 5 percent or whatever it is, which is
your job as the attorney general.
But you can win the battle and lose the war, right? You can
get to the point where a large carrier says these people are
high maintenance and complicated, and we're not going to go
into jurisdictions where people--and I'm not suggesting any bad
faith here on the part of the judge or whatever, but, you know,
it's getting like everybody is a claimant or knows a claimant,
and so they kind of may feel, how do you get a fair shake in
this area? We're not going to go into jurisdictions that are
going to take our insurance contracts and act like they're an
etch-a-sketch and rewrite them for us?
And how do you then as the policymaker, or how do you as
the chief law enforcement officer in your State, create the
environment where a carrier says that's a place we want to do
business? Because taxpayers in my area don't want to subsidize
coastal living in your area.
Mr. Hood. Yes, sir. There are several answers involved in
your question as far as--that's why I reached a settlement with
State Farm, was to keep them in Mississippi. Because, you see,
after a storm, all the companies want to flee, especially one
like this. And so our objective was to keep as many there as
possible, and that's what they had indicated that they would do
is stay in Mississippi. Because you really--I mean, if you
don't have insurance, you can't rebuild, even if you get the
money, you know, you can't rebuild. So we realize that. We want
to create that market. But as to the issue of what the Federal
judge did, I suppose there again, these policy provisions are
not tested. They're approved by an insurance commissioner who's
not a lawyer, has no idea of what the separate branch of
government, our courts, have established as proximate cause.
You can't enter into an illegal provision in a contract. You
can't contract to kill someone.
So if this provision violates State law, and I would
respectfully submit, even in Illinois, where State Farm is
located, they're probably--their proximate cause law would be
violated by these anti-concurrent cause provisions. So it's not
void as against public policy. That was one of the issues you
asked that I raised in State court. The Federal judge issued it
as violating a long-standing State proximate cause provisions.
And so to create an environment to keep them there is what
we're trying to encourage them to do, and that's why we're
asking Congress for something, because they can punish
Mississippi. That's why they pulled out. They pulled out
because of that judge's decision, but it only affects storm
surge areas where those provisions apply, just down on our
coast.
It doesn't affect northern Mississippi where my good
friends that sell the insurance for them are being punished
because they can't sell new policies for State Farm. It was
meant to punish Mississippi and to make an example and to scare
us into doing things.
State Farm's 9 months in those six--they made $6.8 billion
net profit. That's more than the Federal Government gave us,
and thank goodness for what you all did of sending us money to
try to help rebuild, but we're just now getting that money on
the ground.
And so we settled this to try to complement that, to allow
people to rebuild. And we want those companies to stay, and
we're trying to do all we can to encourage them to stay, but be
punished by them.
Chairman Watt. The gentleman's time has expired. The
gentlelady from New York, Mrs. McCarthy, is recognized for 5
minutes.
Mrs. McCarthy. I thank you. Listening to this, I certainly
hope, Mr. Hood, that when you go back and everything is kind of
settled down, that you'll start reaching out to other attorneys
general throughout the State and have them change how the
language is written. I've been reading since I got here, and
you'd have to be a genius to figure out what's insured and
what's not insured. I mean, you really do.
I know when I came back from New Orleans, I looked at my
insurance policy. I'm inland, and I had no idea whether I
needed flood insurance, but I wasn't going to take the chance.
I found out I actually did need flood insurance, which brings
me back to FEMA. I was told that FEMA was redoing all the maps
along the areas. And I was just wondering, has your budget for
2008 increased differently from 2007 so that you'll have the
money to bring up the flood maps? Because from what I
understand, a lot of people didn't know they were in a flood
zone.
Mr. Maurstad. We are in the midst of, I believe, the third
year of a 5-year flood map modernization effort. It's a billion
dollar effort by the Congress. It's $200 million a year, along
with approximately $50 million from the National Flood
Insurance Fund to update our maps.
The Gulf Coast area was in the process of being updated. In
fact, some parts of the Mississippi coast, and some parts of
the Louisiana coast were within a couple of months of having
new preliminary maps provided to the communities to start the
adoption process.
Clearly, the hurricanes changed the coastline, changed the
dynamics, and we are continuing in the process and have the
funding in place to provide new digital flood maps for the Gulf
Coast area. We're hopeful to have--
Mrs. McCarthy. With that, are you working with the right
government--you know, mortgages. Are you--how are you telling
people you need to get flood insurance, especially if they have
a government-backed mortgage?
Mr. Maurstad. Sure.
Mrs. McCarthy. Shouldn't that be mandatory, by the way?
Mr. Maurstad. It is mandatory in the 1 percent annual
chance high risk area, and it is mandatory for all federally
backed mortgages. Of course, there are people with other than
federally backed mortgages, people without mortgages who
aren't--
Mrs. McCarthy. I don't see people along the coast in these
mega homes having a government mortgage for some reason.
Mr. Maurstad. Any federally backed mortgage. And so it's
the responsibility of the lender community to make sure that
those that are under the mandatory purchase requirements of the
Federal law, that they in fact, the person receiving the loan
does have a flood insurance policy. But there are many areas
that were outside the 1 percent annual chance that were
affected by this storm, because it was a greater than a 100-
year event.
To get to your question, what are we doing, we have a
public education and outreach and awareness program, Flood
Smart, to try to get people more attuned to what their risk is.
That's an obligation I mentioned in my testimony of the
program. And that takes all of the partners; the lenders, the
real estate, the insurance agents, the insurance industry, and
local elected officials who adopt flood plain management. It's
all of our responsibility to make sure that people who are
supposed to have a flood policy in a high risk area do have
that policy.
Mrs. McCarthy. Thank you. Mr. Hood, I'm just wondering, in
your State, and I don't know how it even works in my State of
New York, who picks those--we have an insurance commission, and
they go over, if the insurance company comes in and says all
right, here's the wording, who picks the the commissioners, and
who's watching them? And why are they accepting the kind of
language that even probably a very well educated person
wouldn't be able to figure out what the heck they're talking
about?
Mr. Hood. That's--in Mississippi, it's an elected insurance
commissioner, and I think in the majority of States, it is an
elected position, and it's his or her duty to approve those
contracts as they come in.
Mrs. McCarthy. Does that mean that person has to run for
office?
Mr. Hood. Yes, ma'am.
Mrs. McCarthy. Does that mean that person has to raise a
lot of money?
Mr. Hood. Yes, ma'am.
Mrs. McCarthy. No, I'm not going to ask that question. I'll
get in trouble.
Mr. Hartwig. Ma'am, just for the record, the majority of
insurance commissioners in the country are appointed. I think
there are only about 11 or so who are elected.
Mrs. McCarthy. But that's the point. Because I know in New
York they're actually appointed. The whole thing comes down to
I'm actually wondering who is actually protecting the consumer.
