[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PERSPECTIVES ON NATURAL
DISASTER INSURANCE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 27, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-19
______
U.S. GOVERNMENT PRINTING OFFICE
35-411 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 JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Housing and Community Opportunity
MAXINE WATERS, California, Chairwoman
NYDIA M. VELAZQUEZ, New York JUDY BIGGERT, Illinois
JULIA CARSON, Indiana STEVAN PEARCE, New Mexico
STEPHEN F. LYNCH, Massachusetts PETER T. KING, New York
EMANUEL CLEAVER, Missouri PAUL E. GILLMOR, Ohio
AL GREEN, Texas CHRISTOPHER SHAYS, Connecticut
WM. LACY CLAY, Missouri GARY G. MILLER, California
CAROLYN B. MALONEY, New York SHELLEY MOORE CAPITO, West
GWEN MOORE, Wisconsin, Virginia
ALBIO SIRES, New Jersey SCOTT GARRETT, New Jersey
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
CHARLES A. WILSON, Ohio GEOFF DAVIS, Kentucky
CHRISTOPHER S. MURPHY, Connecticut JOHN CAMPBELL, California
JOE DONNELLY, Indiana
BARNEY FRANK, Massachusetts
C O N T E N T S
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Page
Hearing held on:
March 27, 2007............................................... 1
Appendix:
March 27, 2007............................................... 47
WITNESSES
Tuesday, March 27, 2007
Bennett, Malcolm N., President, International Realty &
Investments, on behalf of The National Multi-Housing Council
and The National Apartment Association......................... 22
Brown-Waite, Hon. Ginny, a Representative in Congress from the
State of Florida............................................... 16
Klein, Hon. Ron, a Representative in Congress from the State of
Florida........................................................ 11
Mahoney, Hon. Tim, a Representative in Congress from the State of
Florida........................................................ 13
McCarty, Kevin M., Office of Insurance Regulation, State of
Florida, on behalf of The National Association of Insurance
Commissioners.................................................. 18
Nutter, Franklin W., President, Reinsurance Association of
America........................................................ 31
Porter, Robert W., Executive Director, ProtectingAmerica.org..... 23
Racicot, Marc, President, American Insurance Association......... 29
Spragens, Ann W., Senior Vice President, Secretary, and General
Counsel, Property Casualty Insurers Association of America..... 27
Taylor, Hon. Gene, a Representative in Congress from the State of
Mississippi.................................................... 1
Thomas, Gary, Broker/Owner, RE/MAX Real Estate Services, on
behalf of The National Association of Realtors................. 25
Valdivia, Andrew, CPCU, ARM, President, White & Company Insurance
Inc., on behalf of the Independent Insurance Agents and Brokers
of America..................................................... 20
APPENDIX
Prepared statements:
Brown-Waite, Hon. Ginny...................................... 48
Klein, Hon. Ron.............................................. 52
Mahoney, Hon. Tim............................................ 55
Bennett, Malcolm N........................................... 62
McCarty, Kevin M............................................. 68
Nutter, Franklin W........................................... 86
Porter, Robert W............................................. 99
Racicot, Marc................................................ 105
Spragens, Ann W.............................................. 111
Thomas, Gary................................................. 119
Valdivia, Andrew............................................. 130
Additional Material Submitted for the Record
Klein, Hon. Ron:
Written responses to questions submitted to Franklin W.
Nutter..................................................... 139
Neugebauer, Hon. Randy:
Statement of Janice M. Abraham, President and CEO, United
Educators Insurance........................................ 142
Statement of Charles Chamness on behalf of the National
Association of Mutual Insurance Companies.................. 150
PERSPECTIVES ON NATURAL
DISASTER INSURANCE
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Tuesday, March 27, 2007
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:40 p.m., in
the Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Present: Representatives Waters, Cleaver, Green, Murphy;
Biggert, Shays, and Neugebauer.
Ex officio: Representative Bachus.
Also present: Representatives Watt and Feeney.
Chairwoman Waters. This hearing of the Subcommittee on
Housing and Community Opportunity will come to order. Without
objection, all members' opening statements will be made a part
of the record.
I would like to start by introducing each of our witnesses.
We have a panel of elected officials here, Members of Congress,
who are with us today.
On panel one we have: the Honorable Gene Taylor,
representing Mississippi; the Honorable Ron Klein, representing
Florida; the Honorable Tim Mahoney, representing Florida; and
the Honorable Ginny Brown-Waite, also representing Florida.
Without objection, the written statements will be made a
part of the record. You will each be recognized for a 5-minute
summary of your testimony. With that, let me just start with
Mr. Taylor.
STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSISSIPPI
Mr. Taylor. Thank you, Madam Chairwoman. And I want to
thank you for having a hearing to address a problem that
affects not just south Mississippi, but 53 percent of all
Americans; according to NOAA, 53 percent of all Americans live
in a coastal community. In 17 States, from the Gulf of Mexico
to the Atlantic Coast, the insurance industry, on a State-by-
State basis, is pulling out.
Long experience in south Mississippi is that, despite the
efforts of south Mississippians to board up their homes, and to
protect their goods, thousands of people lost everything they
owned the night of Hurricane Katrina. That was the first
tragedy.
The second tragedy was that within days of the storm they
were told that because there was wind and water that occurred--
even though they had bought all the insurance that was
available to them in both a wind policy and a flood policy--
they were denied wind coverage. In fact, it seems the only
people who were paid their wind claims in the beginning were
people who were eye witnesses to the devastation of the storm.
So now, Madam Chairwoman, what I'm going to ask you to do
is--in response to the fact that the insurance industry
apparently no longer wants to cover people for wind damage in
coastal America, or will not provide that coverage at a cost
that is reasonable--to consider legislation that will expand
the National Flood Insurance Program to include all natural
perils.
Under the rules of this House, it would have to be done in
a way that pays for itself. Thus, any argument that this would
be taxpayer-subsidized would be eliminated because under the
new Rules of the House, that is not an option. But it does
affect thousands of people.
And quite frankly, people should be encouraged to get out
of coastal areas in a time of a storm, rather than encouraged
to stay behind with a camera to record the event.
In my State, thousands of people have had to resort to
hiring a lawyer, hiring engineers, and having to go to court.
In fact, about the only people who have gotten justice were
either eyewitnesses, or people who hired high-profile lawyers
to settle their claims. That really shouldn't be the case.
In the case of the Flood Insurance Program, we allow the
private sector to write that policy, but we also allow them to
adjudicate the claim. So, as companies are issuing internal
documents that tell their employees to blame everything on the
water, and pay the flood claim immediately, that flies in the
face of their contractual obligation to our Nation, to a fair
adjudication of claims.
So, the present system isn't working. It's not working for
individuals who are affected by the storm, and it's not working
for our Nation's taxpayers, who paid the difference. I would
remind my colleagues that in the same year that the insurance
industry had $45 billion in profits, the National Flood
Insurance Program lost $20 billion. It doesn't have to be that
way.
Our Nation stepped forward in the late 1960's to come up
with the National Flood Insurance Program, because there was a
need that the private sector chose not to fill, and our Nation
wisely filled that need. I think it's time for our Nation to
step forward once again for a need that needs to be filled that
the private sector, for whatever reason, is choosing not to
fill, and that is for all catastrophic--whether it's a tornado
in Alabama, an earthquake in California, a fire in the Pacific
Northwest, as long as a person has built their home to the
proper standards, as long as they have paid their premiums, as
long as we can devise a program that is done in a way that pays
for itself, the people of America ought to be protected.
Because in south Mississippi right now, it is a common
occurrence for people who had 3,000-, 4,000-, or 5,000 square-
foot houses to be replacing them with 1,000 square-foot houses.
First, because they weren't paid their claim from the last
storm, and now they're being told, ``If you do rebuild, you're
going to pay 4 or 5 or 6 times more for insurance than you did
before.'' Quite frankly, no one I know wants to pay more on an
insurance note than they want to pay on a house note.
It just stands to reason that we have to do better. We have
to do better as far as building codes, and we have to do better
as far as the national flood elevation maps, which were so
grossly inadequate. It's in the Nation's best interest to do
this for the 53 percent of all Americans who live in coastal
America.
So, Madam Chairwoman, we have had many opportunities to
speak about this, but this is the first opportunity to actually
offer a piece of legislation. And so, I would very much request
that, at your convenience, some sort of a mark-up be held on
H.R.--I believe it's 94, with the opportunity to make the case
for that, as a stand-alone measure.
I welcome what my colleagues in Florida have to say today.
I don't believe reinsurance is the answer, but I am pleased to
see such a large delegation recognizing that the problem does
exist, and it exists not just for them, for Mississippi, for
South Carolina, and Alabama, but for the 53 percent of all
Americans who live in a coastal community, and who are looking
to their Nation for some help.
Chairwoman Waters. Thank you very much, Mr. Taylor. I
allowed you to give your testimony, because you told me that
you may have to leave a little bit early. But if you could
remain around, I will then move to allowing the members of the
committee to give opening statements.
And then, of course, for those members who wish to remain
around for some questions, we would like to have you stay. But
if not, we do understand that you all are under some time
constraints.
I would first like to thank the ranking member of the
Subcommittee on Housing and Community Opportunity, Mrs.
Biggert, for working with me to hold today's hearing,
``Perspectives on Natural Disaster Insurance.''
This is not a prelude to legislation on this issue,
although many of you are aware of the various bills that have
been introduceed to address natural disasters. Some of the
Members of Congress who have introduced bills, certainly, are
here today.
So let me just welcome the Members of Congress who are
testifying before the subcommittee. Again, I ask you to stay,
if you can, after you give your testimony, for questions. But
if you have to leave, we do understand that.
The issue of natural disasters and insurance has been front
and center in the 110th Congress, as well as in the 109th
Congress. If any of you have visited the Gulf Coast region
since Hurricanes Katrina and Rita, you understand that it is
essential that we come to grips with reality, and the potential
for another major disaster.
More than half of the City of New Orleans's pre-storm
population of nearly 450,000 remains absent from the City, and
large areas of the City are still uninhabitable. The estimate
of destroyed or severely damaged housing stock in the Gulf
region is as high as 300,000 units, representing billions of
dollars in lost equity, pain, and suffering.
We were not adequately prepared to deal with the aftermath
of Katrina and Rita, and there are many who feel that we are
still not ready for another major disaster. The National Flood
Insurance Program estimates that it will reach its $20.78
billion limit in September of 2007, through claims payments and
interest payments on outstanding debt. The NFIP has already
borrowed more than $17 billion, just to deal with claims from
Hurricanes Katrina and Rita. So, if we have a hurricane season
this year that is catastrophic in nature, will it be prepared
to address the additional claims?
Insurance is also one of the major obstacles to rebuilding
in the Gulf region. Both the Louisiana and the State of
Mississippi homeowners grant assistance programs have been
slowed, in part, by insurance issues.
Each time that I have visited the Gulf, and as recently as
February, when the subcommittee held hearings in the Gulf
region--New Orleans and Gulf Port, Mississippi, I have heard
countless horror stories related to the damage incurred as a
result of the hurricanes in the Gulf region, and the problems
with insurance.
Insurance is one aspect of recovery that we need to be able
to rely on after catastrophic catastrophe, to help make
people's lives whole again. The reverse has been true for many,
and many insurance claims have gone unpaid, or the claims paid
have not been commensurate with the damage to the property.
People cannot rebuild without adequate financial resources in
the aftermath of a natural disaster.
However, cost is critical. And many are not able to afford
insurance. While there are those who have limited and
inadequate insurance, prior to a disaster, in places like
California, many decided not to carry insurance at all,
precisely because they believed that the government will become
involved if a natural catastrophe occurs. We all know this is
partially true.
Many insurance companies do not offer flood damage
insurance. Many homeowners have the option to obtain a policy
under a State program, which is unaffordable for most, and it's
not carried by many, for this simple reason. In New Orleans,
only one-half of the households had flood insurance under the
government's National Flood Insurance Program.
Whether the cause of the damage is wind or water, most
homeowners merely want to be able to get on with their lives,
and have their insurance companies pay their claims.
Last year, the House supported national flood insurance
reform legislation, which takes important steps to make the
National Flood Insurance Program work, but we still have major
gaps in that program, and no program tied to natural disasters.
Today's hearing is a proactive step to establish an effort
to answer several questions. What role do insurance companies
play in natural catastrophes or disasters? How do insurance
companies assist in the recovery process? Or do they undermine
the process? Do the efforts of insurance companies support the
rebuilding process, where there has been a natural disaster or
catastrophe? Is there a role for the Federal Government, and
the States in partnership, to provide insurance in the event of
a natural disaster? What is the role of the reinsurance
industry in natural disasters?
I look forward to hearing from the rest of my colleagues
who are on this first panel today and, of course, from the
industry experts who will be on the second panel. I thank you,
and I will yield to Mrs. Biggert. Is Mr. Bachus here?
Mrs. Biggert. Yes.
Chairwoman Waters. Oh, there you are. I think I had better
yield to Mr. Bachus.
Mrs. Biggert. I would appreciate it.
Chairwoman Waters. Would you appreciate that? All right; 5
minutes. Thank you.
Mr. Bachus. I was actually hoping that Mrs. Biggert would
go first, so I could be more informed on the issue. But first
of all, let me thank you, Representative Taylor. I know that
the last 2 years have been very difficult for you, and for your
district, and I appreciate your testimony.
I also thank Chairwoman Waters and Mrs. Biggert for holding
this hearing.
Seven of the twelve most costly natural disasters in
American history occurred in 2004 or 2005, including Hurricanes
Katrina, Rita, and Wilma. Even if the frequency and severity of
future storms remains constant, as coastal development and
property values expand over time, loss exposures will keep
growing with new record damages certain to occur in coming
years.
And this prospect has spurred continued pressure for
government--you could call it involvement, or you could call it
interference, depending on your philosophy--in the marketplace.
One of my concerns for government involvement, or increased
involvement, is that the track record in the past has not been
sterling. Insurance has accumulated roughly $600 billion of
surplus, with tens of billions of disaster reinsurance
available, and additional tens of trillions accessible in the
investment market, seeking the highest rate of returns.
In fact, despite the enormous 2004 and 2005 losses, the
insurance industry still achieved record growth in profits and
surplus with relatively few insolvencies. The private market
has now proven it has adequate capacity available to handle a
$60 billion-plus event. The marketplace will not match the
continued growth in coastal insurance demand, unless it can
attract new capital by convincing investors that the rate of
return outweighs the perceived risk.
Investors want to know, will the government control prices
with rates required to be arbitrarily broken down and subject
to formal or informal rejection? Will the government dictate
what coverage can be afforded or excluded, and for how long?
