[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 920, THE MULTIPLE PERIL
INSURANCE ACT OF 2007
=======================================================================
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
__________
JULY 17, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-50
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38-391 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida THADDEUS G. McCOTTER, Michigan
JIM MARSHALL, Georgia
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 THADDEUS G. McCOTTER, Michigan
BARNEY FRANK, Massachusetts
C O N T E N T S
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Page
Hearing held on:
July 17, 2007................................................ 1
Appendix:
July 17, 2007................................................ 57
WITNESSES
Tuesday, July 17, 2007
Baker, W. Anderson III, CPCU, ARM, President, Gillis, Ellis &
Baker, Inc..................................................... 37
Baker, Hon. Richard H., a Representative in Congress from the
State of Louisiana............................................. 10
Conrad, David R., Senior Water Resources Specialist, National
Wildlife Federation............................................ 41
Hartwig, Robert P., Ph.D., CPCU, President and Chief Economist,
Insurance Information Institute................................ 39
Jindal, Hon. Bobby, a Representative in Congress from the State
of Louisiana................................................... 13
Majewski, Ted A., Senior Vice President, Harleysville Insurance
Group, on behalf of the Property Casualty Insurers (PCI), the
American Insurance Association (AIA), and the National
Association of Mutual Insurance Companies (NAMIC).............. 34
Maurstad, David I., Federal Insurance Administrator, and
Assistant Administrator, Mitigation Directorate, Federal
Emergency Management Agency.................................... 15
Melancon, Hon. Charlie, a Representative in Congress from the
State of Louisiana............................................. 8
Pogue, Pamela Mayer, Immediate Past Chair, Association of State
Floodplain Managers, Inc....................................... 30
Praeger, Sandy, Commissioner, State of Kansas Insurance
Department, and President-elect, National Association of
Insurance Commissioners........................................ 32
Small, Cheryl A., Policy Advisor, National Flood Determination
Association.................................................... 36
Swagel, Hon. Phillip, Assistant Secretary for Economic Policy,
U.S. Department of the Treasury................................ 17
Taylor, Hon. Gene, a Representative in Congress from the State of
Mississippi.................................................... 6
APPENDIX
Prepared statements:
Baker, W. Anderson III....................................... 58
Conrad, David R.............................................. 65
Hartwig, Robert P., Ph.D., CPCU.............................. 68
Jindal, Hon. Bobby........................................... 79
Majewski, Ted A.............................................. 82
Maurstad, David I............................................ 86
Pogue, Pamela Mayer.......................................... 89
Praeger, Sandy............................................... 95
Small, Cheryl A.............................................. 107
Swagel, Hon. Phillip......................................... 113
Taylor, Hon. Gene............................................ 115
Additional Material Submitted for the Record
Taylor, Hon. Gene:
Letter from Allstate......................................... 125
Letter from Governor Haley Barbour........................... 129
Letter from Senator Trent Lott............................... 131
Letter from Nationwide Insurance............................. 132
Baker, Hon. Richard:
Copies of charts referred to in testimony.................... 134
Pearce, Hon. Stevan:
Statement of the Consumer Federation of America.............. 136
Letter from the American Insurance Association, the National
Association of Mutual Insurance Companies, the Property
Casualty Insurers Association of America, and The Financial
Services Roundtable........................................ 146
H.R. 920, THE MULTIPLE PERIL
INSURANCE ACT OF 2007
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Tuesday, July 17, 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 p.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the subcommittee] presiding.
Members present: Waters, Cleaver, Green; Biggert, Pearce,
and Miller of California.
Also present: Representatives Watt, Kanjorski, Hinojosa,
Baker, Melancon, Taylor, and Jindal.
Chairwoman Waters. Good afternoon. This hearing of the
Subcommittee on Housing and Community Opportunity will come to
order.
Good afternoon, ladies and gentlemen. I would like to thank
the ranking member, Ms. Judy Biggert, and members of the
Subcommittee on Housing and Community Opportunity for joining
me for today's hearing on the Multiple Peril Insurance Act of
2007, H.R. 920.
I would like to start by noting that without objection, Mr.
Paul Kanjorski, the chairman of the Subcommittee on Capital
Markets, Insurance, and Government Sponsored Enterprises; Mr.
Mel Watt, chairman of the Subcommittee on Oversight and
Investigations; and Mr. Ruben Hinojosa will be considered
members of the subcommittee for the duration of this hearing.
Also without objection, all members' opening statements will be
made a part of the record.
I am looking forward to hearing from today's witnesses
about H.R. 920, the Multiple Peril Insurance Act of 2007,
introduced by Rep. Gene Taylor and co-sponsored by a number of
Members, including me. As you know, last month, the
Subcommittee on Housing and Community Opportunity held a
hearing on H.R. 1682, the Flood Insurance and Reform
Modernization Act of 2007, because of issues related to flood
insurance reform and modernization, as well as funding, and the
National Flood Insurance Program.
Given the ongoing debate concerning wind and flood risk, I
believe it is prudent for the subcommittee to address the
policy implications of H.R. 920 related to the National Flood
Insurance Program. H.R. 920, the Multiple Peril Insurance Act,
would create a new program in the National Flood Insurance
Program to enable the purchase of wind and flood risk in one
policy. The bill requires premiums for the new optional
coverage to be risk-based and actuarially sound, so that the
program would be required to collect enough premiums to pay
claims.
Multiple peril policies would be available where local
governments agree to adopt and enforce building codes and
standards designed to minimize wind damage in addition to the
existing flood program requirements for floodplain management.
Any community participating in the flood insurance program
could opt-in to the multiple peril option, but the greatest
demand for the optional coverage product will be in coastal
areas that face both flood and wind risk from hurricanes and
tropical storms.
Because insurance companies are withdrawing from coastal
areas, State-sponsored insurers of last resort have been forced
to take on much more disaster risk. The Multiple Peril
Insurance Act would allow homeowners to buy insurance and know
that their damage from both wind and water will be covered.
This is primarily a concern after a hurricane, where the worst
destruction is typically caused by a combination of wind and
flooding. Homeowners would not have to hire lawyers, engineers,
and adjustors to determine what damage was caused by wind, and
what was caused by flooding.
The bill would set residential policy limits at $500,000
for the structure, and $150,000 for contents and loss of use.
Non-residential properties could be covered up to $1 million
for structures and 750,000 for contents and business
interruption. Once the new optional coverage program is
enacted, a private insurance market should develop to offer
coverage above the limits. This would allow insurance companies
to design policies that would have the equivalent of a $500,000
deductible for residential properties or a $1 million for non-
residential properties.
Again, I look forward to hearing the witnesses' testimony
on H.R. 920, and now I would like to recognize the ranking
member, Ms. Biggert, for her opening statement.