Because again, I've been reading this for probably a couple
of months since I came back from--and you can't make sense. I
went to my insurance agent, who I've had since I was 18 years
old, and I said, all right. Tell me what I have? Because,
blindly, I thought he was protecting me. And I asked him what I
had, what am I covered?
And then I started, to be very honest with you, because
most people don't go through--you know as well as I do, if you
take out insurance, this is what you're getting. And the
further back you go, because I did look at my insurance, the
smaller the print, and you have to figure out what each word
means. The average consumer is not going to do that, and they
will not. So a lot of things are hidden in here. All right.
Consumer beware. Fine. That means our committee or other
committees on financial services can certainly try to make that
a difference on the Federal level.
But I hope that, Mr. Hood, you do go back and start talking
to the attorneys general, because to me, as far as I'm
concerned, I met with our insurance companies back on Long
Island, and I said, ``Listen, I know that you you're concerned
about--you know, because we're Long Island. It's water. We had
heard they were thinking of pulling out, and I met with all of
them. No, we're not pulling out, you know, we haven't had a
hurricane. We did a press conference so we could reassure my
constituents and other constituents in the New York area. In 10
days they announced that they were--stopped writing, and were
going to start pulling out. No New York again. They're only
allowed to pull out 4 percent a year. So every year, they are
pulling out. And personally, I think it's obscene what they're
doing.
With that, I yield back the balance of my time.
Chairman Watt. I thank the gentlewoman. Mr. Mahoney from
Florida is recognized for 5 minutes.
Mr. Mahoney. Thank you, very much. I just have a couple of
questions. I represent a district, Florida 16, which has eight
counties, and up until that fateful morning in August when
Katrina slammed into the Gulf Coast, it was the site of the
single biggest natural disaster in North America. My district
has been hit no less than 4 times in 2 years, and one of my
communities, Punta Gorda, is still missing about 70 percent of
its downtown as a result of a hurricane. So this is something
near and dear to me. Mr. Hartwig, I believe you were giving
some statistics about the year that Katrina hit, as far as what
happened in the States of Mississippi and Louisiana. Could you
repeat that to me in terms of what the loss was and--
Mr. Hartwig. In terms of the amount of premium that was
washed away?
Mr. Mahoney. Yes.
Mr. Hartwig. I believe in the State of Louisiana it was 25
years worth of homeowners' insurance premium and every dime of
profit ever earned, and in Mississippi it was 17 years.
Mr. Mahoney. Okay. And that was in 2005?
Mr. Hartwig. Correct.
Mr. Mahoney. Okay. In 2005, when the dust was all settled,
what were the profits to the homeowners insurance industry
nationwide?
Mr. Hartwig. Nationwide, including every type of insurance
sold everywhere in the United States, all 50 States, was $43
billion approximately that year.
Mr. Mahoney. And that's homeowners insurance?
Mr. Hartwig. No. That's every type of insurance.
Mr. Mahoney. What do you mean by every type?
Mr. Hartwig. That would include all types of property
casualty insurance, everything from worker's compensation to
auto policies to commercial general liability policies.
Mr. Mahoney. Do you know the answer--let me ask you this
question--do you have a number on what profits were made on
homeowners insurance?
Mr. Hartwig. In which year?
Mr. Mahoney. In 2005.
Mr. Hartwig. In 2005 on a national basis, it would have
been a negative number, but I don't know the figure.
Mr. Mahoney. Okay. And over 25 years, is it a negative
number?
Mr. Hartwig. Over 25 years in terms of underwriting profit,
yes, it's a large negative number.
Mr. Mahoney. So--
Mr. Hartwig. Homeowners business, yes, on a national basis,
if you went back 25 years, has actually been a money losing
proposition for property casualty.
Chairman Watt. Would the gentleman yield for a second?
Mr. Mahoney. Yes.
Chairman Watt. Are you saying that insurance companies are
making their money on investments as opposed to premiums?
Mr. Hartwig. Insurance companies do make some money on
investments. However, homeowners insurance has been racked by
many major catastrophes. If you go back not just to 2004, 2005,
you can go back to earthquakes in California, you can go back
to Hurricane Andrew, which at the time was the largest disaster
in history. And again, it doesn't make a lot of sense to look
at these numbers on a national basis.
Chairman Watt. I'll yield back to the gentleman.
Mr. Mahoney. Yes. Let me ask the question a different way.
What you're testifying to today is the fact that if you took
all the premiums and the money that you made investing in this
premiums versus the losses in homeowners insurance, that it's a
net negative number for the insurance industry?
Mr. Hartwig. That's correct, yes.
Mr. Mahoney. Over the last 25 years?
Mr. Hartwig. Yes it is, sir.
Mr. Mahoney. Okay. And so the next question is, is why does
the industry--why do people stay in the industry of providing
homeowners insurance if it's a money-losing proposition?
Mr. Hartwig. In some States, it's not a money-losing
proposition. I'm giving you the numbers in the aggregate. For
example, in a State like Illinois, it's a profitable
proposition. But, particularly in the last 15 to 20 years, it's
become a very, very difficult situation, particularly in the
more catastrophe-prone areas of the country, and that has a
tendency to drive up the overall loss numbers on a national
basis.
In many States it can be profitable. However, the size of
the catastrophes are so large, particularly since, really if
you go back to Hurricane Hugo in 1989, which is now quite some
time ago, the losses in aggregate exceed the actual premiums
and investment income.
Mr. Mahoney. Okay. Let me ask you another question, Mr.
Hartwig, given the fact, what you're saying now is the fact
that a handful of storms over the last 25 years has resulted in
wiping out the profits of the homeowners insurance portion of
your industry?
Mr. Hartwig. There were, I think, 29 named storms in 2005.
I believe there were about 18 or 19 in 2004. There have
probably been over 100 named storms.
Mr. Mahoney. But those 29 storms have basically wiped out
the profits for that portion of your industry?
Mr. Hartwig. The profitability in the insurance industry is
going to be something that is both cyclical in nature and
volatile.
Mr. Mahoney. I'm just looking for a yes or no. I mean, you
said that homeowners insurance in the last 25 years has been a
money-losing proposition, correct?
Mr. Hartwig. In the aggregate, yes, on a cumulative basis.
Mr. Mahoney. Right. And I'm just saying that basically
these are coming from a relatively small number of storms,
right? That has wiped out the profit.
Mr. Hartwig. In relative terms, it seems that the number is
growing.
Mr. Mahoney. Okay. No, but I'm just--you know, I just want
to make sure that I understand what we're talking about here.
So I guess the next question I'm asking you is, is that, well,
obviously it says that it's very important where you write and
where you don't write, because if you write in the right
places, you can make money, and if you write in the wrong
places, like in my district, you can't make money?