Will the government mandate payment for other insurer's losses
through State-mandated subsidies of fair plans and guaranteed
funds? And will government programs directly compete with the
private market, undercutting fair prices through tax advantage,
credit-subsidized State pools?
If these questions continue to be answered affirmatively,
no amount of government safety net will bring back the private
market. Capital is highly mobile, and excessive government
interference becomes the disease, not the cure.
In particular, I am concerned about legislative proposals
in the aftermath of Katrina to impose an enormous potential tax
increase on all Americans to subsidize coastal insurance,
largely in response to the actions by a small number of
insurers who allowed their risk portfolios to be overextended
in the Gulf Coast region.
And as Congressman Taylor said, we certainly witnessed some
questionable conduct by a few of these insurance companies--I
don't think all of them--and I think some have been really
unfairly the target of criticism or scrutiny, because of the
actions of one or two. But certainly there has been some really
questionable conduct on the part of one or more of our
insurers.
I don't want that questionable conduct of one or more
insurers to lead to an overreaction by this Congress, or by
government officials, and we should not allow it to become the
foundation for Federal excess, in covering up the resulting
flight of capital. We should not force rural and middle America
to pick up the tab and insure insolvent State programs and
insurers that want to maintain their market share without
buying reinsurance.
Today, we will hear more testimony about whether the
government should increase its involvement in disaster
insurance.
I applaud the leadership of Congresswoman Brown-Waite and
her fellow Floridians on this. Members of this committee have a
long history of trying to establish a Federal backstop for
disaster insurance, going back well over a decade. Mrs. Brown-
Waite has also worked with Representative Moore from Kansas on
streamlining the non-admitted and reinsurance markets,
increasing insurance availability by reducing excessive
government regulation, and allowing the marketplace to function
more freely, in a bill that passed the House unanimously last
year.
I am disappointed that Representative Jindal was not
allowed to testify. He is not only an original co-sponsor of
several bills to increase available disaster insurance for
coastal consumers, but he is also the author of legislation to
eliminate the tax penalty on long-term catastrophic reserves.
According to insurance regulators, allowing insurers to
look forward, as well as back, on catastrophic losses, would
help to reduce short-term volatility in coverage available
after an event. This critical fix should be considered as part
of any comprehensive solution.
Let me simply close by saying that, Congressman Taylor, I
do--your idea about an all perils coverage, as opposed to just
water or wind, obviously, I think we--because of the events and
experiences we have seen along the Gulf Coast, there is a need
for us to at least consider some of what you--some of your
advice.
It does--it makes very little practical sense to have a
property on the beach, where you have wind-driven water, and
you find that the coverage--there is no coverage, because it
was water, even though it was driven by the wind. And although
that's the way the policies were apparently designed, and I
guess approved, by the State of Mississippi, and maybe the
State of Alabama--if we're going to have flood insurance, if
we're going to have a Federal program, if we're going to have
these policies, we certainly need to look at that.
And I would say this. I would solicit your advice as we
move forward, and will promise that I will keep, at least as
one member of this committee, I will keep an open mind about
this entire subject. And what I have read today is actually my
opinion, now. That's subject to change. So, thank you.
Chairwoman Waters. Thank you very much. I will yield 1
minute to the gentleman from Connecticut, Mr. Murphy.
Mr. Murphy. Thank you, Madam Chairwoman. Just to say--I
don't have a formal opening statement, but just to say I look
forward of the testimony of, certainly, my two fellow freshmen
members, Mr. Klein and Mr. Mahoney, as well as their colleague,
who has been leading on this issue for a very long time.
For those of us who are new here, and who have watched what
has happened to the Gulf Coast over the past several years, I
think we, as well as many other people, understand that it's
not enough for us to simply close our eyes and hope that this
situation gets better.
Mr. Klein, in his written testimony, talks about a
catastrophe financing plan at a national level, and I think
that the members of this panel will find a lot of friends from
throughout this country, who agree that this is a national
concern.
And although the colors may change as you go throughout the
country on a map such as that, what we watched happen--not just
to those people who had homes right on the water in Louisiana
and Florida, but those who made choices to live in their
hometowns miles and miles inward from those very coastal
areas--that's a national priority for many of us.
I look forward to working with the chairwoman, ranking
member, and those members of the panel on that national
financing plan. Thank you.
Chairwoman Waters. Thank you very much. I yield 5 minutes
to the ranking member of the subcommittee, the gentlelady from
Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you very much, Chairwoman Waters, and
thank you for holding this hearing today. I would also like to,
again, thank Mr. Taylor for his hospitality and his testimony
when we held the field hearings in Mississippi.
I will keep my remarks short, so that we can hear from
today's witnesses. First, I, too, wish that Mr. Jindal had been
invited to testify. He has some interesting market-driven
proposals to address insurance catastrophe issues; they fall
within the jurisdiction of the Ways and Means Committee, but I
think they warrant our attention.
Second, there are several questions that need answering
today. Is it necessary for the Federal Government to provide
reinsurance? Is there sufficient private reinsurance capacity?
If the cost of reinsurance and insurance is rising in the most
catastrophic-prone regions of our country, is it okay to let
the marketplace assess the risk and price insurance
accordingly?
If private insurance and reinsurance prices are high and
rising in the most catastrophic-prone regions of our country,
but the insurance is available, is it wise to set up the
Federal program that offers less expensive reinsurance, putting
taxpayers on the hook?
Third, I would like to mention that yesterday Chairman
Frank and I introduced H.R. 1682, The Flood Insurance Reform
and Modernization Act of 2007. After the 2005 hurricanes in the
Gulf Coast, it became abundantly clear that the National Flood
Insurance Program was at risk of becoming insolvent and needed
an overhaul.
The bill significantly reforms the program which provides
flood insurance coverage for consumers. It does that by
updating the Nation's flood maps, increasing enforcement and
accountability, and reducing the burden on the taxpayer. This
bill has been a long time in coming, but before we consider the
proposals to expand the National Flood Insurance Program, we
need to reform it, and make sure that it works.
I look forward to today's testimony and I yield back the
balance of my time.
Chairwoman Waters. Thank you, very much. We have two
members who are with us who are not members of the
subcommittee. I would like to request unanimous consent that
they be able to give remarks, and without objection, such will
be the order.
I will yield, before going to Mr. Feeney, to the gentleman
from Missouri.
Mr. Clay. Thank you, Madam Chairwoman. I will forgo any
opening statement today in order to hear from our colleagues,
and to let the other side present opening statements. Thank
you.
Chairwoman Waters. As I understand it, Mr. Neugebauer, you
wish to speak, or be recognized for purposes of presentation
for 3 minutes. I yield, to recognize you for 3 minutes.
Mr. Neugebauer. Thank you, Madam Chairwoman. Also, I ask
unanimous consent to enter into the record testimony submitted
by Janice M. Abraham, president and CEO of United Educators
Insurance and Reciprocal Risk Retention Group, of Chevy Chase,
Maryland.
Thank you. Well, I appreciate this panel here, and I know
that many of the people on this panel have been working
tirelessly on coming up with a solution to this issue.
Certainly, I am a firm believer, and agree with most
everyone, that we need to come up with a solution that doesn't
portion liability when we have these events. When somebody runs
into your car, or you back your car into a fire hydrant, what
happens to your car doesn't really matter. What happens to your
car if you suffer damage to your car, you know, your insurance
company is responsible for that.
And so, I believe that the products that are offered along
our coastline should be consistent, and that whatever the
perils that might inflict damage to that house are covered.
I think some of us--and I think the interesting part of
this debate will be--is what kind of solutions that we put in
place. I have said, and feel very strongly, that, quite
honestly, having a flood insurance and then a wind policy and a
hurricane policy, and having these divided coverages creates a
very similar situation to what Mr. Taylor was alluding to.
And so, what I would hope, as we move forward, is that we
look for a policy, working with the insurance industry--I
believe very strongly that the insurance industry needs to be
driving this train--what are ways that we can encourage market
solutions to this problem. I appreciate Ginny Brown-Waite
trying to bring, in some way, an incentive to this process to--
where the government has a--whatever minimal role it needs to
take, in order to be able to encourage the private sector to
come and offer products to do that.
Now, what this is probably going to entail--and this is not
something that everybody wants to hear but we have to make
sure, also, that whatever kind of plan we put in place has to
be actuarially sound. And so, in high-risk areas, the cost of
that commodity, or the insurance, is probably going to be
higher than in other places.
I live in west Texas, and on that map, we're susceptible to
hail storms and tornadoes and wind storms out there. I am sure
that we're paying a higher premium for living in that area than
some people who are not susceptible to that, but that's just
the part that goes with living in that area. I choose to live
there, so whatever the fare is, that's what I am going to pay
to live there.
But I don't think we need situations where companies are
trying to look for a way to get out of the liability, but they
have an actuarially sound policy, and when these disasters
happen, we have people down there with checkbooks, and not
lawyers, trying to keep from paying the claims.
And so, I look forward to this debate. I think this is a
good process, with a lot of interesting proposals on the table,
and I thank the chairwoman for holding this hearing.
Chairwoman Waters. Thank you, very much. I recognize Mr.
Shays for 3 minutes.
Mr. Shays. Thank you, Madam Chairwoman. And I thank the
ranking member, as well, for this hearing.
I just want to express, first, my particular admiration to
Gene Taylor, who sat in on the Katrina hearings, and provided
tremendous insight. And also, just for your whole attitude
during what took place, how you dealt with it personally, no
complaining. I think you should be very proud of the people in
your State, and how they have responded.
Just to say that I was there, a week after Katrina, and I
was stunned to be both in Louisiana, where we saw, really, the
bathtub of decay that occurred from the flooding of the levees
into New Orleans. But then, to be 10 miles inland, in
Mississippi, and see a water line 20 feet high. It literally
was a water line on a bridge over a road. I was told that
people used to bring their cars up there to protect them, 10
miles inland, and there was never any water, so to have 20 feet
of just water blew me away.
So, there is a part of me that says that kind of
circumstance we need to deal with. But where I have a bit of an
issue is folks right on the coastline who are clearly in a
high-risk area, and so I am going to be curious how I sort that
out. I think that insurance companies have figured into their
whole calculations that kind of cost, and I would not want them
to then put it on the rest of us. So that's one point.
I do think there is a difference between natural disaster
and a terrorist attack. And so I feel like, very clearly, the
government needs to step in. So I am kind of someone who has
real reservations, but still somewhat of an open mind about
what we do here. But I do see a difference between natural and
terrorist attacks.
But, again, I thank all of my colleagues, and I know Ginny
Brown-Waite a little better than I know our new colleagues, and
I have just tremendous admiration for all of you for being
here. Thank you.
Chairwoman Waters. Thank you, very much. I recognize the
gentleman from North Carolina, Mr. Mel Watt, for 3 minutes.
Mr. Watt. Thank you, Madam Chairwoman, and I won't take 3
minutes. I want to express my appreciation to the chairwoman
for convening the hearing, and my appreciation for her allowing
me to sit in and be a part of it.
The one thing that I think we all recognize in the
aftermath of these hurricanes is that the insurance payment and
adjusting process was broken in some ways, and that it had
multiple parts to it--flood insurance, private insurance,
various and sundry other parts--and none of them were working
all that well together.
So, the result was that policyholders and non-policyholders
came away, quite often, not feeling like they had been dealt
with in the most effective way. And as we try to address that,
the real concern I have is that we don't duplicate each other's
efforts.
We had a hearing in the oversight subcommittee on insurance
in general. I wanted to be here today to make sure that, as we
chart the next hearing in our oversight subcommittee, we don't
redo what another subcommittee has done, but we continue to
build the factual record for us to make an effective
legislative response to problems that have occurred.
And it's for that purpose I am here, and I appreciate the
gentlelady, the chairwoman, and the ranking member, for
allowing me to be a part of this, and I yield back.
Chairwoman Waters. Thank you, very much. I recognize Mr.
Feeney for 3 minutes.
Mr. Feeney. I thank the chairwoman. This is obviously a
very important issue to us in Florida. I have been a
policymaker since 1990 in the State legislature.
We have a lot of experience with hurricanes. We learned
some great lessons in 1993 with Hurricane Andrew. By the way,
my son was born in the middle of that hurricane in Orlando. If
I had known about his tempestuous personality, his name would
probably be Andrew and not Tommy.
But we learned an awful lot of lessons, and I worked with
my good friend and colleague, Ron Klein, and with my good
friend and colleague, Ginny Brown-Waite, in the Florida
legislature. By the way, we all know if that storm had hit 20
or 30 miles north, Congressman Klein, we would have been
looking at a $110 billion event, or more, and not a $20 billion
or $25 billion event. So, in some ways, we were fortunate, as
bad as it was.
We learned a lot of lessons during that event. I think that
Kevin McCarty, who will be testifying in the next panel, will
share some of those lessons that we brought with us.
I would say that no State, no contemporary State, has
thought more, or more successfully, about how to deal with
preparation for hurricanes, in terms of response, in terms of
the market abnormalities that occur in the aftermath, than
Florida. We have experienced it. If you watch the preparation
that occurred, and how we dealt with four hurricanes in a 3-
month period a couple of years ago, you will see that we have
learned some very serious lessons.
But perhaps nothing was more important as the lesson that
the hurricanes were not a partisan issue. They're an issue
with--where people on the ground have real needs that swamped
the ability of local or State governments.
Since we have three Florida panelists here, I won't go into
those details. Plus, Mr. McCarty--I am glad they--all three of
my colleagues from Florida and Mr. Taylor--are here.
When we're talking about the national CAT fund, or a State
and regional CAT fund, or some of the reinsurance bolstering
that Representative Brown-Waite has been a leader in, whether
we're talking about increasing reserve opportunities, all of
these are important things.
But I would like to reiterate what Mr. Neugebauer said, and
that is, ultimately, that actuaries and markets need to drive
this show wherever and whenever possible. When politicians and
bureaucrats drive this show, we're going to end up leaving
responsibility in places where the incentives are all wrong and
upside-down.
One of the bills I have provides for catastrophic savings
accounts. Representative Wasserman-Schultz and I filed that
last year. We intend to file it again this week, and it solved
some problems of tax equity. The Florida markets--some people
now have deductibles, for those in the audience, of as much as
$20,000 or more on their home in Florida. So we have a very
different market than much of the country.
Providing tax equity, getting people to think ahead of time
about how they protect their homes, and how they have resources
available, this doesn't work for everybody. But there are a lot
of people that this will help, and there are many ways that we
can, at a Federal level, adjust policy consistent with
actuarial soundness and markets that will not throw the baby
out with the bath water, and end up with a socialized property
and casualty market.
With that, I thank the chairwoman, and yield back the
balance of my time.
