[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



                                 ______

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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

                              ----------                              
                                                                   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

                              ----------                              


                        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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