Mr. Hartwig. Well, actually, the reality is, is that if
insurers are given the right conditions, they can operate under
very risky conditions.
Mr. Mahoney. Okay. So that's my next question, which is,
given the situation where we need to have an insurance industry
and people who the average American's investment in their home
is their single biggest asset, and the fact that the insurance
industry is, you know, an American industry and we're all
Americans and we need to make sure that we help people, what
would you recommend from the insurance industry's perspective
to be able to provide coverage to people in these higher risk
areas?
Mr. Hartwig. I'm glad you asked that question, because
that's a very fundamental question facing the country today,
not necessarily just in areas prone to hurricanes, but across
the country.
What we need to do in this country is redouble our efforts
to strengthen building codes, for example, and Florida has been
a leader there, but there's much more that can be done. Places
like California have also done a lot in terms of retrofitting.
We need to provide coastal dwellers with incentives to
retrofit and to mitigate their homes against disasters, and not
only does that preserve their homes, of course, but it
preserves lives.
Better land use policies would be another way to go. We do
have in this country, despite the fact that we've been raked by
hurricanes, we have an extraordinary amount of development in
very, very vulnerable areas. And so, as I mentioned during my
testimony, there's currently about $2 trillion worth of insured
coastal exposure in Florida. But despite the insurance issues
that we've heard about today, that continues to grow at about a
10 percent annual rate. So, land use policies are very
important, because otherwise, we're on the steady, upward
trajectory towards ever greater losses.
And of course, we need a commitment by legislators,
regulators, and others to allow risk-based pricing to prevail
everywhere across the country, including areas prone to mega
disasters.
Mr. Mahoney. Would you yield me 1 more minute?
Chairman Watt. I ask unanimous consent for 1 additional
minute for the gentleman.
Mr. Mahoney. Okay. Really quickly, I'd like to ask the
Attorney General, Mr. Hood, what do you think, based upon your
most harrowing experience that you've just gone through? What
would you recommend that we should do from a consumer
perspective to make sure that we're providing adequate
homeowners insurance coverage for people in our States?
Mr. Hood. I think we either need to have an all-risk policy
and require the private companies to write it in all areas of
the Nation in order to be licensed anywhere in the Nation, or
we do what Congressman Taylor has suggested, having a Federal
program to pick them both up. Because there is a natural
conflict of interest when you send out an adjuster who is
working for both, allegedly, to dump off on the taxpayer.
So I think we need fundamental reform in that area.
Mr. Mahoney. Thank you.
Chairman Watt. Let me, in the interest of fairness, ask
unanimous consent that a chart--maybe I should just put the
whole report in, since I don't want to appear to be unfair.
I ask unanimous consent to submit for the record a document
prepared, the title of which is ``Property Casualty Insurance
in 2007: Overpriced Insurance, Underpaid Claims, Declining
Losses and Unjustified Profits,'' in which there is a chart on
page 19 that indicates that--that gives the profit and loss
ratios for the top seven property casualty insurers and
indicates that the industry net income for 2005 was 48.8
percent--I'm sorry--$48.8 billion.
And in the interest of fairness to Mr. Hartwig, I was
looking at your testimony to see if you had submitted any
information to justify the numbers that you were giving us, and
noticed that you did not attach any to your testimony. But in
the interest of fairness, I would invite you to submit whatever
report you're working from, and we will enter that into the
record also.
I'm only interested in getting a fair picture here, and I'm
not trying to get into a debate about whether insurance
companies are making profits or not making profits.
Mr. Hartwig. And I'll be happy to supply that information,
which will show insurer profitability over a very long period
of time, and just for the record, for the 19th consecutive year
in 2006, the property casualty insurance industry reported a
lower return on equity in aggregate than did the Fortune 500
group.
Chairman Watt. Well, that's fine. The report I'm looking at
goes back to 1987, and the only negative year for the industry,
according to this report, was 1992, of $2.7 billion loss for
the industry.
Mr. Hartwig. Well--
Chairman Watt. Every other--no, I'm sorry, 2001 was the
other negative year, $6.7 billion loss. But the facts will be
as they are. Both reports, whatever you submit, and this
report, will be in the record, and it will help us to try to
get a more balanced perspective on what we have. So we thank
you for submitting that.
We have now completed the first round for the committee
members, and we have already approved a unanimous consent
request to allow nonmembers of the subcommittee to ask
questions. And I would now recognize Mr. Melancon for 5 minutes
for questions.
Mr. Melancon. Mr. Chairman--and I wasn't in the room when
we started the initial--this hearing on this committee or this
panel. As the Oversight Committee, are we doing swearing in of
witnesses and panel?
Chairman Watt. We have not.
Mr. Melancon. We have not? Okay. Mr. Hartwig, I guess let
me ask you a few questions if I can. Insurance business is risk
takers and pooling of moneys to share--to cover losses and
expenses. Is that correct?
Mr. Hartwig. That's correct.
Mr. Melancon. Okay. Through the years as you go, and I've
looked at some of the returns--the statements on companies,
when in fact you had hard markets, soft markets, profits were
made either in the insurance business because you raised rates,
or in the investment side because you had dropped the rates,
and so you could lose 105 percent as long as you made your
money on the investment side. And is that not an uncommon
practice?
Mr. Hartwig. Insurers do earn, attempt to earn money on the
investment side of the equation. Of course, we have to make it
through days like yesterday where the stock market drops 400
percent--400 points. But it's also important, of course, that
insurers day in and day out do their job in terms of quality
underwriting.
Chairman Watt. Just for the gentleman's information, I
wanted to start the hearing with a moment of silence for the
stock market yesterday.
Mr. Melancon. Yes, 2001 wasn't pretty, and if this keeps
up, it won't be pretty again. So I guess what I'm looking at
and thoughts that I'm having is this. During those soft
markets, if homeowners insurance is a loss leader or a problem
for insurance carriers, why in fact are they discounting their
rates in competition with each other to go buy more business?
Because that's what they're doing by lowering their rates.
And when the market is hard, they're bringing them up,
they're restrictive on what they want to write. And part of the
problem, if you're correct in what you say that the losses in
Louisiana would have been over the last 25 years of premium, is
that not because the insurance companies are playing games with
their rates and then doing investment side earnings?
And had they stayed at actuarially sound rates, which was a
term that used to be used about 25 years ago, actuarially sound
rates, and put the reserves away rather than paying dividends
to the stockholders and bonus packages and severance packages
to their executives and getting into this reinsurance market
which allowed them instead of putting a million dollars in
reserve to put a quarter of a million, and then use the three-
quarters of a million in hopes that they wouldn't have the
losses, reinsurance would take it, and then they could disburse
profits again?