Chairwoman Waters. Thank you, very much. Now we will return
to our panel. The Honorable Ron Klein.
STATEMENT OF THE HONORABLE RON KLEIN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Klein. Good afternoon, Chairwoman Waters, and Ranking
Member Biggert. I sincerely appreciate the opportunity to
discuss natural disaster insurance before the subcommittee,
particularly in light of the very helpful comments that were
made so far today.
I hope that our presence at this hearing emphasizes the
seriousness of this problem and demonstrates our commitment to
move forward in identifying a national solution.
The 2005 hurricanes illustrated all too well how quickly a
natural disaster can change the lives of millions. The most
devastating of the storms, which struck from Louisiana to the
Florida panhandle, also dealt unprecedented losses through
residential, commercial, and industrial property. Hurricane
Katrina, in particular, opened many eyes to the problem of
natural disaster financing, and showed that it is up to us to
make sure that we are adequately prepared to handle a disaster
of catastrophic proportions, because it is simply a matter of
time before the next one hits.
As such, we must think ahead, proactively, to develop a
plan to address natural disasters before the next one hits,
rather than simply continuing to operate without a catastrophic
financing plan at the national level.
We have seen the consequences of large-scale disasters, and
the physical and economic destruction that accompanied them,
and must act responsibly and prepare to act responsibly.
We are all familiar with the sights and stories of
Hurricane Katrina, but we must also recognize that families
across the United States face a variety of other threats that
could rise to the level of catastrophic proportions, and hit
without warning. Many residents in California certainly
remember the devastation caused by the North Ridge earthquake,
which killed 60 people, injured 3,800, and caused $43 billion
in property damage.
Even with California's history of seismic activity, only
about 14 percent of Californians currently have earthquake
policies, which is a real eye-opening statistic. It only takes
one day of devastation from an earthquake, fire, volcano,
flood, or hurricane to make us wish that we had thought ahead
to establish a national system to deal with catastrophic
financing.
The economic impact accompanying natural disasters
resonates throughout our entire Nation. Total economic damages
from the 2005 hurricanes will likely exceed $200 billion, with
the Federal Government responsible for paying out an excess of
$109 billion for disaster relief. This money, which we all
agree was entirely necessary to spend, comes from taxpayers
throughout our 50 States, not simply from those affected
regions.
Those who say that natural disasters are a regional problem
limited to coastal States are dead wrong. Until we are able to
develop a national financing mechanism to provide certainty for
large-scale natural catastrophes, each taxpayer throughout the
United States will continue to be responsible following a
catastrophic event.
On the local level, more and more families across the
country are facing the real prospect of being dropped by the
property insurance company. Hundreds of thousands of homeowners
in my home State alone have been dropped, or slated for non-
renewal by their insurance companies, even after they paid
premiums for 15 to 20 years without making a claim. Those who
remain insured are confronted with crippling premiums, which in
some cases are forcing homeowners to make tough decisions about
whether they can go without property insurance, which of course
you can't do if you have a mortgage.
Take the case of one of my constituents. We have an
individual in my district who was paying $3,100 a year for
homeowners insurance in 2005. She is now coping with a premium
that reached $16,000 this year. That's a $12,900 increase over
2 years. How can we possibly expect families to make payments
each year to protect their homes.
Skyrocketing insurance premiums are posing a real threat to
homeownership, particularly among our most vulnerable
populations, such as the elderly. Older Americans, many of whom
are on fixed incomes, may even have to lose their homes
outright.
The property insurance crisis, as I said, is not isolated
to Florida, either. Last year, property insurers indicated they
planned to stop offering new coverage in Maryland, and in
Virginia's coastal markets. Property insurance carriers have
also stopped writing new policies for residents in parts of
Delaware, New Jersey, and Connecticut, no matter where in the
State the damage may be.
Furthermore, tens of thousands of homeowners in New York,
North Carolina, South Carolina, Alabama, and Texas have also
been dropped. It is impossible for property owners to be able
to get reliable coverage in these markets, and it's precisely
for this reason that we need to have a national solution.
Over the last number of weeks, I have worked closely with
Mr. Mahoney, Ms. Brown-Waite, Mrs. Maloney, and others,
including Mr. Taylor, who has a number of ideas, as well. We
have been working with Chairman Frank, who has asked us to work
on this, and who also believes the natural solution is
necessary. We are now discussing this issue with consumer
groups and other interested parties, and we are assembling bi-
partisan, multi-regional groups of Congressmen who collectively
recognize the problem on a large scale. We're looking forward
to a well-developed idea with a national backstop, much of
which will be identified with the private sector and private
sector financing ideas.
We will also be working to develop incentives for
mitigation standards, including property owners' exposure--
reducing property owners' exposure to natural disasters, which
will be an important part of reducing the national exposure. We
want to encourage responsible development through building code
standards and other means.
The time for action is now. With the Federal Government
clearly in the position of being the de facto insurer of last
resort, we hope to establish a more efficient system to foster
predictable coverage at reasonable rates.
Again, I would like to thank the subcommittee for holding
this hearing today on this very important issue, and I am
looking forward to working with all of you, Chairwoman Waters
and others, and Ranking Member Biggert, to develop an
appropriate solution. Thank you.
[The prepared statement of Mr. Klein can be found on page
52 of the appendix.]
Chairwoman Waters. Thank you, very much.
The Honorable Tim Mahoney.
STATEMENT OF THE HONORABLE TIM MAHONEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Mahoney. Thank you, Chairwoman Waters, and Ranking
Member Biggert, for holding this important hearing today, and
allowing me to discuss problems that the people of my great
State of Florida are having, coping with the devastating impact
of natural disasters and their struggles to meet those
challenges by having access to comprehensive and affordable
homeowner insurance.
Before I begin summarizing the insurance crisis facing my
district in the State of Florida, I want to make sure that this
committee understands that this isn't just a problem for
Florida; it's a national problem. States all around the Gulf
Coast, from Texas all the way up to Maine are facing similar
situations, due to hurricanes. My colleagues in California,
with earthquakes and fires, and my friends in Oklahoma and
Ohio, with tornadoes and floods; we're all facing the same
challenge.
The single biggest investment most Americans have is their
home. The increased occurrence and severity of natural
disasters, whether they be hurricanes, tornadoes, earthquakes,
fires, or volcanoes, has caused insurance premiums to rise. In
2 years, the Gulf Coast region was struck by seven major
hurricanes. Just one of those hurricanes, Hurricane Katrina,
caused more than $40 billion of insured losses; approximately
$15.5 billion of that amount was the result of homeowners'
claims.
Up until the moment Katrina ravaged New Orleans and the
Gulf Coast, my district, District 16, was the single biggest
disaster area in the Nation, with no less than 4 major
hurricanes destroying homes and businesses. Today, 3 years
after Hurricane Charlie ravaged the town of Punta Gorda, you
can still see the scarred downtown, and a community working
heroically to rebuild.
Despite no major storms during the 2006 hurricane season,
many Florida homeowners have seen their insurance premiums
double or triple during this past year. Earlier this month, one
Florida insurance company won an arbitration case that will
allow it to raise premiums on more than 22,000 customers by an
average of 75.8 percent.
As anyone who has ever had a mortgage, knows, insurance is
a requirement. And the payment of your insurance is non-
negotiable. This has created a vicious cycle of terror for our
seniors living on fixed incomes and our middle class families
struggling to provide for their children.
The toxic cocktail of rising gas prices, skyrocketing
property taxes, and exorbitant homeowners' insurance costs have
created a situation for the first time in our State's history
where we have more people leaving Florida than coming. It is so
acute that the real estate industry has a name for these
people, ``Half-backs.'' They move to Florida from the north,
and due to the out-of-control costs, they leave Florida, and
move halfway back, to places like Georgia, Tennessee, and North
Carolina.
Madam Chairwoman, in fact, one in five businesses in
Florida cannot get property insurance. In January, the Florida
legislature passed legislation that was intended to provide
consumers with rate cuts. Following the passage of this
legislation, a Florida insurance commissioner estimated that
the average rate cut for homeowners would be approximately 24
percent.
However, according to one Florida newspaper, Florida's
biggest private insurers are asking for price cuts far less
than State estimates. For example, State Farm, a Florida
insurance company, requested a rate reduction plan that seeks
to reduce the average premium in Florida by only 7 percent.
Likewise, USAA's requested plan would decrease premiums by a
mere 3.1 percent.
The situation is so severe that, in order to have
insurance, the people of my State had to get into the business.
Today, the State runs Citizens Insurance Company, the largest
provider of homeowners' insurance in the State. The solution to
our insolvent insurance company was to make it more
competitive, by offering fire and theft coverage, as well,
clearly the best solution our elected leaders could find when
the market failed.
The affordability of property insurance is not the only
obstacle facing my constituents. Millions of Florida's
hardworking families have paid their insurance premiums on time
for years. And despite the increased cost. In addition, many of
these families have never filed a claim on their policy.
Insurance companies have rewarded these responsible homeowners
not with rebates, but with non-renewal notices.
Just a few weeks ago, Nationwide announced that it would
continue with its earlier decision to non-renew policies in
Florida. As a result, 25,000 Florida homeowners will be
receiving notices that their policies will soon be canceled.
The recent action by Nationwide, as well as similar decisions
by their competitors, communicate that the market is broken,
and that they are willing to be part of a solution.
As these companies profit from the freedom, stability, and
prosperity this Nation offers, I believe that the industry
should consider its corporate responsibility, and join with
Congress and the American homeowners in finding a solution to
this crisis.
Chairman Frank, at a press conference on this very subject,
made the statement that, ``The role of government is to step in
when markets fail.'' I am here, Madam Chairwoman, to testify
that in my beloved State of Florida, the insurance industry is
broken, and as a result, the State is facing an economic
crisis.
Floridians are giving up their American dream, and are
being forced into foreclosure, or to make decisions not to take
their prescription medicine, so that they can afford to pay
their homeowners' insurance. Or, they're being forced to sell
their homes in a depressed real estate market, and leave the
State.
It is clear that homeowners across the country need a
national catastrophe insurance program. The program that we in
Congress create must assist our private insurance industry, to
help them manage risk. Nobody got into the homeowners'
insurance business thinking that they would ever need to
underwrite the devastation of an Andrew or a Katrina.
Secondly, the homeowner needs to be protected, as it
relates to the availability of homeowners' insurance. The
policies they purchase must be comprehensive, eliminating the
loophole between wind and water.
Finally, responsible legislation must ensure people take
responsibility for their decisions to live in high-risk areas.
Good legislation should not give people and builders a blank
check to ignore risk. Good legislation must provide homeowners
and builders with incentives to mitigate risk by employing
state-of-the-art technology.
Again, I would like to thank Chairman Frank and Chairwoman
Waters for their leadership on this issue, and I thank this
committee for the opportunity to testify on behalf of the
people of my State of Florida.
[The prepared statement of Mr. Mahoney can be found on page
55 of the appendix.]
Chairwoman Waters. Thank you, very much.
The Honorable Ginny Brown-Waite.
STATEMENT OF THE HONORABLE GINNY BROWN-WAITE, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF FLORIDA
Ms. Brown-Waite. I thank the chairwoman for holding this
hearing for and giving us the opportunity to present testimony.
The insurance crisis that Florida and other coastal States
are facing is imminent; and I am very grateful that this
committee has taken an interest so early in the 110th Congress.
I have been working on this issue with my colleagues for
the past 3 years, and while we have made some headway, the
perception that natural disaster insurance availability and
affordability is only a Florida problem could not be more
wrong.
While it is true that Florida is feeling the effects more
acutely, lawmakers in Louisiana and Mississippi are having a
hard time luring insurance companies back to their States. And
consumers as far north as Massachusetts, Chairman Frank's great
State, a State that has not experienced significant natural
disaster in a decade, are also losing their coverage.
Congress cannot wait for the market to completely collapse
before we decide to act. And I thank you for your leadership on
this issue.
I have introduced my bill, H.R. 91, the Homeowners
Insurance Protection Act, and H.R. 330, the Homeowners
Insurance Availability Act. I am also working with my
colleagues Ron Klein, Tim Mahoney, Carolyn Maloney, and Vern
Buchanan on a bipartisan solution to the property and casualty
insurance crisis facing this Nation.
Additionally, my counterparts in the Senate introduced a
version of my bill. The proposals are simple and specific. Both
of these bills create a Federal catastrophic fund to provide
the stability needed in today's market.
The main reason that States are losing providers is the
skyrocketing cost of reinsurance. Those representing the
insurance industry will testify that they have plenty of
capacity. But what they won't tell you is that it is not
affordable. In 2002, the cost of reinsurance accounted for 71
cents of every dollar a homeowner spent on insurance, and just
4 years later, in 2006, reinsurance accounted for 44.5 cents of
every dollar homeowners' spent.
Madam Chairwoman, I ask for unanimous consent to submit
this chart from the Florida office of insurance regulation,
detailing the soaring cost of reinsurance.
Chairwoman Waters. Without objection, it is so ordered.
Ms. Brown-Waite. I appreciate that. Until the market
stabilizes, and reinsurers provide a product that is available
and affordable, the Federal Government must have that role.
Both of my bills accomplish just that. H.R. 330 would
divide the Nation into 6 different regions, so the Federal
Government could sell reinsurance policies to the insurers.
This Federal fund would only be available if a 1-in-100-year
event or higher occurred. And this reinsurance would be a
fraction of the cost, potentially as low as a quarter of what
the current industry costs are.
H.R. 91 takes a different approach. The Federal Government
would sell reinsurance policies directly to States, not private
insurers, that have established State catastrophic funds. This
approach is more comprehensive, and better for our Nation,
because under this bill, States would have to take the
responsibility for planning for natural disasters by enacting
strong building codes and committing at least 35 percent of
their State funds toward mitigation.
Under H.R. 91, States would also have to establish a pass-
through mechanism, so that any savings insurers realized from
my bill are passed on to the consumers, as we all believe that
they should be.
H.R. 91 also establishes tax-deferred reserves for private
insurers. These act as kind of a savings account for insurers
to plan for future catastrophic disasters, instead of relying
so heavily on expensive reinsurance from the private market.
Insurers could not use them unless there is a 1-in-100-year
event or higher.
The role and responsibility of H.R. 91 is also considerably
less than some of the other proposals that are before Congress.
Under the bill, the Federal catastrophic fund could not be used
unless a 1-in-200-year event or higher occurred. Additionally,
once the reinsurance fund is triggered, States must still pay
10 percent of the cost so that the Federal Government is never
on the hook for the full cost of the natural disaster.
In short, the bill offers a multi-layered approach to
covering natural disasters. First, the primary insurers cover
homeowner losses, and the States provide coverage. Then,
finally, the Federal Government provides coverage, if need be.