Mrs. Biggert. Thank you, Chairwoman Waters, and thank you
for holding today's hearing on H.R. 920, the Multiple Peril
Insurance Act of 2007.
I had the pleasure of spending time with Mr. Taylor at a
field hearing in Mississippi earlier this year, and I
appreciate his hospitality as well as his commitment to his
community and the issue of insurance availability. I'd also
like to thank both Congressman Baker and Congressman Jindal for
their longstanding interest in natural disaster issues, and I
look forward to their testimony today.
In February, I did visit the Gulf Coast and saw the
devastation that Hurricanes Katrina and Rita caused in both
Louisiana and Mississippi. It has been almost 2 years since the
hurricanes hit land, and entire neighborhoods still await
rebuilding, in part because many homeowners face difficulties
in securing insurance. Today we will hear from witnesses to
help us determine if wind should be added to the National Flood
Insurance Program, and I will admit that at this time, I do not
support this idea, which is envisioned in Mr. Taylor's
legislation. But at the same time, I do think that we need to
more closely examine the insurance availability problems that
exist in some areas of the country like the Gulf Coast.
First, I am interested in hearing from today's witnesses
about the ways that State regulatory systems influence
insurance availability. Why are there availability problems in
some States, but not others? Are insurers allowed to price for
the true risk a particular property faces? In Illinois, free
market pricing benefits consumers, ensuring that they will have
choices, since insurers are encouraged to compete for their
business. I'm also interested in discussing ways we might
lessen the regulatory burden to spur the creation of a private
market multiple peril policy at an affordable rate for
consumers.
Second, I'm concerned that expanding the Flood Insurance
Program to include wind could compromise efforts to enact much-
needed reform of it and FIP, which is the Nation's largest
single-line property insurance provider. To help reform the
Flood Insurance Program, I introduced H.R. 1682, the Flood
Insurance Reform and Modernization Act, with Chairman Frank. I
look forward to marking-up this legislation at the end of this
month.
To put it simply, the NFIP is under water. To pay 2005
hurricane claims, the Program was forced to borrow from the
Treasury a substantial amount of money, over $17 billion, that
it will likely not be able to repay. I'll admit that I'm a bit
of a skeptic. It seems to me that before expanding a sinking
Federal program, we should reform it. We need to reform the
NFIP by updating the Nation's flood maps, improving private/
public sector coordination, and removing subsidies from
properties that repeatedly flood.
In January, the Government Accountability Office placed the
Flood Insurance Program on its high-risk series list which
recommends increased congressional oversight for troubled
programs. So before expanding the NFIP to include wind, we
should keep our commitment to reform the NFIP and to move H.R.
1682.
Third, H.R. 920 requires that wind coverage be offered at
actuarial rates. I support actuarial insurance pricing, but I'm
concerned that it is a concept that does not work in practice.
Approximately one quarter of NFIP policies currently in place
are subsidized. The Congressional Budget Office believes that
even unsubsidized properties may not be charged at actuarial
rates because outdated flood maps do not in many cases
accurately identify risk. I'm concerned that wind coverage
would be no different, further exposing taxpayers to large
financial risks should an underfunded wind program face another
Katrina.
After such large events like the 2005 Gulf Coast
hurricanes, the market must reevaluate its exposure and the
regulatory environment in the wake of tremendous disasters,
natural and otherwise.
We often seek a silver bullet to make things run more
smoothly next time or prevent the past from repeating itself;
however, we must be careful not to move too quickly. After
Enron and other accounting scandals, the committee worked
diligently to enact reform legislation. While Sarbanes-Oxley
represents an important step forward in safeguarding our
Nation's financial markets, in the years since its enactment,
we have learned that acting too quickly can lead to problems
down the road.
Instead of endorsing one legislative approach over another,
at this point we should study and review ways to increase
insurance availability and encourage the private sector to
offer this coverage over the long term.
I look forward to continuing to work on reforming flood
insurance programs and setting ways to encourage a more robust
market for catastrophic insurance.
I yield back.
Chairwoman Waters. Thank you very much, Ranking Member
Biggert. I would now like to recognize Mr. Cleaver for 5
minutes.
Mr. Cleaver. Thank you, Madam Chairwoman, and I take this
opportunity to express appreciation to you and Ms. Biggert for
leading the delegation down to the Gulf region earlier this
year, and we had an opportunity to visit with our colleague,
Congressman Gene Taylor, who was kind enough to spend a
considerable amount of time with us, showing us around.
This is a very important hearing. I think most of the
hearings we have are important, but to me this is extremely
significant because of the discussions that people are still
having about what happened in the Gulf Coast region and, in
many instances, the failures of the Federal Government. And I
think we have an opportunity now to be proactive.
I have a little different perspective with regard to the
term ``acts of God,'' only because in the context that we are
dealing with, it is something negative, and we are experiencing
one of the ``acts of God'' right now. It's just called an
avalanche of oxygen.
That's theological. We don't have to get into it. We can
exchange papers on the subject, but the final point I want to
make here is that--and this may be somewhat provocative--in
addition to flood and wind coverage, at some point, perhaps not
today, but at some point, I think it is going to be important
for us to explore other perils like earthquakes and tornadoes.
Tornadoes, for example, are readily seen in my native State
of Texas, and of course in Missouri, which I represent today,
and all over the Midwest. And so I think at some point that
needs to be dealt with. I am very proud to be a co-sponsor with
my colleague, Gene Taylor, on the all peril insurance bill,
H.R. 920. I look forward to hearing your comments and being
directed in another way that would be better than the direction
we're traveling.
Thank you, Madam Chairwoman.
Chairwoman Waters. You're welcome. And now, I would
recognize the gentleman from North Carolina, Mr. Mel Watt, who
is also the chairman of the Subcommittee on Oversight and
Investigations.
Mr. Watt. I thank the gentlelady for yielding me time, but
I just came to listen, having developed an intense interest in
this because of the oversight hearings that we are having
regarding the failure of the insurance payment process in the
aftermath of Hurricane Katrina. I'm disappointed that more of
the members are not here to get actively engaged in this
because it's an issue that we really, really must deal with and
deal with more aggressively than we have.
And like Representative Cleaver, one of the concerns I have
is whether the proposal goes far enough in defining the range
of perils that should be included under a policy that is
written by the Federal Government as opposed to private
insurers.
The difference, it seems to me, between the market being
able to take care of insurance, as Ms. Biggert has indicated is
a desirable and worthy objective for the market to be able to
do, is that when you have catastrophic acts of God that can't
be really anticipated or reserved for, those are the
circumstances in which the risk should be spread throughout the
Nation because that's what the whole idea of the Nation coming
to the aid of people who have had catastrophic losses is all
about.