So the question or the point I'm trying to come to, to find
out is, had they kept actuarially sound rates and not played
the game of up and down competition based upon what the stock
market and investments were doing, would those numbers be the
same in losses in the States of Louisiana and Mississippi?
Mr. Hartwig. Insurers have made every effort to keep their
rates actuarially sound. They are regulated in such a way at
the State level. They have to charge rates that are adequate by
law. They can't be excessive, but they must also by law be
adequate. They are also independently reviewed in terms of
their total financial situation by ratings agencies.
We are one of the most regulated industries in the country,
both in terms of rates, but also in terms of solvency. So--but
occasionally, there are changes in the risk profile of parts of
the country, such as the Southeast, where we're being told by
the leading minds in meteorology that the next 15 to 20 years
are going to be characterized by more frequent and more severe
storms.
So what that means is insurers are going to have to adjust
to that higher plateau of risk, and part of that adjustment
means that rates will need to be commensurate with that risk,
but it means many other things, many of the things I mentioned
earlier on in terms of further strengthening of homes and
encouraging mitigation.
Mr. Melancon. And that's all well and fine, but agents are
encouraged by companies to discount and to go find those risks,
to write the volumes and to produce the volumes so that they
can have the volumes they need. Now what happens to me in
Louisiana, and it happens in every other State, is that the
agents are as threatened by the insurance companies' threats to
pull out, because that's their livelihood, as Mr. Hood said.
And so they're out there, and they don't want you to do
anything to them.
Now I've always been a State's rights person, but I'm
starting to wonder whether that's the right position to be in.
And I've always been against Federal control. But--and I don't
have a problem with regulations at State level.
But what I do have a problem with, and I guess the question
is, is you're taking pooled money. I'm Zurich Insurance, I'm
Cigna, I'm INA, whatever, you're taking pooled money, not
necessarily subsidized by any other area of the country, if you
are doing actuarial rates.
If you were doing actuarial rates, then your rate structure
for the Gulf Coast or the coastal areas of this country should
have been adequate, particularly over the long run, to cover
the losses. Is that not correct?
Mr. Hartwig. I think that if insurers had perfect knowledge
of the future, which they don't, which the greatest minds in
meteorology don't, which the regulators in the States of
Mississippi and Louisiana do not, then it is impossible to
forecast with complete accuracy what expected losses are.
Effectively what you're saying is how come we didn't foresee
the day and date and the magnitude of Hurricane Katrina? I
don't believe that's a reasonable thing to request of insurers.
But what we can do is gather the evidence, gather the science
and adjust our rates and our underwriting so that we can
provide for a better environment in a sound and financially
secure insurance industry that can operate in these areas.
Mr. Melancon. Now, Mr. Chairman, if I could then. The 2
years that you talked about that were statistically losses, if
we could take a look at what the stock market performance was,
if you could get the staff to do that, look at that and see
what the rate structures, if we could get that from the
insurance companies, the Insurance Institute, and let's see
were they discounting more, was the market performing higher,
so were you not taking discounts to buy business? I mean,
that's--and that's an industry thing. I was on that side at one
time.
Mr. Hartwig. First of all, this notion that agents, for
example, are encouraged to produce nothing but volume is
completely incorrect.
Mr. Melancon. I beg to differ.
Mr. Hartwig. Anybody can produce volume. The question is,
can you produce volume profitably? In other words, can you
wisely underwrite your business? No company can survive on a
volume-based model on its own.
In terms of the investment income situation, State
regulators explicitly require insurers to incorporate the
expected returns on the investment portfolio for the benefit of
policyholders. I worked for many years in a rating context and
testified at rate hearings around the country, and that was my
job to actually estimate what the offset factor was for
investment income, because by law, it accrues, at least in the
area of worker's compensation, to the policyholder.
Chairman Watt. The gentleman's time has expired, and I
recognize Mr. Taylor for 5 minutes.
Mr. Taylor. Thank you, Mr. Chairman. Mr. Chairman, I want
to enter into the record two letters, both claim to be signed
by the same claims adjuster, that involve a couple standing
over there, and that would be James and Jo Dell Beckham.
In the first letter, the agent who is doing the adjusting
for State Farm says: ``Hurricane Katrina demolished the
structure, the superstructure of the residence such that only
the concrete slab of the home was left. High winds and flooding
forces from Hurricane Katrina were both significant in
structure to the damage. There was significant physical
evidence''--``There is insufficient physical evidence to
determine the proportion of the wind versus water surge.''
A couple of days later, another form shows up. It's
allegedly signed by the same person. It says: ``Storm surge
from Hurricane Katrina destroyed the residential building.''
This was signed by Paul Monie.
Only one problem, Dr. Hartwig, Paul Monie says he never
signed that second letter, that he had submitted it as a fraud,
with a fraudulent signature of his, and that fraud went on to
be quoted by State Farm when they wrote the Beckhams and said,
``Based upon the results of the discussion, site inspection and
investigation, it has been determined that damage to your
property was caused by flooding, rising water, tidal surge.''
Now that is an agent hired by State Farm, who submits a
form that says these folks' residence was destroyed by a
combination of wind and water. The second letter comes out that
he claims is a forgery, and State Farm denies their claim based
on this. I'm just curious. As a part of the Insurance
Information Institute, how would you classify that?
Mr. Hartwig. Sir, I can't--
Chairman Watt. And before you respond, let me just do a
couple of things for the record. Let the record show that the
people to whom Representative Taylor referred are here with us
today.
Mr. Taylor. Would you raise your hands, please, Mr. and
Mrs. Beckham? Thank you.
Chairman Watt. And, without objection, we will enter both
of those things into the record.
Now, Dr. Hartwig?
Mr. Hartwig. Thank you. Obviously, I have not seen these
letters, and I cannot comment on any specific claim involving
any specific company.
Mr. Taylor. Okay. If I may. I did pass to you a copy of a
memorandum that State Farm sent out to their employees shortly
after the hurricane, and I'm quoting: ``Damage to property
caused by flood waters with available flood policy. Where wind
acts concurrently with flooding to cause damage to the
insured's property, coverage for the loss exists only under
flood coverage.''
Now that is instruction from headquarters Illinois to
claims agents down in south Mississippi. It's really a question
for both you and the head of the Flood Insurance Program. I'm
curious when you said on behalf of the Flood Insurance Program
that there was wind and water, and you're going to pay. Because
I'm wondering what's your legal authority to make that
statement?
And let me walk back. The director from the Insurance
Institute says that, you know, claims were paid expeditiously.
In many instances, claims were paid that day. You know, it's
kind of funny, because I remember when the two ladies from
State Farm came to my property, and I walked them about 300
yards from where my house used to be, and showed them pieces of
my roof then asked them to count the steps back to my house.