Many members representing non-coastal States have asked me
why they should support a national catastrophic fund. These
members and their constituents forget that they already are
paying under the fragmented insurance system that we operate
under today. Congress is the insurer of last resort, even
today, as we found out in Katrina.
Many of these projects are needed to help people rebuild
their lives. Florida has even been a recipient of these funds
from the Federal Government. But wouldn't it be nice if
Congress already had a fund, a reinsurance fund, filled with
insurer premiums, not tax dollars, to pay for these
resurrection projects? For the first time, Congress would be
proactive, instead of reactive. How unique.
Consider this. Since its enactment in 2001, not one dollar
of the TRIA fund has been spent. Yet, insurers have allocated
additional capacity to terrorism risk. Prices have declined,
and purchase rates have increased. In 2003, only 27 percent of
companies purchased terrorism reinsurance. In 2005, 58 percent
purchased this insurance. Again, without one dollar of TRIA
funds ever being spent.
I don't propose that my bills are the silver bullet, or the
final answer. However, they are part of the solution.
There is only one State in the Nation not susceptible to
natural disasters, and that is North Dakota. Every other State
in the union is prone to hurricanes, earthquakes, and
tornadoes. Either Congress moves everyone to North Dakota, or
we enact real, meaningful, proactive solutions to a crisis that
affects this whole Nation.
Let's look at who supports the bill: Realtors, bankers, and
certainly homeowners are very supportive of these concepts.
Again, Madam Chairwoman, I thank you for your indulgence in
holding this hearing, and for helping to shine the light on the
need for this kind of Federal action.
[The prepared statement of Ms. Brown-Waite can be found on
page 48 of the appendix.]
Chairwoman Waters. Thank you, very much. I would like to
thank all of the members for their patience. I would like to
thank you for your concern. I would like to thank you for
having decided that you're going to make this a priority on
your legislative agenda.
We are confronted with a serious problem in this country.
We do need your effort to help us solve it. I have been in the
Gulf, I don't know how many times now. I have been with Mr.
Taylor. I feel as if I know his district, his area very well,
having gone there so many times. I know his passion for trying
to help us come up with some answers, and I look forward to
working with all of you. Thank you very much for being here
today.
With that, we will call our second panel: Commissioner
Kevin M. McCarty, Office of Insurance Regulation, State of
Florida, on behalf of The National Association of Insurance
Commissioners; Mr. Andrew Valdivia, CPCU, ARM, president, White
& Company Insurance, Incorporated, on behalf of The Independent
Insurance Agents and Brokers of America, from California; Mr.
Malcolm Bennett, president, International Realty and
Investments, on behalf of The National Multi-Housing Council,
not only from California, but from my district; Mr. Robert
Porter, executive director, ProtectingAmerica.org; Mr. Gary
Thomas, also from California, the Orange County area, broker/
owner, Re/MAX Real Estate Services, on behalf of The National
Association of Realtors; Ms. Ann Spragens, senior vice
president, secretary, and general counsel, Property Casualty
Insurers Association of America; Mr. Marc Racicot, president,
American Insurance Association; and Mr. Frank Nutter,
president, Reinsurance Association of America. Welcome.
Without objection, your written statements will be made a
part of the record. You will each be recognized for a 5-minute
summary of your testimony. Let us begin with Commissioner Kevin
M. McCarty, Office of Insurance Regulation, State of Florida.
STATEMENT OF KEVIN M. McCARTY, OFFICE OF INSURANCE REGULATION,
STATE OF FLORIDA, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Mr. McCarty. Thank you very much, Madam Chairwoman, Ranking
Member Biggert, and members of the subcommittee. Thank you very
much for the opportunity to testify today on behalf of the
National Association of Insurance Commissioners regarding this
very significant issue of natural disasters, and the response
of the Federal Government.
I applaud your leadership on this very critical issue of
national importance that is not only an insurance issue, but it
is an economic recovery issue. My name is Kevin McCarty, and I
am the insurance commissioner from the State of Florida.
We have heard from a number of representatives from our
State on some ideas on how to resuscitate the property market
in our State.
I also serve as a chairman of the National Association's
property and casualty insurance committee, as well as its
committee on catastrophe insurance. Through these working
groups, State insurance commissioners from around the country
have been involved in research and analysis of the impact of
natural disasters on our economy and society for the last 20
years.
Insurance commissioners from across our country are working
to find solutions to manage the catastrophic risk exposure to
their respective States, exposure that, as we know, grows with
increased real estate development, rising property values, and
expanding commercial development in catastrophically-prone
areas.
The NAIC currently is engaged in developing a comprehensive
national plan, discussing a structure for governance for a
multi-state plan for a multi-state catastrophe fund.
In addition, the NAIC has adopted resolutions, both in
December of 2005 and again in June of 2006, supporting a
national disaster plan and calling for a Federal commission to
further study the issues, weigh the alternatives, and focus
this very important debate.
We have a national problem that demands a comprehensive and
rational national solution. Our current approach is not
working. It is a post-event outpouring of Federal taxpayers'
money. As generous and compassionate as the American people
are, the current system leaves much to be desired. For those
who would argue that this is merely a coastal problem, I would
point to the roughly $110 billion in relief allocated following
Hurricane Katrina.
Attached to my testimony, Madam Chairwoman, is a State-by-
State breakdown of taxpayer dollars allocated for Katrina. From
the great State of California, your State's share, Madam
Chairwoman, is $13 million. And yet, that money leaves no
infrastructure or legacy behind to ensure that your
constituents are taken care of when a catastrophe falls on the
State of California.
And, again, this is not a coastal problem. The Great Lakes
and Plains States will contribute approximately $26 billion to
Katrina relief. The NAIC believes that a more proactive system,
which prepares the public and mitigates the potential for
catastrophe damage, is more practical, less expensive, and
better for all taxpayers, in the long run.
Currently, the United States is the only industrialized
nation in the world not to have a Federal catastrophe plan. A
multi-layered approach, encouraging personal responsibility,
maximizing the private sector, and a third layer of Federal
participation with the government's commitment to reinsure
State entities, is the cap stone of our recovery. We will
proactively help any catastrophic recovery, as well as provide
stability in our housing market, by allowing State entities to
diversify their risk.
Accomplishing this goal is likely to lure additional
private capital, which is a critical part of any economic
solution, stimulating more availability, more competition, and
ultimately, lower premiums for everyone.
A key component of any comprehensive plan must emphasize
mitigation efforts. From responsible land use plans that tell
us where to build, better building codes that tell us how to
build, and retrofitting programs that strengthen what we have
already built, these programs may come with some up-front
costs, but ultimately will save many dollars in investment.
But, moreover, will save American lives.
A comprehensive national strategy should also find ways to
expand private capacity. Many non-U.S. insurers are able to
deduct reserves from future catastrophe losses, tax free, which
potentially gives them a competitive edge over U.S.
counterparts. The inability to build catastrophe reserve forces
insurers to prepare financially, as if they were going to have
a major storm in multiple locations every year.
Given the variety and complexity of these concepts under
consideration, the NAIC strongly endorses the concept of a
national commission to weigh the merits of each of these plans,
and the best mix of solutions. And whatever we come up with
must be answered in the context of, ``Will this make insurance
more available and affordable?''
Thank you, Madam Chairwoman.
[The prepared statement of Mr. McCarty can be found on page
68 of the appendix.]
Chairwoman Waters. Thank you, very much.
Mr. Andrew Valdivia.
STATEMENT OF ANDREW VALDIVIA, CPCU, ARM, PRESIDENT, WHITE &
COMPANY INSURANCE INC., ON BEHALF OF THE INDEPENDENT INSURANCE
AGENTS AND BROKERS OF AMERICA
Mr. Valdivia. Good afternoon, Chairwoman Waters, Ranking
Member Biggert, and members of the committee. My name is Andrew
Valdivia, and I am pleased to be here today on behalf of the
Independent Insurance Agents and Brokers of America, also known
as the ``Big I.''
I currently serve as the California State and national
director for the Big I. I am also president of White & Company
Insurance, Inc., in Santa Monica, California, a full-service
agency that serves clients in Santa Monica and the surrounding
area, with both commercial and personal insurance.
As a Californian, and as your constituent, I first would
like to thank you, Madam Chairwoman, for holding this important
hearing on an issue that has not only impacted Californians,
but millions of Americans in communities across the country.
Our members approach the issue of natural disaster
insurance from a very simple perspective. We are here to serve
the consumers' needs, whether it is helping them secure
coverage to protect their families and their homes prior to an
event, or assisting consumers after an event, to ensure that
claims are paid quickly and fully.
The Big I strongly believes that our industry must come
together with policymakers to find a national solution that
will encourage and ensure participation in at-risk markets. We
welcome all reasonable ideas that lead us to a healthy and
competitive insurance marketplace.
The Big I believes that the private market cannot handle,
and is not handling, catastrophic risks. Private market
coverage is scarcely available at any rate in some areas. This
is fast becoming an availability problem, rather than simply an
affordability problem. Many insurers have either stopped
writing new business in, or withdrawn completely from at-risk
markets. The natural disaster insurance crisis currently
threatening the marketplace is not an insurance company issue.
It is a consumer issue.
As the conduit between the insurance companies and the
consumers, the Big I recently joined the Natural Catastrophe
Policy Holders Coalition, as an ex-officio member. The
coalition is an alliance of policyholders who have joined
together to address issues related to the availability and
affordability of catastrophe insurance. In fact, we are working
with two other witnesses here today, the National Multi-Housing
Council, and the Realtors, as part of this coalition.
I would particularly like to stress that this is not simply
a Gulf Coast problem. It is a national problem. Whether it's
hurricanes on the Gulf Coast, tornadoes in the Midwest, or
earthquakes in California, we all face some risk of natural
disaster.
In California, we are particularly susceptible to the
earthquake risk. In fact, AIR Worldwide estimates that if there
were a 7.9 magnitude quake in San Francisco, the losses could
top $100 billion. To put that into perspective, the insured
losses from Hurricane Katrina, the costliest natural disaster
on record, were just over $40 billion.
California did try to proactively deal with this risk by
creating the California Earthquake Authority, or CEA, whose
goal is to provide a basic level of residential earthquake
coverage to Californians. Despite CEA's existence, only 12
percent of Californians have residential earthquake insurance.
The commercial earthquake market in California is equally
precarious. While the CEA offers some earthquake protection for
the residential market, it does not offer policies to the
commercial market. The primary source of commercial earthquake
coverage is the non-admitted market, which is under strain, as
a number of commercial policyholders in California are unable
to secure coverage at reasonable prices.
Put simply, insuring against natural disasters is a
national problem that requires a national solution. Only a
program that is national in scope will be able to generate
enough capacity to cover the most devastating events. The Big I
believes the best solution is for a Federal role to be in place
before the events happen, to have a mechanism that encourages
the private sector to handle as much risk as possible, and to
only trigger Federal involvement as a last resort upon private
market failure.
Specifically, the Big I supports a Federal catastrophe
reinsurance program. We are also open to a number of potential
solutions with limited Federal involvement, including insurer
tax-free reserving, and catastrophe savings accounts, among
others.
Further, the Big I supports efforts to reduce costs of
disasters, whether it is through mitigation, enhanced building
codes, or financial incentives to mitigate risk. While it may
be a difficult task, we believe that any solution will likely
need to be comprehensive in its approach.
We also urge you to consider legislation introduced that
would establish a national commission to study the issue, and
recommend solutions. A good commission could develop a
comprehensive approach, and provide momentum that may be
necessary for a legislative solution.
In conclusion, we commend you, Madam Chairwoman, for
convening today's hearing. Achieving consensus within the
insurance industry for a solution to this growing problem has
been elusive. But we hope your continued focus on this issue
will encourage the private and public sector to develop new and
innovative solutions. We stand ready to assist your efforts in
any way we can.
[The prepared statement of Mr. Valdivia can be found on
page 130 of the appendix.]
Mr. Green. [presiding] We thank you for staying within the
allotted amount of time. And Mr. Bennett, you will now be
recognized for 5 minutes.
STATEMENT OF MALCOLM N. BENNETT, PRESIDENT, INTERNATIONAL
REALTY & INVESTMENTS, ON BEHALF OF THE NATIONAL MULTI-HOUSING
COUNCIL AND THE NATIONAL APARTMENT ASSOCIATION
Mr. Bennett. Thank you, and good afternoon, Chairwoman
Waters, Ranking Member Biggert, and distinguished members of
the subcommittee. My name is Malcolm Bennett, and I am the
founder and president of International Realty & Investment, a
firm that specializes in property management and real estate
sales and investment in Los Angeles, California.
I am here today representing two trade organizations: The
National Multi-Housing Council, and The National Apartment
Association. With their combined membership, they represent
owners, development, managers, and builders of residential
properties.
We would like to commend you, Madam Chairwoman, for holding
this meeting today, and say that our members are extremely
concerned about the future stability of the insurer's market
being able to withstand continued catastrophic events, be they
disaster or terrorism. As property owners, we are looking for
some assurance that there is some insurance available now and
in the future, that is not only available, but is affordable.
As a California multi-family property owner and manager, I
find it increasingly difficult to be able to still deliver
affordable housing with the unpredicted rising cost of natural
and disaster insurance costs. My industry colleagues have
national property portfolios that include the Gulf Coast and
the East Coast, and they are continuing to have enormous
problems in attaining coverage since the 2005 hurricane
seasons.
As Congress continues to explore ways to address this
critical issue, we welcome the opportunity to participate in
this discussion. We strongly feel that any Federal initiative
should include relief for the commercial real estate sector, as
well as the residential. Previous policy debates focused
primarily on homeowners coverage, not realizing the very
important part that the industrial and commercial plays in
this.
As you know, Katrina had a devastating impact on the
property insurance market across the States. California felt
the rippling effect with skyrocketing premiums, reduced limits,
and a higher deductible for earthquake insurance. While most of
the attention was focused on the wind storm coverage in the
Gulf Coast States, it is important to understand that the risk
pool includes earthquakes, tornadoes, hurricanes as well, so
California property owners and others in the Gulf Coast were
impacted by this, as well.
As an industry, we expected rising premiums as a result of
the 2005 hurricanes, but they far exceeded our worst case
expectations. Property owners with catastrophic exposure such
as wind and earthquake reported significant costs ranging
anywhere from 100 to 400 percent increases in their policies.
My real estate portfolio is limited to California, where
earthquake premiums present the biggest challenge to property
owners. After the 1994 earthquake, the insurance industry acted
the same way it did after 9/11 and Katrina, which resulted in
increasing pricing and limiting availability.