So while private insurers can model and anticipate and
reserve for and calculate on statistically the likelihood of
fires in Chicago, or in Illinois, where the gentlelady is from,
I don't think I remember Chicago having a flood of the
magnitude of Katrina, or Illinois having a flood of the
magnitude of Katrina. So you get into these situations where,
if the private market has part of the coverage, and the Federal
Government has part of the coverage, you are always going to
have these finger-pointing episodes with people pointing the
finger at each other and saying, you're responsible for that.
And so there needs to be some threshold, I think, above
which a Federal catastrophic policy, call it a multi-peril
policy, kicks in because we recognize that as being beyond what
can be reasonably anticipated by the private market and
reasonably insured against by the private market. So this is a
very difficult issue, and it's not that I have any opposition
to the private sector doing this, but I think the gentlelady
will find that even the private sector is in full accord with
trying to get out of these guessing games when you have a 100-
year or 1,000-year flood.
The private market simply can't model and insure against
that, and the masses of the American people ought to be put at
risk under those circumstances so that we can spread that risk
appropriately across the entire Nation.
Chairwoman Waters. Would the gentleman yield?
Mr. Watt. I'm happy to yield to the gentlelady.
Mrs. Biggert. Since the gentleman mentioned fire, I might
just remind him that the whole City of Chicago burned down.
Mr. Watt. And I'm not suggesting that fire is one of the
perils that ought to be insured against. I guess there are
occasions on which fires have been caused by acts of God where
you have lightning striking somewhere, and it sets off a fire.
But at least the insurance companies know the likelihood that a
fire is going to break out, and it may be a theological debate,
as Reverend Cleaver indicated. Few of us know the likelihood
that an act of God is going to consume us, and I think that's
kind of the threshold that the American people ought to be
prepared to accept when they accept the fact that an act of God
has intervened and you can't really anticipate that.
I'm over my time. I appreciate the gentlelady yielding the
time. I didn't really intend to take anywhere near that amount
of time, but I appreciate the gentlelady having to yield.
Chairwoman Waters. Thank you very much, Mr. Watt.
At this time, I'd like to introduce our first panel of
witnesses, including several of our distinguished colleagues in
the House. Serving on this committee: Hon. Richard Baker, the
author of the bill; the Hon. Gene Taylor; and also,
representing Louisiana, Hon. Charlie Melancon and Hon. Bobby
Jindal.
Thank you all for coming. I don't know when we've had such
a distinguished panel before my subcommittee. So with that, we
will start with our first witness, Mr. Taylor.
STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSISSIPPI
Mr. Taylor. Thank you, Madam Chairwoman.
Madam Chairwoman, just as a quick reminder, on the day I
was elected to Congress, coincidentally, the San Francisco
earthquake occurred, and I remember some of the earlier votes
that I cast were for the supplementals to help the people in
that area. The people--people back home--said, ``Why are you
doing that?'' And I distinctly remember saying that there will
come a time when we're going to need the help of the people
from California, and I want to thank you for being the face of
that help. You have been of tremendous assistance, and I'm
personally indebted to you. And when this is all said and done,
the people of Mississippi, the people of our country, are going
to be indebted to you as well.
I want to thank all of you for being here and for your
trips to Mississippi. Most of you have come to Mississippi only
in the aftermath of the storms, but if you had been to the
south coast of Mississippi prior to Hurricane Katrina, if you'd
gone to my neighborhood, you would have seen a house like this
one.
That's my buddy, Jody Bienvenutti. He lived about a hundred
yards from me. He had a house that was about 180 years old,
been through no telling how many hurricanes. He is in the
supplemental health insurance business, so he had a lot of
faith in the insurance industry. He bought a lot of insurance--
about $586,000 worth of insurance on that house.
That's what it looked like the day before Katrina. This is
what it looked like 2 days later when he could make his way
back from Mobile to see what he had left. If he would have gone
a little bit further down the block, you'd have seen the home
of Corky and Molly Hadden. And Corky is a financial planner,
MBA, built a hurricane-proof home. Look at it. It's up on
stilts. It has a very shallow roof to minimize the wind
exposure. It has shutters. He built a hurricane-proof home.
He's a financial planner, a very smart guy financially.
So he insured that home for $650,000. He was also out of
town, smartly, on the day of the storm; he got out like the
local authorities told him to. When he got back, this is what
he found. Jody had $580,000 worth of insurance; Corky had
$650,000; and 23 months after that storm, neither one of them
has gotten a penny from their insurance company. To give you an
idea of the magnitude of the storm, I really could have started
in Slidell, Louisiana, about 30 miles to the west of where my
house was, and I could have gone to Bayou la Batre, Alabama,
which is probably 80 miles to the east of me.
So I'll go a little bit further to the east to the town of
Long Beach, Mississippi, which looking at is a fairly typical
south Mississippi home owned by the Kissingers. They had
$149,000 worth of insurance. This is what it looked like the
day before the storm. This is what it looked like when they
could make their way back to it. They had $149,000 worth of
insurance. They were luckier than most. They were paid $21,000
on a $149,000 policy.
Now, if you go about another 15 miles to the east of
Biloxi, Mississippi, and if you'd been there the day before the
storm, you would have seen the Strawns' home and get a fairly
typical south Mississippi home. They had $134,000 worth of
insurance. They came home to that, and their insurance company
paid them nothing.
You could go east another 20 miles to Ocean Springs,
Mississippi, to the home of the Openchofski family, again,
another fairly typical south Mississippi home. This is what it
looked like the day before Katrina. This is what it looked like
the day after. They had a $143,000 policy, and they got paid
nothing.
The point I'm trying to make is whether it is Slidell,
Louisiana; Bay St. Louis, Mississippi; Ocean Springs,
Pascagoula, Mississippi; or Bayou la Batre, Alabama, a natural
event occurred where people built what they thought were safe
houses, where they bought what they thought was an insurance
policy that would be their good neighbor, or they'd be in good
hands. They paid their premiums.
And in the weeks after the storm, one by one they had an
adjustor come to their house and say, we see no evidence of
wind damage. We're not going to pay you a dime. Sometimes they
stretched that out for days, sometimes for weeks, and sometimes
for months. And the insurance will come to you and they'll say,
but we settled all these claims. We settled 98 percent of them.
The day they walked on my property, 2 weeks to the day of
the storm and said--despite all the evidence to the contrary
and despite that I walked them hundreds of yards from where my
house was, showed them where my tin roof was--tin doesn't
float; where the holes were where it ripped through the bolts
that attached it to the roof--and they just, with bold face
said, ``We see no evidence of wind damage.''
So I know what happened. And so whether they told you 2
weeks after the storm, 2 months after the storm, or 2 years
after the storm, the fact of the matter is that people who
played by the rules and expected their insurance company to
play by those same rules got screwed by their insurance
companies. It is the only way to describe it, as individuals.
But it gets worse, you see, because when the insurance
companies don't pay claims that they should, because we are a
generous nation, our taxpayers do.