And I said, okay--and I purposely asked them not to say a
thing. And then we got back to my house. I said, okay, ladies,
what did you see? After showing them my tin roof about 300
yards from where my house used to be, the first words out of
their mouth were, ``We see no evidence of wind damage.'' To
which I asked them, what were the floating characteristics of
tin? And I offered to walk them over to the bay, throw a piece
of tin in there and show that it didn't float. Which tells me
that in one instance, State Farm had already told those ladies,
blame it all on the water.
And we have a Federal agency that's supposed to be
responsible for looking out for the taxpayer saying, yes, let
them stick it to the taxpayers. I mean, I shouldn't be
surprised. After all, this is an agency that paid $16,000 per
trailer to haul a travel trailer from Purvis, Mississippi, down
to the coast, about 60 miles, plug it in, hook it up to a water
hose and hook it up to a sewer tap. I mean, it's not like you
guys have distinguished yourselves as good stewards of the
Federal dollar.
But on the flip side, in this instance, you are literally
the puppets of the insurance industry. You have a
responsibility to the Federal taxpayer--and I have to admit I
have mixed feelings on this. I think it's great that people got
their flood policies. They needed that. In fact, National was
the only insurance agency that was really fair with people down
there.
The flip side is, I think the taxpayers got stuck with
bills that State Farm, Nationwide, USAA, and others should have
paid. And I'm appalled that no one in your agency was looking
for things like this gentleman's forged engineering reports.
Can you think of any other Federal agency where someone can
send the Nation a bill for $100,000, $150,000, or $250,000 and
nobody ever looks to see if we really have to pay it? But
that's what you did.
Well, you said you didn't find any discrepancies, to which
I want to ask, how many times did you look? And did you look
very hard? And did you bother to look into this instance? And
I'd like both of you to answer those questions.
Mr. Maurstad. Well, let me start, sir, I mean, we take very
seriously our responsibility to only pay what the program is
responsible and obligated to pay for the damages caused by
flooding under the flooding policy. We take it very seriously.
We have a very rigorous program of oversight in place.
We--and so I don't--
Mr. Taylor. Would you walk us through that policy? Because
I didn't--as a citizen, I saw zero evidence of that oversight.
Mr. Maurstad. Well, there are a number of ways that we did
it. I included it in my testimony, my written testimony, and
alluded to it in my oral testimony. We have--assignment of the
liability of the policies is a part of the responsibility of
the random selections that are done to oversight the policies
by general adjusters representing the program. We do random
audits.
We do--whenever requested by either the policyholders, but
the insurance companies sometimes go out and review to make
sure that the amounts are being appropriately paid. It's
handled in audits of the company's performance. So there are a
number of ways, and I will provide you with the detailed
oversight that we have in place to make sure that what you're
talking about does not occur. It would be a violation of the
arrangement between the write your own companies and the
National Flood Insurance Program.
It's also a very--from the company's point of view, even
though this was a large disaster, still a very small part of
their overall operations. And they have told me on many
occasions, they're not going to risk their reputation and their
brand on small items such as we're talking about here--
Mr. Taylor. Mr. Maurstad, if I may.
Mr. Maurstad.--notwithstanding your individual claim, the
circumstances are that there are processes in place, and
there's no incentive for the companies to get caught with their
hand in the cookie jar.
Mr. Taylor. Well, to that point, Mr. Maurstad, and I'm
going to go back to my individual circumstance. Those ladies
were prepared to give me, and did give me a check that day. Can
you think of any other Federal agency that allows a private
company to write a $200,000 check that day without anyone
looking over their shoulder?
Chairman Watt. The gentleman's time has expired, so I'm not
going to let him ask another question, but I'm going to let
these two gentlemen respond.
Mr. Maurstad. There might not have been anyone looking over
their shoulder that day, but that file would be reviewed, and
it would be made certain that they didn't pay for more than
what you should have been paid under your National Flood
Insurance policy.
Mr. Taylor. But you accepted their statement that--
Chairman Watt. The gentleman's time has expired. I'm sorry.
Mr. Maurstad. Let me--if I could just conclude, because I
gave a slightly insufficient answer. If I could elaborate just
a bit.
Chairman Watt. Well, I don't want to cut you off, Mr.
Maurstad, but what you are saying now seems to be inconsistent
with what you said before. Because I gave you the opportunity
to tell me whether The National Flood Insurance Program had
overpaid any claims. You say that you're not looking at it on a
daily basis, but that you're reviewing later, and you
determined that none of these claims were overpaid. So it seems
to me that you are already on the record on this question.
Dr. Hartwig, there was another question that I can't
remember what it was that you've been called on to respond to.
If you remember the question, we'll get your response.
Mr. Hartwig. I don't remember what it was either.
Chairman Watt. But we need it quickly.
Mr. Hartwig. Well, let me just respond this way, that
insurers make every effort to pay every amount that is due
under the terms of the insurance contract for the types of
coverage for which people purchased that policy. And so
insurers and adjusters work diligently to make sure that
occurs.
And getting back to the numbers, again, $41 billion, the
lion's share of that being in the homeowners area, is really a
demonstration of the fact that our insurers are doing that. And
let me just put things in proportion. Even in the cases of slab
claims, for instance, in the majority of those cases, to my
knowledge, insurers were paying money as well. So, this notion
that there was some sort of blanket denial of various types of
claims is untrue.
Chairman Watt. Thank you. The gentleman from Mississippi,
Mr. Thompson is recognized for questions for 5 minutes.
Mr. Thompson. Thank you very much, Mr. Chairman. Attorney
General Hood, as you know, I represent a portion of the
district that received some damage from Katrina, and I know
that you have been investigating a number of claims with
respect to Hurricane Katrina. And you know that there are
several Congressional committees who are looking at many of the
issues. Have you shared with the local U.S. Attorney's Office
in Mississippi your work?
Mr. Hood. Yes, Mr. Chairman, we have tried to work with
them. The example that Congressman Taylor just gave about the
forgery, the forged engineering report, one said it was wind,
the next one says it was water. If I'm correct about that case,
that's a situation where I think the forgery actually occurred
in another State. We needed the Federal Government engaged and
involved in working on these type of cases, as well as the
National Flood Insurance program issue, as to whether or not we
taxpayers had to shoulder costs that should rightfully have
been paid by the insurance industry.
And part of the numbers that we've been talking about, the
profits, and why they've increased and actuary tables, one of
the things that the companies have adopted is this ACE program
State Farm was sold by McKenzie Consulting out of New York.
What it's done is--State Farm is just an example. Allstate
purchased it and others have done it as well. In 2002, State
Farm returned 70.6 percent of the premiums to their
policyholders. After implementing some of this ACE program, it
went in 2005, they were only returning 51.6 percent, the most
catastrophic year in history.