Even though I live in California, we do have the California
Earthquake Authority, as was previously mentioned, but multi-
family is excluded from that. I have no choice in purchasing
earthquake insurance; it's just unaffordable. The only way I
would possibly be able to afford it would be to pass the cost
on to the residents, but in most areas in Los Angeles, rent
control would bar us from being able to do this.
Large and new apartment owners managing national portfolios
face the same challenge that we have. It's not uncommon for
owners of low-income housing tax credit properties not to
purchase earthquake insurance unless mandated by their lender,
because unlike market rents, these properties offer no rent
adjustment, and no option to offset the costs, because those
rents are based on household levels.
The uninsured properties then remain at risk, leaving the
owners and lenders exposed. It's really not clear if the
government solution exists at this time for this crisis, or if
one will come from the private market.
But what we do know is that continued occurrence of
catastrophic events, whether they're natural disasters or
terrorism, will result in significant cost and impact to our
Nation. We realize that the solution will not be an easy one to
identify, and no one size fits all.
On behalf of The National Multi-Housing Council and The
National Apartments Association, we hope to work with Congress
to identify and support a viable legislative initiative that
will offer long-term stability for the insurance market, and we
have certainly joined with other stakeholders in this.
I would like to thank you for the time to present the views
on the multi-family industry, and thank you very much.
[The prepared statement of Mr. Bennett can be found on page
62 of the appendix.]
Chairwoman Waters. Thank you, very much.
Mr. Robert Porter.
STATEMENT OF ROBERT W. PORTER, EXECUTIVE DIRECTOR,
PROTECTINGAMERICA.ORG
Mr. Porter. Thank you, Madam Chairwoman, Ranking Member
Biggert, and members of the subcommittee. My name is Bob
Porter, and I am the executive director of
ProtectingAmerica.org. I appreciate the opportunity to appear
before you today.
ProtectingAmerica.org is a nonprofit organization committed
to finding better ways to prepare and protect American families
from the devastation caused by natural catastrophes. Our
organization was formed in the summer of 2005, right before the
onslaught of Hurricanes Katrina, Rita, and Wilma, and is
chaired by James Lee Witt, former Director of FEMA, and Admiral
James Loy, former Deputy Secretary of Homeland Security, and
former commandant of the U.S. Coast Guard.
ProtectingAmerica.org's more than 200 members from some 27
States include the American Red Cross, and other first
responders, emergency management officials, insurers,
municipalities, small businesses, and Fortune 100 companies,
along with thousands of private citizens.
We support the creation of a comprehensive national
catastrophe management solution that protects homes and
property at a lower cost, improves preparedness, and reduces
the financial burden on consumers and taxpayers, all in an
effort to speed recovery, protect property, save money, and
save lives.
The simple fact is that catastrophe can and does occur
virtually anywhere in the country. The unfortunate reality is
that tens of thousands of our fellow citizens are not able to
pick up their lives where they left off before these
catastrophes occurred. Every national and international
forecasting agency has predicted that the worst of these storms
is yet to come.
Max Mayfield, the recently retired director of the National
Hurricane Center, has said that he wished Katrina was the worst
storm he would ever see in his lifetime. Current and projected
climate signals indicate that U.S. hurricane activity this year
will be 75 percent above the 1950 to 2006 average.
Notwithstanding the well-documented problems with the
response to Katrina, when catastrophe strikes, Americans have
historically done a remarkable job of coming to the aid of
those in need. All Americans owe our first responders an
enormous debt of gratitude and thanks.
While little can be done to completely eliminate the actual
catastrophe, we must break the cycle of build, destroy, and
build again in the same way and in the same place.
ProtectingAmerica.org believes that we should reduce the
enormous taxpayer subsidy of recovery efforts that currently
exist. Taxpayers from Maine to Montana are already paying for
the Nation's natural catastrophe response. We believe that the
time has come for a better solution.
Our solution would include privately financed State
catastrophe funds to provide more protection at a lower cost to
consumers. These State-level CAT funds would serve as a
backstop to the private insurance and reinsurance markets, and
would generate investment earnings that, in addition to helping
pay claims, would be used for mitigation, prevention,
preparation, and first responder programs.
We also support the creation of a national catastrophe fund
that would serve as a backstop to participating State funds in
the event of a mega-catastrophe, such as another Katrina, or a
North Ridge earthquake.
These State catastrophe funds would be financed through
mandatory contributions by insurance companies in each
participating State, in an amount that reflects the risks of
the policies. Actuarially sound premiums, not tax dollars,
would support these funds. Qualified State funds would be
required to set aside a minimum of $10 million, up to a maximum
of 35 percent of investment income for first responders and
prevention and mitigation programs.
Qualified State funds would be able to purchase reinsurance
from the national backstop program. Rates for this coverage
would, again, be actuarially based, and would only be available
to qualified State programs that have established prevention
and mitigation funding.
How would this all work? In the event of a major
catastrophe, private insurers would be required to meet all of
their obligations to their policyholders. Should catastrophic
losses exceed those obligations, the State CAP fund would kick
in. In the event of an extraordinary catastrophe, the national
backstop program would provide benefits to the State, and help
pay remaining claims.
Because this is an opt-in State-by-State program based
entirely on risk, the likelihood of a taxpayer subsidy is
virtually eliminated. This approach requires pre-event funding,
and relies on private dollars from insurance companies and
States most exposed to catastrophe.
Madam Chairwoman, all of the elements I have mentioned are
contained in legislation currently pending before the Congress.
These bills have strong bipartisan support, and the support of
members from across the Nation. That support, and your hearing
today, is indicative of renewed concern in Congress that
protection and preparation for massive natural catastrophe must
be a national priority.
Our organization commends you and Chairman Frank for making
this national priority a priority of this committee. Thank you.
[The prepared statement of Mr. Porter can be found on page
99 of the appendix.]
Chairwoman Waters. Thank you, very much. Now we will hear
from Mr. Thomas, Mr. Gary Thomas.
STATEMENT OF GARY THOMAS, BROKER/OWNER, RE/MAX REAL ESTATE
SERVICES, ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS
Mr. Thomas. Thank you, Chairwoman Waters, Ranking Member
Biggert, and members of the subcommittee, for inviting me to
testify here today before the Subcommittee on Housing and
Community Opportunity, and present the views of the National
Association of Realtors, NAR, on the issue of natural disaster
insurance.
My name is Gary Thomas, and I am a Realtor from Aliso
Viejo, California, where I am CEO of RE/MAX Real Estate
Services, one of the six largest RE/MAX brokerages in the
Nation.
In 2001, I had the honor of serving as the president of the
California Association of Realtors. Currently, I serve as
chairman of Real Estate Business Services, a subsidiary of the
California Association, and as liaison to NAR's public and
Federal issues group. NAR is the largest trade association,
representing more than 1.3 million members, involved in all
aspects of the residential and commercial real estate
industries.
The catastrophic events of 2004 and 2005 has shown the need
for a comprehensive, forward-looking natural disaster policy.
NAR believes that any real solution to the insurance problems
now facing this country must go beyond a discussion of natural
disaster insurance, and include a comprehensive natural
disaster policy that addresses, but is not limited to,
insurance availability and affordability.
Such a policy should take into account the responsibilities
of multiple actors, including property owners, insurance
companies, and each of the different levels of government in
preparing and paying for future catastrophic events. My
testimony today offers suggestions for what Realtors believe
must be included in a comprehensive natural disaster policy.
The availability and affordability of property insurance
is, at its core, a consumer issue. The importance of available
and affordable insurance to homeowners, commercial property
owners, and those who would like to own their own home or place
of business, cannot be overstated. This is something that your
constituents, Madam Chairwoman, have long understood in
California, since we have dealt with problems of insurance
availability and affordability numerous times, most recently
after the North Ridge earthquake.
The inability to obtain affordable insurance is a serious
threat to the residential real estate market, impacting not
only single family detached homes, but condominiums,
cooperatives, and rental units, as well. Homeowners' insurance
is a necessary component in securing a mortgage and buying and
selling a home.
NAR believes that people who bear the risk should pay a
fair share, by obtaining and maintaining adequate insurance
coverage. However, if insurance is not available or affordable,
many make the unfortunate, but understandable, decision to
purchase only the minimal amount of, or type of, insurance
required. This is precisely the decision made by many
Californians--buying the required property casualty coverage,
but forgoing earthquake insurance, due to its high cost.
The problem with this rational economic decision is that if
the big one hits, and people are not insured for that type of
catastrophe, then every American taxpayer will pay.
Property owners should have confidence that their homes and
businesses will survive future catastrophic events. Appropriate
mitigation measures can help to create that confidence. Federal
and State governments can provide incentives to property owners
to undertake appropriate mitigation measures for their homes
and businesses. Research shows that every dollar spent on
mitigation saves society an average of $4.
NAR believes that States are the appropriate regulators of
property insurance markets. However, there may be a role for
the Federal Government to intervene in insurance markets to
prevent market disruption and insolvencies. The level of
intervention, however, must be set at a level that will not
interfere with the normal market forces.
Finally, an essential part of a comprehensive natural
disaster policy is a recognition of the basic responsibility of
government, at all levels, to build and maintain
infrastructure. The failure of the levees protecting New
Orleans during Hurricane Katrina contributed significantly to
the loss of life and property from that storm.
According to USA Today, the Army Corps of Engineers has
identified 146 levees nationwide--including 42 in California--
that pose an unacceptable risk of failing in a major flood.
Moving forward, we believe that all levels of government must
do a better job of shouldering their respective
responsibilities.
We stand ready to work with you, Chairwoman Waters, the
Committee on Financial Services, and others in Congress, to
develop a responsible natural disaster policy that addresses
the needs of consumers, the economy, and the Nation.
NAR is working with others, including two organizations
represented here today, The National Multi-Housing Council, and
The Independent Insurance Agents and Brokers of America, as
members of The National Catastrophe Policy Holders Coalition.
NAR will continue to work with these and other organizations to
help develop and advocate for a comprehensive solution.
And I thank you very much for inviting me to speak.
[The prepared statement of Mr. Thomas can be found on page
119 of the appendix.]
Chairwoman Waters. Thank you, very much.
Ms. Ann Spragens. Thank you, very much.
STATEMENT OF ANN W. SPRAGENS, SENIOR VICE PRESIDENT, SECRETARY,
AND GENERAL COUNSEL, PROPERTY CASUALTY INSURERS ASSOCIATION OF
AMERICA
Ms. Spragens. Thank you, very much. My name is Ann
Spragens, and I am senior vice president, secretary, and
general counsel of the Property Casualty Insurers Association
of America, or PCI.
PCI is a trade association representing over 1,000 property
casualty insurers that write almost 40 percent of the
homeowners insurance, and 40 percent of the commercial property
insurance sold in the United States. Thank you for the
opportunity to appear before you today.
Insurers, regulators, and consumers all want the same
thing: a healthy and competitive insurance market in which
consumers can choose a variety of coverage options from a
variety of financially secure insurers. PCI is a strong
believer in the power of markets to solve most problems, but at
the same time we believe there are some risks in some areas
that market solutions alone may not have the tools to address.
These are the mega-catastrophic risks that if not addressed
can undermine the economies in these critical areas of the
country, and insurers need to work with State and Federal
policymakers to develop innovative solutions that promote
increased insurance availability and responsible economic
development.
PCI wants to work with State and Federal legislators to
develop and implement viable, long-term solutions that create
insurance markets that consumers, companies, and public
policymakers can rely on.
We think that the best way to accomplish this is to design
solutions that meet the unique needs of consumers in each
State. The solution to market disruptions in Louisiana, South
Carolina, or Massachusetts will look much different from those
crafted by Florida legislators, because local conditions are
different. That's why we favor a State-by-State approach backed
up, at a very high level, by a Federal liquidity protection.
We believe that the Federal Government can play an
important role in stabilizing certain markets against the risk
of mega-catastrophes by providing high-level Federal liquidity
support for responsibly-managed State funds.
Given the very serious catastrophe lessons we have seen
over the last several years, and the significance of this issue
for our membership, our organization has devoted considerable
time and effort to developing a range of sound public policy
solutions, including market reforms, stronger loss reduction
and prevention, and new approaches to financing catastrophic
risk.
PCI suggests several major areas for consideration. First,
we need to do more to control and reduce catastrophe exposure,
including: State and local governments updating their building
codes in catastrophe-prone areas; the establishment of Federal
incentives for greater investment in loss reduction and
prevention; responsible restriction of development in
catastrophe-prone areas; and taking greater steps toward
preparedness.
Second, we believe Congress should complete its efforts to
reform the National Flood Insurance Program, and we support
your bill, Mrs. Biggert. We would like to work with you to
smooth out some of the administrative concerns to make that a
really good solution.
Third, we must expand private sector capacity to handle the
risk, and the best way to accomplish this is for State
legislators to give insurance markets greater freedom to
respond to the exposures we face. As many have said, it is very
important to attract the industry.
We also encourage a review of two additional proposals.
First, we endorse establishing voluntary tax-deferred
catastrophe reserves, such as H.R. 164 proposes, introduced by
Representative Jindal. While there are provisions in this bill
PCI believes should be modified, we urge your review and debate
of this bill, as well. And we believe Americans would be very
surprised to find out insurers didn't have the accounting
mechanism necessary to do what that bill would propose.
Second, we will be examining specific steps that might be
taken to remove regulatory legal accounting or tax barriers to
further growth of the catastrophe bond market, an alternative
funding mechanism.
And, finally, with regard to government involvement, as I
mentioned in my introductory remarks, PCI believes that there
is a role, properly structured, for the Federal Government to
play in assisting the financing of mega-catastrophe risk, and
we believe it should be given serious consideration by
Congress.
We believe the growth in natural catastrophe exposure is of
sufficient magnitude in some States that they may need to
consider a State natural catastrophe funding facility. Recent
events show that the industry can respond to very severe
catastrophe events, but private markets may not always have the
capacity to fund increasingly more frequent exposure to mega-
catastrophes, or to a series of very large events in a single
season.
PCI believes, for example, that the Florida Hurricane
Catastrophe Fund provides the basis for ongoing improvement in
regard to that program.
Where major catastrophes exceed the limits of the market
and State catastrophe funds, it may be necessary for the
Federal Government to offer liquidity protection to State
catastrophe funds at a very high level, so as to maintain
stable markets and avoid widespread insurer insolvencies, and
assure stable and healthy markets.
Again, let me thank you on behalf of PCI and its members
for this opportunity to respond to your questions and provide
you with our input on possible solutions. We commend Congress
for its leadership on this issue, and pledge to work with you
to address an issue that is so critical to Americans and our
Nation's economy, because we believe that any solution is
between government efforts and free markets for stronger homes
and safer families. Thank you.
[The prepared statement of Ms. Spragens can be found on
page 111 of the appendix.]