Almost every homeowner's policy had cost-of-living
expenses. If you lose your place, while you are out, we are
going to pay for your apartment. We're going to pay for this.
Well, if they deny your claim, you don't get the cost-of-
living. So in south Mississippi alone, at its peak, we had
42,000 government-furnished FEMA trailers for people whose
homes were either completely destroyed or substantially
destroyed, where our Nation paid to put that $16,000 trailer on
their property, paid another $16,000 just to deliver it to
their property, where our Nation wrote them a FEMA check for
their additional cost-of-living expenses because the insurance
company didn't pay.
Madam Chairwoman, it gets worse than that because not only
did we get stuck with that expense, but under the Federal
write-your-own policy, we allowed the insurance companies to
determine whether the claim was for wind or for water. And so
you're sending a 25-year-old claims adjustor out there who's
thinking about his Christmas bonus, who's thinking about his
next promotion. And you're putting him in the horrible position
of saying, do I ask my company to pay and say the wind did it,
or do I ask the taxpayers to pay and say the water did it all?
Whenever given the chance, they blamed it on the water.
They stuck the taxpayer with the bill and right now in the
State of Louisiana, there is a multi-billion-dollar civil
action suit for people who are trying to recover the money that
the taxpayers were wrongfully billed.
So, for a lot of reasons, I want to commend you for what
you're doing, for looking into this. I'd like to submit for the
record letters from Senator Lott and Governor Barbour, who are
both in support of something along this line of addressing the
problem.
And again, thank you for your personal interest and your
willingness to have what is now, I think, the fifth hearing on
insurance reform since the Democrats took over.
[The prepared statement of Representative Taylor can be
found on page 115 of the appendix.]
Chairwoman Waters. Thank you very much. And without
objection, such is the order.
Mr. Melancon?
STATEMENT OF THE HONORABLE CHARLIE MELANCON, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF LOUISIANA
Mr. Melancon. Thank you, Madam Chairwoman.
I appreciate you holding this hearing today and I
appreciate Gene for working so hard and putting together a
bill. No bills are perfect, but at least maybe we can get this
thing and move it along to where we start remedying the
problems, which may have started in Mississippi, Louisiana,
Alabama, and Texas, but are obviously spreading and spreading
quickly along all coastal areas of this country that are
subject to storms, including the island of Manhattan.
In August of 2005, America watched as Katrina destroyed
over 200,000 homes in southeast Louisiana, and then saw even
more destruction just a few weeks later as Hurricane Rita
ripped apart southwest Louisiana and took almost another 25,000
homes. After the Gulf Coast suffered through two of the worst
natural disasters in the country, our people were forced
through the indignity of another battle--that of fighting their
insurance companies, as homeowners' insurance policies covered
damage caused by wind, but not damage from flooding or storm
surge.
Because it can be difficult to prove whether wind or water
from a hurricane caused a home's damage, many Katrina and Rita
victims found that their insurance companies denied or low-
balled their claims, leaving some of them to rely solely on
payouts from the National Flood Insurance Program, which in
turn had to make outrageously high payments at taxpayers'
expense.
Thousands of homeowners took their insurance companies to
court before they got the insurance payouts they were owed from
years of faithfully paying their homeowners' premiums. Today,
almost 2 years after the storm, some are still waiting for a
check so they can rebuild their homes; family and friends and
others that I know included.
At the same time, insurance companies have been hastily
pulling out of coastal areas like south Louisiana, canceling
policies and refusing to write new ones. More and more people
in south Louisiana are being forced to turn to Louisiana's
State-sponsored insurer of last resort for their homeowners'
insurance, paying premiums that are way above market rates.
While Louisiana's strong consumer protection laws protected
many homeowners who have had insurance policies for at least 3
years from being dropped by their insurance companies, they are
by no means the lucky ones. Even those who did not file claims
after the 2005 hurricane are now being hit with skyrocketing
premium increases, often as much as 2 or 3 times what they had
paid before the storm.
The district I represent in Louisiana is almost entirely in
the hard-to-insure part of the State, and every day I get
calls, e-mails and letters from constituents begging that the
Congress do something about the insurance crisis in south
Louisiana. I've brought some of those, and we can enter those
into the record.
One is a guy named Roy Barrios of South Lafourche who wrote
me saying that Allstate recently canceled his homeowners'
insurance policy and he now will have to pay 3 times as much
for coverage from Louisiana's insurance of last resort. He was
only 2 months shy of being covered by Louisiana's consumer
protection laws that would have kept his policy from being
canceled, although he noted that Allstate is still happy to
renew his profitable automobile insurance policy.
Similarly, Todd Ramirez of Thibodaux, Louisiana, told me
his annual premium increased in one year from $1,188 to $4,165,
almost 300 percent.
Jeanette Tanguis of Houma, Louisiana, said her premium
increased $200 per month. In a letter to me she wrote: ``Having
spent most of my life living in Terrebonne Parish, it never
occurred to me that I would be forced to move from the place I
love and have called home for most of my life. Unfortunately,
my family and I are being forced to make this sad decision.''
These are only a few of the many stories I hear from people
who are being forced to leave their homes and their
communities.
We in Congress must act quickly to solve this insurance
crisis so that middle-class families, the backbone of our
economy, can continue to afford to live in coastal communities.
All-peril insurance, like the proposal Mr. Taylor has,
would go a long way in addressing some of the insurance
problems highlighted by Katrina and Rita. By bundling wind and
water coverage into one plan, multi-peril insurance would cover
home damage by hurricanes, regardless of whether winds or
flooding caused the damage.
Not only will this provide homeowners with peace of mind,
it will indirectly save them money because they will be able to
avoid costly and time-consuming legal battles like those waged
after Katrina and Rita, when many homeowners had to hire
lawyers and engineers to do independent assessments. A multi-
peril insurance policy will create more efficiency in adjusting
claims, and homeowners will receive their payments much faster
than under the two-policy system.
Finally, a multi-peril homeowners' insurance program will
rein in insurance premium costs because rates would be required
to be actuarially sound. Also, a multi-peril NFIP can make
premiums in coastal communities manageable by spreading risk
among a much larger pool of policyholders. With over 50 percent
of Americans living within 50 miles of the coast, a national
multi-peril insurance program would have plenty of prospective
customers. It is time to recognize that market failure exists.
The Federal Government recognized this reality when it
created crop insurance, which now supports a healthy, domestic
agriculture industry that can feed American families. The
inability of private insurance markets to handle catastrophic
losses became evident after Katrina and Rita and the sharp
decline in the availability of affordable homeowners insurance
is crushing our rebuilding effort along the coast.
I thank Mr. Taylor, and Ms. Waters, I thank you for your
efforts.
Chairwoman Waters. Thank you very much.
Now, we'll hear from Representative Baker.