What they're doing is, they're using these engineers, these
so-called independent engineers, and what those are doing at
this program is they jettisoned all their adjusters, their
engineers, and they were able to use someone who is supposedly
independent when they do 85 percent of their business just for
State Farm.
Mr. Thompson. Would you be willing to share your work with
this committee and other Congressional committees as we go
forward in looking at this?
Mr. Hood. Yes, sir. And there were examples I had that I
was unable to disclose because of grand jury secrecy. We have
those documents and would be happy to share them with the
committees.
Mr. Thompson. Mr. Chairman, if I might add, would it be in
order for a request to go to the Attorney General to ask him
for the benefit of his investigative material?
Chairman Watt. We plan to leave the record open from this
hearing for 30 days to submit additional questions, and we will
consider any question that is submitted to us for submission to
the witnesses. I won't necessarily commit to ask it, but we'll
certainly consider it.
Mr. Thompson. Thank you, very much. General Hood, State
Farm and other insurance companies have portrayed themselves as
being besieged by Katrina victims who did not buy flood
coverage and now want someone to pay for their flood damage.
Isn't it true that State Farm and other insurance companies are
using any and all means to refuse to pay claims made under wind
policies for wind damage?
Mr. Hood. Yes, sir, Mr. Chairman. That's exactly what our
point is. It's a misconception that we're trying to change the
policy somehow. We're just trying to make them pay for what
they owe under the wind policies.
Mr. Thompson. Mr. Hartwig, in your testimony, you state
that an adjuster should apportion the loss if some damage was a
result of an excluded loss such as flooding.
Mr. Hartwig. Correct.
Mr. Thompson. Sir, if I take--so if I take that you would
not disagree with the practice of denying the coverage for wind
damage completely just because a portion of the damage was
caused by water?
Mr. Hartwig. If I understand your question correctly, I
think you're asking if the insurer would deny the claim
completely just because of some presence of water. The answer
to that would be no. That would not be practice in the
industry.
Mr. Thompson. And to your knowledge, there's no such
practice?
Mr. Hartwig. I am not aware of such a practice.
Mr. Thompson. With respect--have we put this in the record
yet? Mr. Chairman, just, again, Mr. Taylor has just reminded me
that this memorandum that the industry uses says just the
opposite.
Chairman Watt. Without objection, we'll submit that for the
record. You need to give me a copy of it so that we can get it
to the clerk.
Mr. Thompson. And I'll yield the balance of my time to Mr.
Taylor for further follow-up.
Chairman Watt. I'm afraid your time has expired, but with
unanimous consent, we'll give Mr. Taylor 2 additional minutes.
By unanimous consent, Mr. Taylor is recognized on Mr.
Thompson's time for 2 additional minutes.
Mr. Taylor. Mr. Maurstad, I really would like to get back
to this because as someone who knows a heck of a lot of people
who fall into this category, again, I want to, on behalf of all
of them, express our thanks that the only agency that was fair
with people was the National Flood Insurance Program. I did not
receive a single complaint from a single south Mississippian
that their flood insurance wasn't paid.
What troubles me is the apparent and total lack of
oversight on the part of your agency as to whether or not the
taxpayers had to pay claims that should have been paid by the
private industry. I have shown you a memo where a claims
adjuster says his name was forged on a fraudulent document. I
can get all of that as a Member of Congress. I have to believe
that your agency could have found that, looked into that
instance and determined whether or not the taxpayers were stuck
with a bill, in the case of this company, that State Farm
should have paid.
I don't recall a single--south Mississippi is a community.
We all know each other. Not much happens that people don't tell
me about. I can't think of a single constituent of mine who
said, you know, the folks from the National Flood Insurance
Program came by my property today to see if there was a fair
adjudication of their claim, whether it was wind or water. Not
one.
Now again, so when you're telling me you're looking to see
if we were treated fairly, I see no evidence of that. And that
troubles me, because the same year that those guys made $44
billion in profit, our Nation lost $20 billion in flood
insurance. I don't think it's a coincidence.
Chairman Watt. The gentleman's time has expired, so ask a
question and Mr. Maurstad can respond.
Mr. Maurstad. Well, Mr. Taylor, I mean, the program is
designed as a public-private partnership. There is a legal
between the write your own companies and the program that if
breached we would seek every remedy available to us to make
sure it was right.
But the situation, and what is key is whether or not in
your situation--you indicated, I believe that you said they
wrote you a check, the Flood Insurance program wrote you a
check for $200,000. That $200,000 represents the damage that
was caused by flooding, that the policy that you purchased is
obligated to pay you for. And that's what the program did
throughout the Gulf Coast, a hundred and eighty-some thousand
times.
We do have a rigorous program for oversight to make sure
that there are not common practices of the write your own
companies discharging their responsibility on the Flood
Program. We take that very seriously. That would be an
egregious act for the Flood Program to do that. And again, it's
not to my knowledge that it did happen. What did happen is in
situations like you indicated, and which I'm glad, quite
frankly, did occur, because we wanted policyholders to receive
what they were obligated by the Federal Government as quickly
and as fairly as possible, and that's what the focus is on,
notwithstanding what the insurance wind companies are obligated
for under their policies. We focus on the National Flood
Insurance policy, making sure that the damages from flood are
paid to policyholders.
Mr. Taylor. Mr. Chairman, I'd like to ask unanimous consent
for 1 more minute.
Chairman Watt. Do I hear any objection? Is this your last
question?
Mr. Taylor. Absolutely.
Chairman Watt. The gentleman is recognized for 1 additional
minute.
Mr. Taylor. Mr. Director, you made the statement that where
wind and water exist, the law says that the flood policy will
pay. I would like to see where that is in the code, and if it
is indeed the case, then I think you need to be spreading that
message to people in coastal America, because they may not need
to go through the heartache of having a State Farm or an
Allstate or a Nationwide tell them no. They may not need to pay
a policy if you're going to do that, but there definitely needs
to be a clarification. I'm not so sure you're talking within
the bounds of the law, but if you are, I would like to have
that publicized well so that people in coastal America can make
that choice for themselves.
Mr. Maurstad. And I will get that for you, but as a point
of clarification, I'm going to use the example of a roof. If
that roof is damaged by both storm surge and flood and wind,
the policy is obligated to pay for the damage associated by the
storm surge and the flood.
Chairman Watt. Okay. Without objection, we're going to go
an additional round for subcommittee members only and restrict
the time on this round to 3 minutes for each subcommittee
member. And I recognize the ranking member for 3 minutes.