Chairwoman Waters. Thank you, very much. Mr. Marc Racicot?
Correct me if I did not pronounce it correctly.
STATEMENT OF MARC RACICOT, PRESIDENT, AMERICAN INSURANCE
ASSOCIATION
Mr. Racicot. I think that's close enough, Madam Chairwoman.
It has been a lifelong problem. I don't think it will be
corrected this afternoon, but thank you for being so
thoughtful.
Good afternoon, and thank you for the opportunity to appear
before you. I am Marc Racicot, president of the American
Insurance Association, and I do genuinely appreciate the
opportunity to testify this afternoon.
Hurricane Katrina focused renewed attention on the role of
the private sector insurance industry in managing natural
catastrophe risk, undoubtedly. Fortunately, in our view, the
insurance industry is well-positioned to do that. To do so,
however, insurers must be allowed to measure, reduce, and fund
these exposures. By contrast, quasi-governmental CAT funds, or
Draconian regulatory restrictions and new legal liabilities not
only fail to address the true problem, they also threaten the
viability of our Nation's private insurance mechanism.
In responding to Hurricane Katrina, the insurance industry
performed extremely well under very difficult circumstances. To
date, claims payments have totaled about $40 billion. More than
95 percent of the claims have been successfully resolved. Yet,
in spite of the fact that less than 1 percent of homeowners'
claims across the Gulf have resulted in lawsuits, it is those
claims that have received most of the attention.
As a Nation, we must make sure that we are prepared for,
and can respond quickly to, future catastrophes. Insurers are
fully committed to working with local, State, and Federal
policymakers to assure that this happens. I have testified
before this committee on two other occasions and have recently
shared our perspectives with the southern governors at their
meeting in Washington last month. Each time I have had the
chance to talk with policymakers, I have strongly urged them to
act carefully.
Thankfully, last year's hurricane season was remarkably
mild, but hurricane experts are calling for another active
season in 2007, and each day more and more people populate our
Nation's most vulnerable coastal communities. I am here today
to, again, urge appropriate scrutiny, but also appropriate
care.
As this committee sorts through the various Federal
legislative proposals that have been introduced into this
Congress, the reality is that there are no quick fixes or easy
answers. Moreover, punitive measures directed at insurers,
including recently introduced bills to repeal the McCarran-
Ferguson anti-trust provision, are wholly unrelated to the
issue at hand. They will do nothing to improve the availability
or affordability of coastal insurance. In fact, the cruel irony
is that they will have a serious and detrimental effect on the
very markets that they purport to assist.
The reform agenda we have developed discards the path of
least resistance and instead relies upon sound financial
capital market and environmental principles. It consists of
four major components: mitigation and land use planning;
regulatory and legal reforms; tax incentives; and National
Flood Insurance Program reforms.
We are also working to identify other measures that could
be put in place to address concerns expressed about the
availability and affordability of natural catastrophe
insurance. These measures would be designed to preserve the
essential role that the private insurance sector plays in
response and recovery, while at the same time recognizing the
post-Katrina challenges that are still facing many coastal
communities.
As this committee is well aware, several bills have been
introduced this year to address different aspects of the
natural catastrophe issue, and I would like to offer just a
couple of comments.
First, on the Homeowners Insurance Protection Act, it would
create a Federal reinsurance mechanism to encourage States to
establish CAT funds, based on the premise that large-scale
natural catastrophes are uninsurable by the private sector.
We respectfully, but strongly, disagree with that premise.
Even after Hurricane Katrina, private sector capacity for
natural disasters has grown. Ironically, the single greatest
threat to private sector risk transfer is not the force of
hurricane winds, but legislation and regulations that displace
available private capital, or make it economically unfeasible
for private companies to operate in coastal markets.
Despite the seeming promise of short-term relief, CAT funds
are no panacea for natural catastrophe risk, and they can lead
to generational inequities among policyholders on fair,
geographic, and cross-sectional subsidization, and increased
building in catastrophe-prone regions. They have all the wrong
incentives.
The Multiple Peril Insurance Act of 2007 would expand the
coverage offered by the deficit-laden NFIP from flood-only
policies to policies that include flood and wind coverage.
While the bill promotes the concept of risk-based pricing and
local government mitigation, concepts that we clearly support,
it displaces available private market financial capacity and
claims handling capabilities and expands, rather than fixes, an
already costly Federal program.
As an alternative, we believe there are better ways to
resolve disputes among wind versus water claims, and we would
be happy to explore them with the committee.
Finally, Madam Chairwoman, and members of the committee,
unquestionably, these are tough and complex issues. The private
property casualty insurance mechanism, the system we have in
place, like any human enterprise, is not perfect. It is not
without blemish. But it has been in place since the Civil War,
and it takes good care of millions of Americans, and pays out
about $250 billion a year.
The last thing we want to do--or any government can afford,
for that matter, in the name of reform--is to irreparably
compromise the capacity of the industry to continue doing just
that. Thank you very kindly.
[The prepared statement of Mr. Racicot can be found on page
105 of the appendix.]
Chairwoman Waters. Thank you, very much.
Mr. Frank Nutter.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA
Mr. Nutter. Madam Chairwoman, Ranking Member Biggert, and
members of the committee, I am Frank Nutter, president of the
Reinsurance Association of America. The RAA is a national trade
association representing property casualty organizations that
specialize in assuming reinsurance.
Reinsurance is commonly referred to as the insurance of
insurance companies, and one of the most common purposes for
utilizing reinsurance is for a primary insurance company to
transfer the risk of losses for catastrophic events.
Clearly, any debate about whether there should be a Federal
catastrophe fund should include an analysis of the private
reinsurance market to provide catastrophe capacity as well as
the capacity of insurers to underwrite and retain this risk.
Global reinsurers view U.S. catastrophe risk as an essential
component of their diverse assumed risk portfolios. That
important role is best demonstrated by looking at the 2004 and
2005 hurricane seasons.
In 2004, 4 hurricanes that hit Florida resulted in $30
billion in insured damage. While reinsurers have no direct
relationship to insurance consumers, the global reinsurance
industry paid approximately one-third of these losses to the
insurance companies that did have losses from insurance
consumers.
The hurricane season of 2005 was a year of unprecedented
losses. Katrina, Rita, and Wilma produced losses estimated to
be as high as $60- to $65 billion. The reinsurance industry
ultimately will pay approximately one-half of all of these
losses.
In what some may see as a counterintuitive measure, the
capital markets have actually greatly enhanced reinsurance
capacity following Hurricane Katrina. As they did in 1993 after
Hurricane Andrew, and in 2002 after the terrorism losses of 9/
11, the capital markets promptly provided reinsurance capital
and capacity. Since the fall of 2005, approximately $32 billion
in new capital has been raised and committed to reinsurance
markets. The private reinsurance market is financially strong
and diverse, and reinsurance capacity is adequate, even for
most peak catastrophe markets.
The RAA believes that natural catastrophe risks are
insurable in the private insurance and reinsurance markets, and
that State catastrophe funds significantly displace the private
market. They are not a long-term solution.
The model of the Florida catastrophe fund is one that
offers insurers inexpensive reinsurance premiums up front,
because it is back-loaded. When a hurricane occurs that
requires the Florida CAT fund to pay losses in excess of its
cash balance, as in 2004 and 2005, the CAT fund in Florida
issues bonds. The bond debt is not paid by insurance companies
who receive the cheap reinsurance up front, it is paid by
assessing and taxing Florida policyholders of other lines of
insurance.
In essence, the Florida CAT fund, which only covers
residential exposures, has disintermediated the reinsurance
market, and in its place, put the insured public, commercial,
and residential. The irony of Florida is that the people who
vilified insurers in 2005 and 2006, together with other
policyholders, are now their reinsurers.
State catastrophe funds also violate one of the fundamental
tenants of insurance, and that is risk spreading among various
risk bearers. Private insurance and reinsurance, however,
spread the risk globally. State funds do not reduce the
vulnerability of people to natural catastrophes. Rather, they
are cost-shifting mechanisms. There is no free lunch; someone
will have to pay for these losses.
We do not believe that the creation of a Federal
reinsurance program solves a homeowner's insurance availability
problem. We believe that policymakers should remove regulatory
constraints from the private insurers market's ability to
willingly insure risk. If policymakers follow competitive free
market principles, a Federal natural disaster reinsurance fund
is unnecessary.
With respect to a Federal fund, I would offer the following
thoughts. First, the idea of a Federal fund has been debated
for many years. Unfortunately, many of those proposals are
often with very low attachment, or trigger points, and by doing
so, these will compete with the private reinsurance market
which is providing capacity.
Second, there is no assurance that a Federal reinsurance
program will result in more availability of homeowners
insurance.
Third, a Federal fund that sells reinsurance to State
catastrophe funds concentrates all of the risk associated with
natural catastrophes in government programs. A private market
diversifies this risk, spreading it globally.
Some have suggested that a Federal program is appropriate,
because we are all paying for disaster recovery now, implying
that Federal taxpayers are on the hook for disaster losses.
While natural disasters do occur in all States, except,
apparently, North Dakota, most are modest potential costs,
compared with a few other regions; 97 percent of all earthquake
insured losses have occurred in California, and since 1900, 75
percent of all hurricane losses have occurred in Florida,
Louisiana, and Texas.
The natural disaster related losses in other States are
paid for by insurers in those States, based upon risk premiums.
Federal disaster assistance primarily applies to immediate and
temporary shelter and food, infrastructure repairs, and
emergency response. These losses would not be covered by a
Federal reinsurance program, therefore, it would be expected
that taxpayers would continue to support them.
As others, we too look forward to working with the
committee on any solutions that are put forward, and appreciate
the opportunity to testify.
[The prepared statement of Mr. Nutter can be found on page
86 of the appendix.]
Chairwoman Waters. Thank you, very much. I appreciate all
of the panelists who are here today, testifying before this
subcommittee to help us better understand and get a handle on a
public policy approach for dealing with what is a serious
problem in this country.
I want to make sure that I understand the industry as well
as I possibly can, so I am going to address one or two
questions to Ms. Spragens, Mr. Nutter, and Mr. R-a-c-i-c-o-t.
[Laughter]
Chairwoman Waters. On the one hand, we have insurance
companies that are saying, ``I'm leaving.'' Allstate and State
Farm, I think, in the Gulf region, said that they were going to
leave, that they could not be responsible, and bear the kind of
risk that they were confronted with, and could be confronted
with, possibly, in the future. We have ideas that are emerging
about government reinsurance involvement.
We also hear that the property casualty insurers are making
a profit. So how do we reconcile all of this? Why, then, if
private reinsurance is so good, why can't it reduce the costs
more? And if they can't, why shouldn't the government get
involved to see if they can't drive those costs down?
Mr. Racicot. Madam Chairwoman, I am assuming you are
addressing that question to me, or multiple questions to me.
Chairwoman Waters. Yes.
Mr. Racicot. All of which I think are very relevant
questions, and good questions.
Let me start with the last question, first, and that is
concerning industry profits, and place it in the proper
perspective. I urge you to remember that, in fact, property
casualty companies are responsible for claims that sometimes
have tails as long as 20 years or longer, number one. Number
two, out of the last 20 years, only 2 out of those 20 years
have the property casualty companies of this country
experienced an underwriting profit. And number three, in 2005,
the claims in Louisiana alone wiped out 25 years of homeowners
premiums in the State of Louisiana.
So, we need to place those figures in the proper
perspective. Because what happens is that they have to have
capital available to address claims with long tails. They also
have to make certain that they can expand in other areas and
offer new products. They have shareholders, of course, that
they have to address. And so, at the end of the day, that's the
right context.
When you're talking about some of the insurance companies
that--and I don't have the inside information to be able to
represent their position precisely--but my understanding from
public accounts is that they have decided not to write new
business in those particular areas that you were referring to,
and that they have a great deal of capital.
I know our companies have a great deal of capital still
down in the Gulf, but it doesn't go as far, and it doesn't go
as far because the models have changed. With the frequency of
hurricanes, you have to build that into the modeling,
actuarially, to determine what is an appropriate premium. So as
a consequence of that, you have to be very careful.
The regulatory climate and environment is very difficult
and oppressive. If you think about it for just a moment, what
kinds of signals are being sent to insurers to try and entice
them into some of the Gulf States? The attornies general bring
suits, contracts are abrogated, and there are suspensions of
the capacity to have any regulatory freedom. If you're in the
State on a given day, you may be commanded to be there for some
significant period of time beyond your voluntary choice.
Those signals, just like they would send a signal to Home
Depot, or the mortgage bankers, or to real estate people, or
anybody else, are disincentives for those who would like to
come back into a State, because they are fearful that they will
not be able to do business.
So that, I think, describes the present existing situation.
It's not that there is not capacity, as Mr. Nutter has
indicated. It's just that you cannot charge a premium that is
risk-based, based on cost. And, secondly, the environment is so
hostile and so difficult to do business in, that sometimes even
though they want to come back, they are fearful about entering
into that territory.
Chairwoman Waters. One last one. Let me just say that there
are those who would say that the insurance companies have
enjoyed some protections and to--that is something that should
be repelled, because of the ability to at least discuss, or
share information, places you in a position of being able to
have premium cost, I suppose, that cannot be challenged by
anybody because of the ability to have this protection. What do
you say about that?
Mr. Racicot. Well, Madam Chairwoman, I would say that it's
always possible to reinvent another scheme. But the invention
of a new scheme here, which has worked exceptionally well for
62 years, would bring absolute chaos to the industry.
And, frankly, there are 5,000 property casualty companies
in this country that--some are very, very large, and some are
very, very small. And it would be those that are larger that
could do their own actuarial analysis.
This is all done by the light of day by independent
modelers. Data is shared or provided by all of these insurers.
It's distilled, analyzed, and scrutinized. And then, actuarial
analyses are put out for everyone to utilize. It would be all
the small companies who would be disenfranchised by movement in
that particular direction, and, as a result of that, there
would be a lack of competition, and less of a good bargain for
consumers.
Chairwoman Waters. Thank you. Just one last question. Do
the private property casualty insurers use the same claims
adjusters that we use with our National Flood Insurance
Program?
Mr. Racicot. I believe, Madam Chairwoman, that is a
voluntary choice. There are many companies in the country who
actually can contract with, and act as agents of, the U.S.
Government to carry out the duties of adjusting claims for
flood programs all across the United States.
Chairwoman Waters. That has been identified as a potential
problem--claims being pushed off to the National Flood
Insurance Program rather than being assumed by the private
insurer. Have you heard any discussion about that?