STATEMENT OF THE HONORABLE RICHARD H. BAKER, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF LOUISIANA
Mr. Baker. Thank you, Madam Chairwoman, Ranking Member
Biggert, and members of the subcommittee.
I appreciate the opportunity to be here, and I want to
acknowledge the work of my colleagues as being helpful to
bringing about a remedy. At least they have come together with
a proposal and got it on the table. I, however, have slightly
different suggestions to make to the committee, that I hope
will be taken under consideration, and I'll jump right to it.
Similar to the effect of H.R. 920, but without the taxpayer
liability component, Congress can authorize the issuance of a
national, multi-peril insurance policy. The Congress can
determine what goes into that insurance box. We can include Mr.
Cleaver's tornadoes; we can include western wildfires. We can
describe the risk that would be covered by such a proposal and
ensure that there would be no limits. One of the difficulties
with the flood insurance program is a person's second home, a
vacation home on the beach that's eliminated, or greatly pays a
higher premium rate.
We don't necessarily like it, but we have to constrain the
commercial liability for which we expose ourselves to the
marketplace, and that is driven because ultimately, taxpayers
back up the National Flood Insurance Program, and all too
often, the claims in recent days, are far larger than the
premium flow, which leaves us in a $17 billion hole today. And
may the Lord have mercy on us going through this next season
that we don't have more because that deficit will only grow
larger.
Why would a company then write such a policy? It would
necessitate preemption of State law with regard to pricing. I
have noted with great interest, everyone is insisting on
actuarial rates, not NFIP actuarial. NFIP actuarial only looks
to historical loss data. It doesn't use the sophisticated risk
modeling capabilities that any insurance company still in
business today has to use to protect itself against future
losses, so that if we had real actuarial, as I understand is
the interest, the difference between a market-priced policy and
NFIP-like price policy would be negligible because we'd both be
pricing to the risk.
Currently, it is the local rate control at the State level
which precludes many from entering markets. It's an arbitrary
ceiling against the company's product. And so I suggest that
one way to go is to authorize the creation of such a product. I
had hoped to have a document to lay before the committee today.
We are engaged in working on it now, but it is not finished. I
had indicated to Mr. Taylor that I would try to get it to him
before the hearing, but it's not ready for prime-time and I
will not bring it to the committee until I know it's a
defensible product.
However, there is another alternative. As we did in
terrorism risk insurance, many commercial writers would not
enter into the New York market without the absolute assurance
that they know the finite amount of loss they would engage in.
The same is true in the post-Katrina world below the
interstate. People don't want to write because they don't know
how much money they're actually going to be engaged in losing.
If we were to create a Federal backstop with limits--and
I'm quick to add ``with limits''--there is an enhancement that
would come for people entering into the market. Couple that
with the ability to build up the internal reserves. Today, the
IRS does not look favorably upon people building up pots of
money because they think you're attempting to tax evade, as
well as other regulators don't allow financial entities to
build up what they believe to be artificial reserves. And if we
were to allow the reservings to build specifically for the
purpose of paying all perils loss, while ratcheting down the
Federal backstop, the two could cross. So at some point, the
private market would have in its sock drawer somewhere
sufficient money to have a likelihood of paying all claims made
against such a multi-peril policy. That should also, however,
be coupled with freedom to price the product according to the
risk the company agrees to take, and that is a voluntary
decision.
If you really want to fix the problem, and this is not
maybe quite so serious; it's my remedy but I don't expect you
to take it. It would likely be very controversial, and that is
in the insurance world, generally, to allow people to sell
insurance product for the price they can sell it for. Allow
them to take the risk they choose to take as long as the State
advocacy for the consumer stays in place to ensure that
obligations made are obligations kept.
Now, that is a very dangerous precedent, and I have 6 years
of hearings, 21 to be exact, with 150 witnesses and volumes of
letters in my file to prove how wrong I am. But it is
absolutely the right thing to do in the marketplace to make
this system work in a responsible manner.
Why is this important? When you look at the average rate of
return in financial sectors, securities firms--they almost beat
Fannie Mae and Freddie Mac. They have averaged, over the last 5
years, a 19 percent rate of return on equity. Commercial banks
have averaged 14 percent. The property and casualty insurance
sector has barely made a 5 percent rate of return. Now, there's
a reason why people don't get into the business of taking this
risk. They're not just worried about an unprofitable year.
They're worried about insolvency.
And so we need to address the issues of why the underlying
elements of the commercial insurance marketplace is not working
the way the rest of the financial marketplace is apparently
working. The end result of a flood insurance program, which I
support, is that it has distorted the marketplace. We have
created a program that takes one product, subsidizes it in a
taxpayer way, and therefore has created this wind versus water
litigation flood that we're all in the midst of.
I agree with Mr. Taylor that something has to be done, but
I think a remedy other than creating additional taxpayer
liability is what makes the most sense.
I will move ahead because I'm already out of time.
There is a chart, Madam Chairwoman, that I think we have
distributed. Anyway, it's just simply two pages. The first one
is all storms of record that have come across the Gulf or
Atlantic Coast. The more important and relevant chart for my
discussion is the one that's entitled ``1990 to 2006.'' Those
are the storms of record of the last 16 years.
When one takes a look at the frequency of storms landing on
the coastal United States--and you couple that with this piece
of information--I called this morning to the Louisiana
Insurance office in Baton Rouge and asked for this morning's
average quote for an insurance policy in Orleans Parish for a
$200,000 new construction brick home. The premium today,
average, this is not a single company, is $2,100 per year; 80
miles north in Baton Rouge, same house, same set of facts, that
premium is $1,200, so there is a $1,000 difference by driving
80 miles.
What you really don't often think about, though, is if you
had a $200,000 obligation sitting on this chart, and it was
your money, would you take $2,100 a year on the chance that you
might have to pay out $194,000 at some point in the future?
That's $200,000 less the 5 percent deductible. In other words,
we're asking the insurance industry to take $2,100 premium flow
in today's market place, assume $190,000 responsibility, and
bet that one of these lines isn't going to cross your back
yard. That's the problem we face.
And, Madam Chairwoman, I appreciate your time and courtesy.
I really want to work with the committee in going forward and
hope these ideas will have some relevance in your discussion.
Chairwoman Waters. Thank you very much, Mr. Baker.
Mr. Gene Taylor?
STATEMENT OF THE HONORABLE BOBBY JINDAL, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Jindal. Thank you, Madam Chairwoman, Ranking Member
Biggert, and members of the subcommittee, for allowing me to
testify. Thank you, more importantly, for having this hearing.
I also want to thank Gene for allowing me to work with him
on this legislation, The Multiple Peril Insurance Act. As
you've heard, and I think it's important to remember what this
legislation will do.
Chairwoman Waters. Excuse me, did I call you Gene Taylor? I
have Gene Taylor in my head.