Mr. Miller. Thank you. If any egregious act occurred on any
part of an insurer, they need to be held accountable. I think
there's no doubt about that. Mr. Hood, there's been talk of
collusion. Did each of these insurance companies handle the
claims in the same identical way where you think they went out
and talked and just came out and this is how we're going to do
it? Is there any evidence of that at all?
I mean, I know you're unhappy with some--the way it was
done, but is there--I mean, is it like a bunch of little Xerox
copies, they all met behind a room and everybody went out and
did the same thing?
Mr. Hood. Our investigation, and I can't really talk about
other targets other than those that have been publicly
disclosed, being State Farm, but most didn't zero people out
with that anti-concurrent cost provision.
Mr. Miller. Okay. So they were different. Mr. Hartwig, how
many claims do you think go through the State-run mediation
satisfactorily, and is the State system working in this regard
and the proper market conduct exams being conducted? And, you
know, if not, do we need more criminal prosecutions and
lawsuits because they're not being handled properly?
Mr. Hartwig. Well, with respect to mediation, thousands of
claims are being run through those systems in both Louisiana
and Mississippi, and if I go back to Florida in 2004 with those
storms, I believe a total of about 12,000 claims went through
that particular system.
Now, mind you, while 12,000 may sound like a large number,
that compares to about 2.3 million claims in that State that
year, so it's a very small number, and about 90 percent of
those were resolved successfully. In Louisiana and Mississippi
in 2005, that number is about 80 percent. So it's a good
system. It's a system that works.
Mr. Miller. It does work.
Mr. Hartwig. It's a system that's much more certain than
litigation. It's one that brings about resolution and closure
much more expeditiously and with much less cost. For instance,
a trial lawyer typically takes a third of the typical award.
In terms of oversight, there is a tremendous amount of
oversight in the system, again, consumers are protected at
every level through various Unfair Claims Practices Acts and
other acts that apply to the transaction of insurance.
Mr. Miller. Mr. Hood, you talked about basically vague,
ambiguous language within policies and such that were difficult
to enforce. Was that a correct statement I heard from you?
Mr. Hood. I don't recall--
Mr. Miller. You talked about some--I wrote down ambiguous
provisions within the policies that were hard to enforce. And I
noted that, because that was really problematic to me, because
the problem I've had and I've been stating all along is, you
have basic insurance commissioners or the Office of Insurance
Commissioners have to approve all of these.
And I'm just a poor builder, but I know any contract I ever
do, if it's vague and ambiguous, it's not enforceable. And
surely some insurance commissioner in Mississippi has got an
attorney. And if they're passing out and stamping insurance
policies that are vague and ambiguous, shame on them. If
they're stamping insurance policies that Federal judges have to
remove clauses from, shame on them.
And I feel sorry for Mr. Taylor and others who have lost
their home and such, but maybe we need to start looking in
several directions instead of just looking in one direction for
fault here, that if insurance commissioners, and that's the
problem I've had with as many agencies we have throughout this
Nation to determine policies and regulations they're going to
place on the business sector that they have to comply with and
people spend more time often and money in compliance than they
do trying to do their job.
But you need to look maybe internally, and I--you know, you
need to represent the people of your State. I'm not criticizing
you for that at all. But maybe you need to look back
internally. And if your insurance commissioner or their
agencies are approving polices that are not enforceable or
vague and ambiguous, maybe you as the attorney general need to
look back on Mississippi and correct that in the future. I
mean, that's where I'd go.
But, I mean, we can't just blame one side in this.
Mr. Hood. These policies are pretty much standard in
California or all--
Mr. Miller. Yes, but you approve them within your State.
You don't approve California's. You approve Mississippi's.
Mr. Hood. That's correct. But there again, you can't put a
provision in a contract that's illegal. You can't make a
contract--
Mr. Miller. But I can put a provision in that is not
ambiguous.
Mr. Hood. That's correct.
Mr. Miller. And you used the word ``ambiguous'' when it
came to settling a claim, because I wrote it down, because that
really bothered me. And when I talked to the chairman before, I
was concerned about the regulations we have that are not
working throughout this country and it's been demonstrated in
the Gulf States that there's a problem.
Mr. Hood. We submitted a bill in our State legislature
shortly after Katrina went through. It was a consumers
insurance bill of rights that required standard language, and
maybe the ambiguity came when I was discussing their failure to
place in their water exclusion the words ``storm surge.'' And
under law--
Mr. Miller. Additional 30 seconds?
Chairman Watt. Without objection.
Mr. Miller. My concern is that it's like you've been in a
bar fight. Well, we do things when we're in a bar fight we
might not otherwise do because we're angry. There are a lot of
people in your State who have been hurt because of a major
disaster, and there are a lot of insurance companies that lost
a lot of money, and, you know, they're trying to turn a profit,
too.
People on both sides are looking at this thing trying to
determine how to come out. I just pray that what you do in your
State doesn't create this exodus of the private sector. Because
if you do that, you can put all the language you want to into
law that says we're going to protect the people. But if they
can't get anybody to write a policy on it afterwards, then
you're not protecting your people.
And Mr. Chairman, I thank you for the additional time. I
yield back.
Mr. Hood. California--
Chairman Watt. I think he was just lecturing you rather
than--
Mr. Miller. I was lecturing.
Chairman Watt. He never asked a question, so I'm not going
to allow you to answer the nonquestion. Mr. Mahoney is
recognized for 3 minutes.
Mr. Mahoney. Thank you, Mr. Chairman. This has been very
enlightening for me today because I didn't realize for the last
25 years that the property and casualty industry has been a
losing money proposition. So I appreciate, Mr. Hartwig, of you
telling me that the insurance industry has been doing this as a
public service for the American people.
And as such, it makes me ask the question, which is, in the
State of Florida, you know, one of the things our insurance
commissioners are trying to do is they're trying to figure out
how to incent the insurance industry to stay in and to provide
services, their services to the people of the State.
And one of the things that happened in the State of Florida
as an incentive was the idea that we should provide insurance
companies the ability to operate ``pup'' companies or
subsidiary companies in order to operate in the State. And my
question, Mr. Hartwig, to you is, if it's already a money-
losing proposition, why would there be a need for an insurance
company to operate a subsidiary in a State?
Because in my simple way of looking at insurance is that
the bigger the pool, the more people that are, you know,
contributing to it, the safer it is for both the insurance
company and the person receiving the insurance in terms of
making sure that the claims are being able to be paid. Why
would these insurance companies in the State of Florida and
other States operate in subsidiaries as opposed to operating
just as a nationwide company?
Mr. Hartwig. A couple of things. First, your first comment,
the industry operating as a public service entity, that's not
been the case. When I talked about the fact that there's been
consistent losses for 25 years in the aggregate, I was
referring specifically to homeowners insurance.
But in terms of ``pup'' companies--
Mr. Mahoney. So homeowners insurance has been a loss leader
or a public service?