Mr. Racicot. Well, Madam Chairwoman, I have not seen
demonstrated evidence. I certainly wouldn't suggest to you,
however, that there are not imperfections in the system. Any
human system or institution has some imperfections. But when
you realize that only 1 percent of the claims in this country
that were a consequence of Katrina are actually being
litigated, that's a fairly good record.
Chairwoman Waters. Thank you very much. Yes?
Mr. Nutter. Madam Chairwoman, if I might respond to your
first question, if I could, please. With respect to reinsurance
and the cost, keep in mind a couple of things.
To the extent that there are concerns about or observations
about the insurance industry's profitability in recent years,
some of that is a function of the fact that insurers did lay
off risk to the reinsurance industry. If you looked at the flip
side of the coin, you would find the reinsurance industry was
relatively unprofitable in 2001, 2004, and 2005, largely
because it served the purpose of bearing the risk that the
insurance companies laid off.
And, secondly, you have mentioned a couple of specific
companies by name, and I certainly don't represent State Farm
or Allstate, and wouldn't presume to. But my understanding is
that State Farm reinsurers entirely within the corporate
group--so, a Federal or government reinsurance program--really
does nothing to address reinsurance costs for what is often the
most significant and major insurer in the market.
What the State Farms, Allstates, and others have to do,
however, is look at their risk exposure, to balance it against
the premiums that the regulatory system allows to charge, and
make certain that they remain financially sound and viable to
meet their claim obligations.
Chairwoman Waters. Thank you, very much. Mrs. Biggert?
Mrs. Biggert. Thank you, Madam Chairwoman. My first
question, I guess, is to Governor Racicot. I guess that some
people must have known your name, in order to vote for you, or
how to pronounce it.
Mr. Racicot. I think at some point it becomes so bizarre
they can't forget it.
Mrs. Biggert. Maybe so. Insurance is currently regulated at
the State level, and in many States, it seems that prices and
coverage are highly regulated. This is not the case in my home
State of Illinois. In fact, we always talk about its being a
model for insurance, because it takes the free market approach
to pricing.
Do you think that States should relax or rethink price
controls as a way to attract more insurers, thereby increasing
the availability of insurance for consumers?
Mr. Racicot. Well, I do believe, Mrs. Biggert, that, in
fact, that's a sterling example of how the competitive
influences of a private enterprise system can work with
virtually any commodity or service.
I think you would see some similar signs of that with the
auto market in New Jersey, as well. It's certainly not
occupying the same posture as the regulatory climate in
Illinois. But I think that's a very good example of how you can
drive a better bargain for consumers by opening up the market.
Mrs. Biggert. And then I understand that the AIA disagrees
with the catastrophic coverage proposals currently before
Congress. I think you mentioned that.
Could you explain how that is different from the
availability of terrorism insurance in the private market, and
why a Federal backstop might be more appropriate with terrorism
insurance, rather than this?
Mr. Racicot. Yes, ma'am, to the best of my ability. The
bottom line is, from our perspective, you should keep as much
capacity in the private sector as humanly possible, because
that is how you produce the best bargain for the people of this
country.
There have been some instances, however, over the course of
time, where it has been necessary to look at a partnership
between government and the private sector, because there has
been an inability to be able to quantify risk. The Flood
Program is one of those instances.
Another instance is terrorism. When you think about it, you
determine a premium and risk and what it's going to cost by
having past historical information from which to draw a
judgement, after distilling all the circumstances over a long
period of time. Secondly, you are able to keep abreast of what
it is that's unfolding presently.
The industry does not have any history with terrorism.
Secondly, we do not have top secret intelligence reports every
single day. It is virtually impossible for us to calculate a
level of premium. And as a consequence of those two
circumstances, reinsurers don't offer reinsurance. There is
some capacity, but it is so expensive and so small, that it's
really not very meaningful.
Mrs. Biggert. So, with the national--or catastrophes, you
have more experience that you are able to at least have some
actuarial or underwriting capabilities?
Mr. Racicot. Yes, ma'am. We do believe that there are
important bridge mechanisms that sometimes have to get you from
one place to another. But you always have to keep your eye,
ultimately, on maintaining as much of a private market as
possible, because it produces the best bargain.
So, we believe there is plenty of capacity if we have the
right signals, the right regulatory climate, the right
environmental policies. If people quit building on sandbars, we
will be in a situation where we can make certain we respond to
the needs of the day.
Also, at the end of the day, people have to make value
judgements about where they want to live and how much they want
to pay to live there.
Mrs. Biggert. Thank you. And, Mr. Nutter, would a national
reinsurance program negatively affect the amount of capital the
insurance industry would receive from investments?
Mr. Nutter. I don't think there is any question, Mrs.
Biggert, that State government or Federal Government programs
are going to be far more competitive than the private sector
can be. They pay no taxes, have no capital charge, and often
don't have a risk-based rate.
Certainly, the Florida experience is that the Florida
hurricane catastrophe fund has just disintermediated the
private reinsurance market. I would assume that a Federal
program would do the same. It seems to me to be a mistake to
take off the table a capital commitment from the reinsurance
community worldwide, that wants to write catastrophe risk in
the United States.
Mrs. Biggert. So the free market creates a more diversified
insurance?
Mr. Nutter. Your question to Governor Racicot is a good
one, about a competitive rating environment in Illinois.
Reinsurance rates and terms are not regulated, either.
Reinsurers are regulated for solvency, if they are licensed in
the United States.
What you have is a reinsurance market that is highly
competitive, globally, and in fact, has attracted capital after
every one of the major natural and manmade acts, catastrophe
events, in the last 15 years. It attracts capital to serve this
market. A competitive rating serves a competitive market very
well. And the reinsurance market is a good example of why
that's true.
Mrs. Biggert. Thank you. I yield back.
Chairwoman Waters. Thank you. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. Could you go back
again through the kind of signals, negative signals, that were
sent as a result of Rita and Katrina by the officials? You were
saying there were negative signals. Can you just--
Mr. Racicot. Yes, sir. There are--let me just take them,
without mentioning any individual State. But at least one State
in the Gulf, where almost instantaneously, litigation and
investigation began, and efforts to try and change contracts,
both private litigation and official investigations by various
governmental authorities.
Now, my understanding is that there has been no criminal
activity ever discovered or pled, or any court actions
presently proceeding in that specific direction.
But when you set about to say that the contracts that you
have entered into are no longer sacrosanct, as they have been
throughout our history, and suggest that rules are going to be
suspended, and that there is a regulatory climate that you
can't depend upon, that sends signals. It would to Home Depot,
if they were being told that it doesn't matter what a sheet of
plywood costs, we're going to sell it for $3.50 here, in the
State of Mississippi.
Mr. Cleaver. Yes. The industry paid out $55 billion in
claims and losses in the Gulf Coast.
Mr. Racicot. I believe, sir, it was around $40 billion, as
a result of Hurricane Katrina.
Mr. Cleaver. Okay, $40 billion, and profitability reached
an all-time high. Now, we don't have the numbers in yet, but
since Rita and Katrina there are still--profitability numbers
in the industry are still climbing.
Mr. Racicot. The last 2 years that has been true, yes, sir.
The previous 18 it was not. And there are long--as I mentioned
before, there are long tails on claims, and there are huge
capital requirements. If you're going to diversify and provide
more products in more areas, of course you have to have the
capital to back it up.
Mr. Cleaver. Well, yes. But let's stay with the
profitability. If you are--if you just spent out record numbers
in losses, the industry doesn't appear to have been hurt. If
your profitability rises at the highest level ever, and let's
assume that maybe the claims were not paid until 2007. The 2007
chart is just going to the sky.
I mean, you're getting ready to have--I'm not mad at you--
but the industry is getting ready to have the biggest boom
ever, right on the heels of the worst catastrophe in the
history of the United States.
Mr. Racicot. Well, Congressman, I think last year, of
course, we were very blessed not to have a great deal of
hurricane damage. And as a consequence of that, the Lord has
shown us some mercy throughout that period of time. In addition
to that--
Mr. Cleaver. I'm not sure the Lord is involved in the
insurance industry. But I have this insurance information
institute printout, and there is not a business in this country
that wouldn't like to have this.
Mr. Racicot. Well, Congressman, I don't think that's an
entirely fair analysis. I don't think there is any doubt that
over the last 2 years, that the property casualty companies of
this country--and as I mentioned, there are 5,000 of them--
experienced a profit gain. There is no question about that.
But when you compare their generation of some revenue gain
over the course of the last year, you will find it's in the
range of about 15 percent. And the Standard and Poors average
is around 18 percent. So, when you take a look at other
industries, you don't find that the industry is in a situation
where they have exorbitant returns on capital.
Mr. Cleaver. Yes?
Mr. Nutter. If I could supplement the answer, let me go
back to something I said earlier to Chairwoman Waters. Some of
the reasons for the insurance companies' profitability is that
they laid off risk to the reinsurance market.
Mr. Cleaver. Yes.
Mr. Nutter. If you had that chart for the reinsurers, what
you would see is the following: in 2005, the reinsurance market
had a combined ratio of 129. What that means is that with
losses and loss adjustment expenses, it paid $1.29 for every
dollar of revenue. Lost money. In 2004, it was 125. It paid out
$1.25 for every dollar of revenue.
So, the profitability of the insurance companies is, to
some extent, a mirror image of what happens in the reinsurance
market. The reason that I mention that is that some of the
proposals being considered by the Congress are effectively to
put the government in competition with the private reinsurance
sector, not the private insurance sector.
It would seem to me to be counterintuitive to
disintermediate the reinsurance market, when, in fact, it is
serving the role of being the risk-bearer for these catastrophe
losses to a fairly significant degree.
Mr. Cleaver. Well, you know, I would really like to see the
reinsurance charts, because this appears to fit into what our
colleagues have said earlier--you heard the Members of Congress
who were here--about what has happened with insurance. And
having gone to the Gulf Coast region, and spoken with people
down there, you know, if the numbers are accurate, your 1
percent--you're saying that only 1 percent of the claims were
in litigation, maybe that's one of the few spots on the planet
where we don't have enough lawyers.
Because I can't understand it. I have run into very few
people who--and we had lunch with Senator Trent Lott in
Gulfport, I guess it was, Gulfport, and I have not heard
anyone, not one person, say, ``That insurance company really
did treat us well. And I--this is a great day for America.''
Chairwoman Waters. Thank you very much. Mr. Neugebauer?
Mr. Neugebauer. Thank you, Chairwoman Waters. Ms. Spragens,
I have a question from one of my colleagues, and I will just
read that question for you.
Instead of increasing Federal interference in the insurance
marketplace, are there ways that the Federal Government can
reduce regulatory burdens to increase competitive options and
coverages available for consumers? For example, according to a
2005 Government Accountability Office report, the Liability
Risk Retention Act has had an important effect in increasing
the availability and affordability of commercial liability
insurance for certain groups, allowing members to benefit from
the consistent prices, targeted coverage, and programs designed
to reduce risk.
Shouldn't Congress be looking at attracting new capital,
through elimination of unnecessary Federal burdens, such as
expanding the Liability Risk Retention Act with appropriate
fixes?
Ms. Spragens. Thank you very much for that question,
because it has two important parts, and I want to try to answer
both of them.
First, in terms of the opening up of the Risk Retention
Group Act, our members are very interested in discussing that.
You mentioned Janice Abraham in your opening comments, who is
one of our members. We are going to be discussing that with
them, to try to find that right balance between the interests
of those who are insured by risk retention groups, the groups
themselves, and insurers, to find the right balance, and take a
look at that very thing. And we look forward to working with
you on that.
But you also asked about opening up and reducing other
government--Federal Government--burdens. And there is a very
important one that I alluded to in my opening comments, and
that has to do with the tax-deferred catastrophe reserve.
I really do think Americans would be quite surprised to
find out that insurers can only reserve for past events. What
that means--and this goes to your questions about profits--is
that in that rare event when Mother Nature has been kind, and
we do show a profit--which, by the way, was for all lines, all
products, inland marine, ocean marine, jewelers, all that, it's
all there--that all those occasions when we do, mixed in there
is the amount we are actually spending on catastrophes most
years.
The other thing is, the only way we can show that to you is
a profit. We don't have the option of diverting it before taxes
into a reserve, where it can be called upon to increase
availability, in the event of a catastrophe down the road,
because we can't reserve for future events.
And, you know, there is an important historical precedent
for that. It goes back to ancient Egypt. There were 7 years of
plenty followed by 7 years of drought and famine. And during
those 7 years of abundance, the grain that wasn't needed was
put into reserves. And during the drought, and during the
famine, people did not starve. And that is exactly the position
that the insurance industry is in today, because we don't have
the ability to use the money that isn't needed in a given year,
and put it into a reserve, to be able to call upon it without a
pretty heavy tax hit, which reduces its benefit to
policyholders.
And so, we would strongly encourage you to consider taking
that old, old lesson, and make it possible for insurers to be
able to set aside funds that aren't needed, before it becomes
profit, and before it becomes heavily taxed.
Mr. Neugebauer. Actually, banks have that option available
to them. I believe they can set up loan loss reserves. And I
think they get to do that after tax. Is that correct?
Ms. Spragens. It's a before-tax need.
Mr. Neugebauer. I mean before tax, yes.
Ms. Spragens. It's a before-tax need.
Mr. Neugebauer. Yes, I'm sorry. Next question for Mr.
Nutter. I understand that the unofficial amount of reinsurance
sold for catastrophes in 2006 was around $90 billion, claims
for 2005, the largest on record, amounted to $60 billion. And
many insurance experts estimate that the industry could
withstand a single event in the $100 billion range and remain
solvent.
How do you see the reinsurance market growing over the next
several years, and do you expect them to be able to increase
their capacity?
Mr. Nutter. Thank you for the question. It is my
understanding from market reports that the amount of
reinsurance capacity purchased in 2006 was--in the private
market--was probably in the $75 billion range. If you add the
Florida Hurricane Catastrophe Fund, which is a government fund,
it gets to the $90 billion range.
The larger number that you cited would really also reflect
the fact that some insurance companies retain all of the risk,
and they don't reinsure it at all, and other companies retain
much of their risk, and then only reinsure some.
If the past is, in fact, prologue, the reinsurance market
has grown in capacity in 2005 and 2006. Estimates are that it
grew by 30 percent in 200, and from 2006 to 2007, it grew by
another 14 percent. The capital markets have replenished
losses. The capital markets have seen this as an opportunity to
invest. Reinsurance capacity has increased from--certainly from
2001, where reinsurers paid 60 percent of the losses associated
with the events of 9/11, and continue to grow. I see no reason
to think that would not continue.
Mr. Neugebauer. Thank you, very much.
Mr. Nutter. Thank you for the question.
Chairwoman Waters. Mr. Green?
Mr. Green. Thank you, Madam Chairwoman, and I thank the
witnesses for appearing today.