Mr. Baker. Don't let that bother you. He's been called a
lot worse than that.
Mr. Jindal. That is true.
[Laughter]
Chairwoman Waters. Thank you very much, Bobby Jindal.
Excuse me.
Mr. Jindal. That's all right, Madam Chairwoman. Thank you.
Unfortunately, I've been called a lot worse by my colleagues in
the delegation.
[Laughter]
Mr. Jindal. I think it's important to remind ourselves what
the bill would actually do. It actually enables individuals to
purchase insurance covering losses resulting from flood and
wind storms without requiring those policyholders to
distinguish flood damage from wind damage. I've heard members
suggest we consider expanding the scope. Certainly, in the
future, other legislation will be open to doing that, but for
these purposes, this has been a huge concern, especially when
you have a hurricane like Katrina, or like Rita, where the
worst destruction is caused by a combination of wind and
flooding.
Under this legislation, homeowners wouldn't have to hire
lawyers, engineers, and adjustors to determine in retrospect
what damage was caused by wind, what damage was caused by
flooding. It has been nearly 2 years since those hurricanes
devastated the Gulf Coast of the United States, including large
land areas in my home State of Louisiana. Many property owners
in Louisiana and along the Gulf Coast continue to battle their
insurance companies for unpaid wind damage claims that they
claim should have been paid by their insurance companies, while
others are discovering discrepancies in the way wind versus
flood damages were paid out by their insurance companies.
For example, take the case of Michael Holman, a resident of
the mid-City section of New Orleans. He should have been able
to repair his home. He had both flood and homeowners insurance.
His home suffered damage from hurricane winds that caused it to
lean substantially in one direction. His home also took on 3
feet of water. He was an actual eyewitness to the destruction
of his home. He can substantiate his claim that the hurricane
event caused his home to shift. Despite that, his insurance
company has refused to pay out damage claims to his home.
Today, he is suing his company for not covering the wind damage
that has made his home a complete loss.
Consider the case of Chris Karpells, a prospective buyer of
a townhouse in Slidell, Louisiana, who would be collecting
insurance money as part of the real estate transaction. He
discovered the insurance company had two ways of pricing the
damage repair cost, depending, of course, on whether the damage
was caused by wind or flooding.
If the company attributed the damage to wind or rain, the
price of replacing drywall, for instance, was estimated at $.76
per square foot. If the damage was due to flooding, the
estimate quadrupled to $3.31 per square foot. The homeowner
noted other increases in his insurance adjustment and noted
that they are frontloading all the money on the flood policy.
More than half of our country's population lives along the
coast in hundreds of counties or parishes. In areas such as
these, many residents are required to purchase at least two
insurance policies: required flood insurance; in addition to a
regular homeowner insurance policy that offers wind coverage.
We all know the limits, especially those of us living along
the coastal areas. We all know about the exclusions as well,
including, under the current law, any damages caused by wind or
a wind storm. Under our current system, a single company can
determine and apportion damages caused by the wind policy that
it insures along those caused by flooding, which is insured by
the NFIP and paid for by the Federal Treasury.
In the aftermath of an event like Hurricanes Katrina or
Rita, it sometimes is difficult to determine whether the source
of damage was the wind that toppled the roof and allowed a
property to flood, or if the damage was caused by rising flood
waters caused by failed levies. That's especially important
considering that U.S. taxpayers are responsible for paying
flood claims.
While we appreciate the fact that after Hurricanes Katrina
and Rita, the NFIP approved expedited claims processing for
approximately 240,000 anticipated claims, thus appropriately
ensuring homeowners weren't prevented from rebuilding by red
tape, that current process allows insurers to apportion damage
that may inadvertently open the door to allow insurance
companies to blame flood water when wind was the source of
property damage.
The proposed legislation could eliminate this problem by
covering wind and flood damage under one program. Look,
certainly many questions have been raised. Many questions
should be answered about how exactly H.R. 920 should be
implemented, what modifications can and ought to be made to
make their proposed program even more effective. However, I
believe this legislation is a positive solution, a positive
step toward solving the problem of a lack of affordable and
available insurance in Louisiana.
Many of our constituents are still struggling with
insurance companies over settlements and payments nearly 2
years after the storms. These are normally problems typically
resolved within 3 months after a natural disaster strikes.
Since the 2005 hurricanes, many homeowners' policies in the
greater New Orleans area have seen their premiums go up more
than 50 percent. Insurance costs have gone up an average of 12
percent statewide. Obtaining insurance is difficult because
only a handful of companies are writing property insurance in
the State; 10 of the top 25 property insurers don't do business
currently in the State. Many of those companies that are
remaining are working to eliminate or reduce hurricane coverage
from their portfolio.
In summary, Louisianans are paying more for less insurance,
if they can get it, which is hampering my State's recovery from
the storms. This legislation is a good proposal that will
ensure the availability of property insurance which can allow
recovery in this region to continue.
Madam Chairwoman, I also want to thank you for your
attention to the ideas of a Federal backstop and your general
interest in the recovery of the Gulf Coast. We have noted your
many trips down, your attention to the Road Home Program, and
many of the challenges we face in Louisiana.
Thank you very much.
[The prepared statement of Representative Jindal can be
found on page 79 of the appendix.]
Chairwoman Waters. Thank you very much.
And I'd like to say that all of the members of this
committee, on both sides of the aisle, are very concerned about
the recovery of all of the Gulf Coast, and we know how much
time and energy all of you have put into trying to make that
recovery happen. So we are going to do everything that we can,
including dealing with this issue of wind versus water.
And I'd like to invite all of you, if you would like, to
stay and sit with us and ask questions. Without objection, it
is so ordered. Thank you very much for having been here today.
I'd like to bring our second panel to the table. Our first
witness will be Mr. David Maurstad, Assistant Administrator for
Mitigation, Federal Emergency Management Agency. And the second
witness will be Mr. Phillip Swagel, Assistant Secretary for
Economic Policy, U.S. Department of the Treasury.
Thank you gentlemen for being here with us today. I will
call on our first witness, Mr. Maurstad.
STATEMENT OF DAVID I. MAURSTAD, FEDERAL INSURANCE
ADMINISTRATOR, AND ASSISTANT ADMINISTRATOR, MITIGATION
DIRECTORATE, FEDERAL EMERGENCY MANAGEMENT AGENCY
Mr. Maurstad. Good afternoon, Chairwoman Waters, Ranking
Member Biggert, and members of the subcommittee.
I am David Maurstad, Federal Insurance Administrator and
Assistant Administrator for FEMA's Mitigation Directorate. I
appreciate the opportunity to appear to discuss H.R. 920 and
the bill's proposal to add wind coverage to the National Flood
Insurance Program, a program helping more than 20,300
communities nationwide reduce their vulnerability to flooding,
recover faster after floods, and protect their personal and
community investments with a financial safety net.