Mr. Hartwig. Not a loss leader. It's been a money loser.
Mr. Mahoney. Okay. And why would the industry continue to
operate if it loses money?
Mr. Hartwig. Again, as I said earlier on questioning, that
in aggregate, that has been the case, but not in every State.
And in some States like Florida, they've had a disproportionate
impact.
Mr. Mahoney. Okay. Thank you.
Mr. Hartwig. In terms of ``pup'' companies, if people
aren't aware of what ``pup'' companies are, effectively, they
are subsidiaries of insurance companies that operate in a
single State typically. And the question is, is why would an
insurer do such a thing?
There are a variety of reasons they might do it, in part
because usually these operations are set up in States where the
risk characteristics of operating there are significantly
different from the overall business. So, Florida homeowners
insurance would be a good example of that. You might have a
separately capitalized company. It has its own set of rates and
underwriting guidelines, and you run that company differently
than you would operate a homeowners insurer, say, in Indiana,
Illinois, or Ohio.
So the difference in the business is sufficiently great
that it needs to be handled differently, and that is basically
tied to the risk associated with operating in that State.
Mr. Mahoney. But that being the case, isn't one of the
benefits of having a subsidiary company to be able to protect
the parent in the particular case of a catastrophic loss
business event that would threaten the welfare of the parent
company? I mean, isn't that one of the benefits of subsidiary
companies?
Mr. Hartwig. The benefit and the rationale is to isolate
the risk. And it is very important that insurers keep in mind
their obligations to their millions and millions of
policyholders across the country. It is the case that no
insurer can afford to be brought down by its experience in a
given State. And I think it's extremely important. I mean, one
thing we've talked about here a lot about is insurer profits.
And there seems to be, I don't know, a need or desire to drag
these profits as close to zero, if not a negative number, as is
humanly possible.
The reality of it--
Mr. Mahoney. So you are agreeing that one of the things is
to protect the insurance company from being brought down, as
you said?
Mr. Hartwig. Part of the rationale for a ``pup'' company is
to isolate that risk.
Mr. Mahoney. Okay. That's my understanding.
Chairman Watt. The gentleman's time has expired. I'm being
stricter with the time, because we must clear this room for
another meeting.
Mr. Mahoney. I appreciate it, Mr. Chairman.
Chairman Watt. I recognize myself for 3 minutes, just to
ask a couple of questions to clarify.
Mr. Maurstad, Dr. Hartwig said that one potential solution
to some of this might be encouraging mediation of claims. I
have a memo that the National Flood Insurance Program
apparently sent out which basically prohibits Write Your Own
principal coordinators or participants from allowing mediation.
It says that your office apparently thinks that allowing
any State entity to engage in this process would subject all of
you to State regulation. Is that your position?
Mr. Maurstad. Yes. We do believe that there are
constitutional--
Chairman Watt. Okay. If it were clarified in legislation,
would that be helpful, in your opinion?
Mr. Maurstad. Well, that would reduce one of the objections
to it. I mean, part of it is that 99 percent of our claims are
handled without any legal recourse at all, and it's a resource
issue as to whether or not that's the only way that a claim can
be handled. The Reform Act of 2004 required and we've put in
place the appeals process for policyholders. So, in this case--
Chairman Watt. In other words, you have other objections
other than the fact that it was subject you to State
regulation?
Mr. Maurstad. Yes.
Chairman Watt. Why don't you submit whatever other
objections you have so that we have that information and can
make it a part of the record so that when people look at it and
other subcommittees consider possible solutions to what we are
trying to do here, we have a balanced approach on that?
Now I'm going to ask one more question of Mr. Hartwig,
because I'm a little concerned that this hearing has maybe been
misrepresented, and I just want to use this to send a strong
message to those out there who may be inclined to misrepresent
what we're trying to do here.
The ranking member told us, Dr. Hartwig, that you were
invited because you were an expert in insurance, and then I get
a memo that was sent out by representatives of State Farm
saying that you are here testifying on behalf of the insurance
industry. My question to you is, are you here testifying on
behalf of the insurance industry?
Mr. Hartwig. I'm here to testify on--as an expert within
the insurance industry.
Chairman Watt. All right. That's--
Mr. Miller. May I make one quick point?
Chairman Watt. Sure.
Mr. Miller. I selected him because I looked at his resume
as chief economist of the Insurance Information Institute. Our
side believed he was most qualified and knew more about
insurance than anybody we could bring before this committee who
was not working for any insurance company.
Chairman Watt. And I absolutely respect that. The point I
want to make here is that I don't think anybody who's been here
the course of this hearing today would suggest that I, as the
Chair, have not framed the issue in the most balanced way that
it could possibly be framed.
And I'm going to submit for the record, by unanimous
consent, this memorandum to the Great Lake Zone employees from
some senior vice president who first of all says that--
undermines Mr. Hartwig's testimony by saying that he's here
representing the insurance industry, and then undermines the
impartiality that we have tried to proceed under by
representing that no one from State Farm nor any other
insurance carrier has been invited to testify. We're going to
get to that.
But if you all would tell the folks at State Farm, I see
some of their representatives in the audience, that if they're
expecting to get a fair hearing, they don't get it by trying to
sabotage the hearing process that we have. We can't do
everything in one day, but I guarantee you, by the time we get
to the end of this process, we will have heard from everybody
in this process who wants to be heard.
And just to prove that, I'm going to ask unanimous consent
to submit for the record statements that today were submitted
by the National Association of Realtors, a statement of Gilbert
Randolph LLP on behalf of the Mississippi Center for Justice
and William Quigley, Professor of Law and Director of the
Loyola Law Clinic, and Gillis Long, Poverty Center, Loyola
University, New Orleans College of Law, a statement of the
Mortgage Bankers Association, a statement of Jeffrey Rose from
Lake Shore, Mississippi.
I just want to close this by making it clear that we are
going to continue to try to build a factual record in this
subcommittee, and anybody who goes out of here and suggests
that somehow we're on a witch hunt or they haven't been asked
to testify or won't be allowed to testify, please ask them to
call me before they send out these memoranda to their
employees, because I don't appreciate it.
Now the Chair notes that some members may have additional
questions for the panel, including the members who do not serve
on the committee but who participated in the hearing today.
Without objection, the hearing record will remain open for 30
days for members to submit written questions to these witnesses
and to place their responses in the record.
Without objection.
This hearing is adjourned, and we want to thank the
witnesses for appearing and testifying, and I've been asked to
request that you all kindly exit as quickly as possible to
accommodate the next meeting that's taking place in the room.
Thank you so much.
[Whereupon, at 5:25 p.m., the hearing was adjourned.]
A P P E N D I X
February 28, 2007
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