Let me move quickly to Ms. Spragens. Ms. Spragens, in your
paradigm of a reserve, how is the interest on the untaxed
dollars handled?
Ms. Spragens. It needs to be building up inside the reserve
during the time that it's there. This is for the purpose of
maximizing its benefit to policyholders, sir. The taxes are
paid at a later date, when that money is taken down.
Mr. Green. Governor, permit me to ask you about your
comment on wind versus water. You indicated that you have some
thoughts on it that you would share with us, in terms of how it
should be handled. How would you handle wind versus water?
Mr. Racicot. I think, Congressman, that there are several
different possibilities. A couple that I would mention to you
at the very beginning is, number one, you could try to make
certain that you were in a situation where, for example, the
NFIP could be amended to require Federal participation in
State-sponsored mediations, to determine the extent of damage
caused by wind versus water.
Number two, you could encourage greater coordination on the
marketing and sales of Federal flood and private property
insurance. I think that there are many ways that you could try
to bring more precise definition and protocol to this
particular situation.
This has obviously been highlighted, it's a matter under
extraordinary scrutiny. There ought to be as much clarity and
definition as we can possibly bring to bear as part of the
process going forward, and I think there are ways to do that.
Mr. Green. Let me move quickly to Mr. McCarty. My suspicion
is that you have some opinions that will differ slightly from
the governor's. Can you at least give us some of your thoughts?
Mr. McCarty. Yes, thank you very much. First of all, I
would like to address the issue of the private marketplace, and
maximizing the private marketplace, and allowing the capital
markets to grow. And I share that, because I think a free
market is critically important.
But axiomatic to a free market is willing purchasers and
willing sellers. And, unfortunately, for homeowners, they are
required to buy homeowners' insurance. They are required to buy
the risk of hurricane. And, unfortunately, we're getting fewer
and fewer sellers. So we really don't have a free market of
willing buyers and willing sellers, because we tell the
policyholders and homeowners in Florida, ``You must have wind
exposure.'' And I think that's the appropriate and prudent
thing to do.
Unfortunately, when you compare Florida, which has the risk
of hurricanes, California, with the risk of earthquake,
Illinois doesn't really have catastrophic risk, with the
exception of flooding, which is already taken care of in the
Federal Flood Program. They do have the risk of earthquakes,
but most people in Illinois do not purchase earthquake
coverage--
Mr. Green. Let me interrupt you--
Mr. McCarty.--because it's not required.
Mr. Green.--just a moment, and ask you to respond quickly
to the notion of a reserve.
Mr. McCarty. We would--the reserve concept, I think, is a
very good concept. I think we have to make sure that reserve is
in a separate account, to ensure that it is used for the use
and benefit of payment of claims, and not dividend to the
stockholders.
But to set aside reserves for the future, the United States
is about the only country in the industrialized world that does
not have some mechanism for tax deferment. And if we had done
this--
Mr. Green. Let me intercede one more time, because my time
is about up. Governor, back to you. Governor, you are a former
litigator, are you not?
Mr. Racicot. I am a former prosecutor, yes, sir.
Mr. Green. I would consider you as litigator, as a
prosecutor.
And it is your belief that litigation somehow of a--what is
perceived to be a legitimate claim of liability is somehow a
negative?
Mr. Racicot. No, sir, not a legitimate claim.
Mr. Green. Okay. Well, do you not believe that the
legitimacy of the claim lies within the mind of the person who
sees the damages, and has to assess the damages, and make some
determination? This is why we have lawsuits, because lawyers
differ in opinions.
Mr. Racicot. I think that is entirely accurate. If you are
proceeding in good faith, and with the--
Mr. Green.--opinion that the attorney general for the State
of Louisiana and Mississippi proceeded in something other than
good faith, representing the people of those States?
Mr. Racicot. I don't know that I could offer a precise view
about his--
Mr. Green. Was it not implicit in your statement that there
was something untoward happening, because--
Mr. Racicot. What I said in my statement is that when you
create an environment within which you are going to revisit
contracts that people have knowingly and voluntarily entered
into, you have sent a very bad signal about how business can be
conducted in--
Mr. Green. If you are the attorney general of the State of
Montana, or governor, and you perceive that your people have
been wronged, do you not file lawsuits to protect the interests
of the people that you represent?
Mr. Racicot. If there is evidence to support them, that
allows for you to be able to prove your cause beyond a
reasonable--
Mr. Green. Is it your contention that there is not evidence
to support the notion that wind and rain, coupled with--
together, should cause one to at least consider the possibility
that the water was driven by wind, and that the water driving--
the wind driving the water created the problems such that it's
the wind, and not the water damage that--
Mr. Racicot. I think that's a legitimate question that may
be subject to litigation, and that is not what I am confusing
the situation with.
What I am talking about is whether or not a State, as a
matter of practice and climate, is sending the right signals,
trying to attract business enterprise into their individual
States.
Mr. Green. States have the right, under the Constitution,
to litigate. You would not oppose this.
Mr. Racicot. I would not.
Mr. Green. And we have judges and juries that make
decisions. I cannot believe that you would want to have States
that legitimately perceive their citizens to have been wronged
not to take appropriate action to litigate.
Mr. Racicot. I wouldn't--
Mr. Green. You would have done this, as governor, wouldn't
you?
Mr. Racicot. I wouldn't ask you to believe that, sir. In
fact, I would have a hard time believing that's what I would
want, as well.
Mr. Green. Well, it seems to be implicit in your statements
that the people of Mississippi are not being properly
represented by those who would litigate on their behalf.
Mr. Racicot. No, sir. What I am saying is that when you
create an environment, contribute to or precipitate
circumstances where you set about--
Mr. Green. How the circumstance--
Mr. Racicot.--to abrogate contracts voluntarily entered
into--
Mr. Green. Governor, how are those circumstances being
created?
Mr. Racicot. Well, by--in a number of different ways, in a
number of different--
Mr. Green. Give us some of those ways, Governor. How did--
Mr. Racicot. I just told you. When you set about,
regulatorily, to suspend the ability to have your rates fixed
in a competitive environment based upon sound actuarial
analysis, when you require insurance companies to remain in a
State if they happen to be doing business in your State on that
particular day, beyond--
Mr. Green. But you spoke earlier about litigation.
Mr. Racicot.The point where they would voluntarily choose
to remain.
Mr. Green. Did you not speak about lawsuits earlier?
Mr. Racicot. When there is a--
Mr. Green. I yield back. Thank you, Madam Chairwoman. And
thank you, Governor.
Mr. Racicot. Yes, sir.
Chairwoman Waters. Thank you. Thank you very much. To the
members of this panel, we have a few minutes left, and I would
like to recognize each member for an additional 2 minutes. And
I will start with the panel here, asking this question.
Of all the possibilities for public policy that you have
heard to address this problem, which do you support, if
anything? All perils? H.R. 91, H.R. 330, or do you have
something of your own that you would recommend today?
Mr. McCarty. Thank you, Madam Chairwoman. I am here in the
capacity of the National Association of Insurance
Commissioners, and also wearing another hat as, obviously, as a
commissioner in the--
Chairwoman Waters. Do you have a recommendation?
Mr. McCarty. Our recommendation is for the endorsement of
the concept of having a commission to evaluate and focus
attention on a number of these issues. Each one of them has a
valuable contribution--
Chairwoman Waters. All right. Okay, I am going to have to
move along. I only have 2 minutes. Mr. Valdivia?
Mr. Valdivia. Thank you, Chairwoman Waters. The Big I
supports H.R. 330. Also, we support S. 292, the coalition.
Chairwoman Waters. Okay.
Mr. Valdivia. Yes.
Chairwoman Waters. Thank you. Mr. Bennett?
Mr. Bennett. Yes, Congresswoman. At this point, we are
still looking at all of the complex issues, and we have not
made a determination on any at this point.
Chairwoman Waters. All right. Mr. Porter?
Mr. Porter. We support H.R. 91, but we are open to
additions to that. We want to work with the committee to
broaden that.
Chairwoman Waters. Okay. Mr. Thomas?
Mr. Thomas. Yes. We are still looking at all of the issues,
but we, in concept, support the insurance commissioner's
recommendation.
Chairwoman Waters. Okay. Ms. Spragens?
Ms. Spragens. We would support the notion of a Federal
credit facility, or a loan, because that would not put you into
the business of insurance, and you would not have to be asking
for cross-subsidies from other States or other citizens, and
therefore, creating divisiveness among your constituents.
Chairwoman Waters. If the reinsurers are losing money,
wouldn't they be glad to get out, if we could step in and do a
better job?
Ms. Spragens. Well, ma'am, as you may have noticed, we're
taking a lot of strong questions right now, and you could be in
this chair if you had gotten into the insurance business.
And so, we urge you, instead, to think about a loan, think
about the possibility that if States really do have a market
failure--and that's the important thing, we don't think States
ought to be creating CAT funds unless there is a market
failure, which means our reinsurer friends aren't there--
Chairwoman Waters. Okay.
Ms. Spragens.--create a CAT fund, and that provides
reinsurance. At that point, our reinsurance friends may want to
come in and take part of it, which they would be more than
welcome--
Chairwoman Waters. Thank you. All right.
Ms. Spragens.--economical.
Chairwoman Waters. Thank you. And I like the chair that I
am in.
[Laughter]
Chairwoman Waters. All right. Let us move to Mr. Racicot.
Mr. Racicot. Thank you, Madam Chairwoman. Of those bills
pending, obviously, we want to see the National Flood Insurance
Program reforms enacted.
We would like to see the tax incentives and reserve
questions visited by the Congress. We would also like to make
certain that any of the mitigation efforts that we have
proposed are considered and that catastrophe savings accounts
be enacted, and allowed as an option for taxpayers across the
country.
Chairwoman Waters. Thank you. Mr. Nutter.
Mr. Nutter. Yes, thank you. To the extent that we have a
view on all of these, the only one that we think is a viable
option is really looking at a commission, to see if we can
bring together a consensus on an approach.
Chairwoman Waters. Thank you. Mrs. Biggert?
Mrs. Biggert. Thank you, Madam Chairwoman. I will just ask
one question, too, if we can go down, and it's similar.
If private insurance and the reinsurance prices are high
and rising in the most catastrophic-prone regions of our
country, but the insurance is available, is it wise to set up a
Federal program that offers less expensive reinsurance, but
putting the burden on the taxpayers to pay for it?
Mr. McCarty. And the short answer to that is we believe
that if it's available, and not affordable, then therefore,
it's not available. So there needs to be some alternative to a
mega-catastrophe, when all the wheels fall off, for our system,
for us to have a mechanism that maximizes the private sector,
but at the same time makes the government more efficient.
Mrs. Biggert. Thank you. Mr. Valdivia.
Mr. Valdivia. We believe that there is a legitimate role
for the Federal Government when there is a marketplace failure.
Mrs. Biggert. Mr. Bennett?
Mr. Bennett. Yes. I concur that if the market, the current
market, is not working, then we need to look to the government,
or some other mechanism to build in a backstop to make it
affordable, which would encourage more people to enter it. That
way, the risk would be spread longer over a larger number of
people, just like the pool for the catastrophic loss, which
includes all those areas.
Mrs. Biggert. Mr. Porter?
Mr. Porter. I think in my statement I made it clear that
ProtectingAmerica.org supports the public/private partnership,
where you would have State and Federal catastrophic funds that
would be paid for by private insurers.
Mrs. Biggert. Mr. Thomas?
Mr. Thomas. Only in the case of mega-catastrophes and the
capacity failure by the carriers.
Mrs. Biggert. Okay. Ms. Spragens?
Ms. Spragens. We recommend that you start your thinking at
the level of a high-level Federal loan, as was outlined to you.
Mrs. Biggert. Mr. Racicot.
Mr. Racicot. Mrs. Biggert, we do not believe that it is a
panacea, and that is a very dangerous enterprise to undertake.
And if you're looking for an example, probably the National
Flood Program would be the good example.
Mrs. Biggert. Okay. Mr. Nutter.
Mr. Nutter. Mrs. Biggert, I question your assumption.
Reinsurance capacity is, in fact, expanding, and we're in a
moderating price environment. It operates like classic
economics. And, indeed, this would be exactly the wrong time
for government to get into the reinsurance business, at a time
when the market is trying to serve these catastrophe-prone
areas.
Mrs. Biggert. Thank you, thank you.
Chairwoman Waters. Thank you very much. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. I need some short
answers, because I don't have enough time.
Ms. Spragens, the judge actually followed up on my question
with regard to the reserve fund that you mentioned earlier. And
then, Mr. McCarty actually spoke to where I was going, which
was would there be any safeguards that reserve dollars would
not end up as paid dividends to stockholders?
Ms. Spragens. We have to remember that insurance is just
about the most heavily regulated industry out there, and State
insurance regulators have extensive reporting requirements. We
believe this will actually add to the transparency, and permit
them to see exactly where those profits--pre-profit--can go.
Mr. Cleaver. Okay.
Ms. Spragens. And so we believe it's heavily regulated, and
you would be satisfied with that.
Mr. Cleaver. Yes, I would, with heavy regulation. You
mentioned the 7 years of famine, 7 years of growth. Now, you do
know that the prophet speaking for God said to the people after
the famine, ``I will restore to you the years that the locusts
hath eaten.'' And that's kind of where we are going. We want
the insurance companies to restore to the people what the
lawyers have eaten. And I'm not sure that God is too heavily
involved in the insurance industry. But if you want to throw
him out here, I have some stuff.
[Laughter]
Chairwoman Waters. Amen.
Ms. Spragens. Should I respond?
Chairwoman Waters. Mr. Green.
Mr. Green. Just a closing comment. I believe it was Kennedy
who said, ``Here on Earth, God's work must truly be our own.''
I think we're doing God's work today. And I yield back.
Chairwoman Waters. Thank you, very much. I would like to
thank the panel for being here today, for your patience, and
for the valuable information you have shared with us.
I would also like to ask unanimous consent to include in
the record the information that was shared with us by Mr.
Neugebauer when he earlier spoke about--before he made his
presentation.
I also would ask unanimous consent that the statement of
Janice M. Abraham of United Educators Insurance, and the
statement of Charles Chamness, on behalf of the National
Association of Mutual Insurance Companies, be made part of the
record. Without objection, such is the order.
Thank you very much. The Chair notes that some members may
have additional questions for this panel, which they may wish
to submit in writing. Without objection, the hearing record
will remain open for 30 days for members to submit written
questions to these witnesses, and to place their responses in
the record.
With that, this hearing is adjourned. Thank you.
[Whereupon, at 4:59 p.m., the hearing was adjourned.]
A P P E N D I X
March 27, 2007
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