The NFIP's floodplain management and building code
guidance, its mitigation base, saves an average of $1.2 billion
annually in prevented damages, while structures built to the
program's standards experience 80 percent less damage than
structures not built to such standards. And we're committed to
making the NFIP even better, a commitment requiring that we
stay focused on the program's objectives, helping communities
understand and address their flood risks, and making sure that
more citizens are protected with the financial backstop that
flood insurance provides.
H.R. 920 does not foster these objectives, so FEMA opposes
the bill for several reasons. First, the private marketplace
already offers windstorm coverage. Traditionally, the Federal
Government has provided insurance only when the marketplace
cannot or will not offer coverage that the public must have.
Private property and casualty companies provide wind insurance
throughout the 50 States, and some States have wind pools to
augment their market conditions.
For the most part, the property and casualty industry is
healthy, and although fiscal troubles may occasionally arise,
the solution lies in making certain that rates are adjusted to
reflect the true risk from wind damage and to build the
reserves needed to pay claims after a disaster. As long as the
industry and wind pools adequately address wind insurance
matters, they and not the Federal Government should remain the
market of last resort.
Second, a multi-peril NFIP would be costly to the
government and to taxpayers. Adding wind coverage to the
Nation's largest, single peril insurance entity could make the
NFIP one of the world's largest underwriters. Such a high-risk
program would need reinsurance to protect the Treasury, and
FEMA would have to reconfigure the NFIP's financial structure,
a costly undertaking for a program already billions of dollars
in debt.
Also, the Act is concerned about the hurricane-related
winds threatening parts of only a few States, while flooding
occurs nationwide. If wind insurance were added to the NFIP,
policyholders and taxpayers in all States would end up
subsidizing the insurance costs of hurricane-prone States.
Third, a multi-peril NFIP would derail State efforts to
foster and sustain private markets that address wind risk. As
insurance is a State-regulated industry, States address wind
risk in a variety of ways.
Florida, for instance, has tightened their regulations and
expanded their State wind pools. Louisiana recently passed
proposals to disband their insurance rating commission,
allowing insurers to set hurricane deductibles based on risk,
rather than requiring one deductible for all the State's
policyholders. South Carolina is calling for market-based
solutions to insuring coastal homes against windstorm damage,
and they are thinking about imposing damage costs on builders
who construct in high-risk areas.
A multi-peril NFIP would displace such efforts, forcing all
high wind risk insurance burdens onto the Federal Government.
Clearly, the private industry, the States and communities are
in the best position to address wind risk and related insurance
matters. The NFIP is the result of an integrated approach aimed
at a long-term systemic problem. Before the program was created
in 1968, several academic and government studies recognized
that the private insurance industry was unwilling to provide
affordable flood insurance.
The definitive study was the Johnson Administration's
report, ``Insurance and Other Programs for Financial Assistance
to Flood Victims,'' which concluded that a Federal flood
insurance program is feasible and will promote the public
interest. Furthermore, the natural hazard insurance arena has
been thoroughly analyzed over the past 2 decades with reports
clearly recognizing the commercial availability of wind
insurance and remaining silent on the matter of government
involvement.
Finally, the vulnerability of wind-prone communities will
not be reduced by adding wind insurance to the NFIP.
Communities must understand the risks that threaten them. They
must take the initiative to manage and reduce their risks and
their efforts must revolve around a comprehensive mitigation
strategy.
I look forward to working with the subcommittee, our
insurance companies and other stakeholders, to improve the
National Flood Insurance Program, and I look forward to
answering any questions that the subcommittee may have.
Thank you.
[The prepared statement of Mr. Maurstad can be found on
page 86 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Phillip Swagel.
STATEMENT OF THE HONORABLE PHILLIP SWAGEL, ASSISTANT SECRETARY
FOR ECONOMIC POLICY, DEPARTMENT OF THE TREASURY
Mr. Swagel. Thank you, Madam Chairwoman.
Good afternoon, Chairwoman Waters, Ranking Member Biggert,
and members of the subcommittee. I will very briefly summarize
my statement and have provided the full written statement to be
included in the record.
The Administration supports leaving wind coverage to the
well-developed, private market for such insurance and does not
support creating a Federal program for wind losses. The private
sector is effective at providing insurance for damage from wind
events. Private market coverage can be expensive in areas
facing substantial risk of wind events. This is a reflection of
the risk, not a defect of the market.
Federal involvement in wind insurance will displace private
coverage, lead to costly inefficiencies, and retard innovation.
A Federal program will face pressures to set aside risk-based
pricing. By subsidizing insurance, a Federal program would
undermine incentives to mitigate risk and encourage development
in high-risk areas, potentially increasing future liabilities.
A Federal role in bearing risk would have taxpayers
nationwide subsidizing insurance rates for the benefit of a
smaller population. Federal Government interference in the wind
insurance market will displace markets, promote riskier
behavior, be unfair to taxpayers, and be economically costly.
For these reasons, the Administration opposes H.R. 920. The
Administration looks forward to working with the committee as
it considers other reforms of the National Flood Insurance
Program.
I appreciate very much the opportunity to appear before the
subcommittee and will be happy to answer any questions.
[The prepared statement of Assistant Secretary Swagel can
be found on page 113 of the appendix.]
Chairwoman Waters. Thank you very much.
We have a vote on the Floor, so I'm going to have to ask
all of you to remain with us until we return, so that we may
ask questions. A am sorry to do that to you, but there's no
other way to do it.
Thank you very much. I appreciate your patience.
[Recess]
Chairwoman Waters. I'd like to thank you very much for your
patience. I expect other members will be joining us, and I will
just move now to questions that I have of this panel.
There is a motion suggested in the testimony received from
both government witnesses that the private sector will be
foreclosed from operating in the market if the National Flood
Insurance Program is expanded to provide the coverage
envisioned by the bill. It was also suggested that the States
and the private sector are best positioned to address the
availability and price of insurance in high-risk areas.
On what evidence do you base this conclusion? Are the
private insurers retreating from providing insurance in high-
risk areas, or is this just someone's imagination?
Mr. Maurstad?
Mr. Maurstad. Ma'am, I think that in the past, especially
if you look at flood insurance as an example, when the program
was started the affordability and availability of flood
insurance, the lack of it, was already well-documented. And
once the Federal program started, most of the industry then
left the market. I think that it is safe to reason that if the
National Flood Insurance Program were extended to include
wind--as I believe one of the earlier witnesses indicated--that
it would mostly be in the high-risk areas along the coastlines,
and so that would just force further abandonment, I believe, by
the insurance companies, because there is a government program.
So the government program would end up insuring the riskiest of
the risky and would then place the Federal Treasury at far
greater jeopardy.
Chairwoman Waters. Okay, so you have testified that you
oppose H.R. 920, Mr. Maurstad. Can you think of any way that
the NFIP can develop actuarially sound premiums? I heard what
you just said about if the coverage is confined to high-risk
areas, the private insurers would be assuming unusual risk, and
they wouldn't have much to offset that with. So I guess what I
want to know is, can the NFIP do it?
Mr. Maurstad. Well, I think that certainly an actuarially
rated program can be developed as long as one understands what
actuarial rating is. It would be, in this case, if you would
base it on the number of policies and the amount of premium
that would be generated, the pool would be relatively small, as
was indicated earlier. And as a result, the actuarial rates
would be very high. They may be even higher than what are being
characterized as unaffordable State wind pool rates that also
have, although they're high, and people have indicated they are
not affordable, also clearly are not adequate because most of
the wind pools are in financial difficulties.
So the actuarial rates would be very high. I'm not sure--in
fact, I'm fairly certain they would not be very affordable,
which would put pressure on Congress to discount those, similar
to what was done in the Flood Insurance Program with the Pre-
Firm properties in the program there. But certainly an
actuarially-rated program could be developed. But one also
needs to understand that actuarial rates are generating premium
this year and for a series of years to take care of the losses
over that entire period of time.
And so, in this Federal program, if you had a catastrophic
loss in the early years, where you have not generated the
premium, you have not capitalized the program, there is not a
reserve available; then the Federal Treasury would be looked at
to take care of that catastrophic event in the early years of
any actuarially rated program.
Chairwoman Waters. Thank you very much. I will now
recognize Ms. Biggert for questioning for 5 minutes.
Mrs. Biggert. Thank you, Madam Chairwoman.
But both the Government Accountability Office and the DHS
Inspector General testified for this committee that FEMA does
not currently collect adequate information on write-your-own
companies' wind claims to ensure that the NFIP only pays for
flood damage and no wind damage.
Does FEMA collect this information?
Mr. Maurstad. No, we do not. What we do is, at the time of
the loss, we go out and we look at and determine the liability
for the National Flood Insurance Program and then work to pay
that loss as quickly and as fairly as possible. So we go out;
we determine what was damaged--what property was damaged by
flood--and pay the loss accordingly. The write-your-own
companies that administer the program on behalf of the Federal
Government have the obligation to do that according to our
policies, according to statute, and to follow the guidelines
that we set out so that the policyholder is treated fairly and
the Federal Treasury is protected.
Mrs. Biggert. Well, I understand that after Katrina, many
homeowners complained about a lack of coordination between the
NFIP and insurance companies in adjusting claims. How is FEMA
reviewing its policies to ensure that in the future there is
adequate cooperation between the NFIP and wind insurers, or
should there be?
Mr. Maurstad. Well, I think that in some States, for
example in Mississippi with the State wind pool, we had the
single-adjuster program that worked on behalf of both the State
wind pool and the National Flood Insurance Program to adjust
the losses with the policyholders and to provide that customer
service that you are talking about.
If a write-your-own company both writes the homeowner
policy and also administers the write-your-own standard flood
insurance policy for the government, they also, under the
arrangement that we have with the write-your-own companies,
have the obligation to assign a single adjuster to that
particular claimant to handle both of the claims.
But we have a very good working relationship. It's a very
strong public/private partnership with the nearly 90 write-
your-own companies that are a part of the program, and we
certainly are always looking at ways to better coordinate the
claims-handling process with the industry.
Mrs. Biggert. Well, when the Flood Insurance Program was
created in the late 1960's, coverage was generally unavailable
in the private market from coast to coast. How does this differ
with the state of wind coverage today?
Mr. Maurstad. It is my understanding that there are
certainly affordability--primarily affordability--issues. And
in certain parts of certain States, there are availability
issues for wind coverage and wind insurance. States have
addressed those issues, where it has affected their market, by
creating the wind pools, which we believe is the best way to
deal with the circumstances within that particular
jurisdiction.
But in vast parts of the country, I would say in 40 of the
50 States, there is certainly available and affordable wind
coverage being provided.
Mrs. Biggert. Do you think that this bill, H.R. 920, would
discourage private insurers from continuing to offer wind
insurance?
Mr. Maurstad. I believe that it would. I think, as
indicated before, it would be similar to when the flood program
started, most of the private insurance sector--fairly shortly
after the program started, those private insurers that were
involved in the flood program abandoned the flood program
completely and let the Federal Government deal with the risk. I
think that it only is common sense that if the Federal
Government is going to provide this type of coverage in the
riskiest of the risky areas, that the insurance industry will
avoid those areas and go to other areas where they can price
their product more fairly.
Mrs. Biggert. Thank you.
Then, Mr. Swagel, what could State regulators and officials
do to allow for more competitive, market-based pricing for
insurance, and attract more insurers to their States?
Mr. Swagel. As Mr. Maurstad just said, in most States, wind
coverage is generally available. The problems have typically
been in States that have taken actions that have had unintended
consequences of displacing the private coverage. Florida is one
example. The symptom is the unavailability, and the problem is
typically the unintended consequences of State regulators.
Mrs. Biggert. I might just note that I'm from Illinois, and
we certainly, you know, have a lot of market competition
because we don't have the regulation that so many States have.
Does that help?
Mr. Swagel. That's right. You know, this is a case in which
there's a lot of private sector capacity. There's capital both
in the United States and worldwide that after a hurricane or a
natural catastrophe does tend to withdraw, but then comes back
in, and sometimes well-intended actions can interfere with that
process.
Mrs. Biggert. Thank you.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you very much.
Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman.
Mr. Maurstad, FEMA has a herculean responsibility. It's one
of the most difficult jobs, probably, in the Federal
Government, and that's why I've always tried to restrain my
criticism, even after I was very disappointed in what happened
in the Gulf region.
My concern, however, at this point is that when I look at
your opening statement, it appears as if FEMA is assessing
economic trends. I won't criticize the failures in the Gulf
region, but I have to tell you, I am really concerned about
FEMA's expertise in assessing economic trends. You say that a
Federal program would undermine economic incentives to mitigate
risk because the program would like the historic rates from
actuarial values.
Did FEMA bring on some economists to help it reach this
position?
This morning--this would have been an appropriate response
from Dr. Friedman from Harvard. We had a committee hearing
today dealing with monetary policies and the state of the
economy, with Dr. Meltzer from Carnegie Mellon and John Kenneth
Galbraith from the University of Texas. And so, I guess before
I can go any further, I need to understand FEMA's expertise in
exercising economic trends.
Mr. Maurstad. Thank you, Mr. Cleaver.
Certainly, we have actuaries on our staff who assess the
trends, economic and otherwise, of the insurance industry. We
also have many staff members who together have nearly 40 years
of experience in administering and operating the National Flood
Insurance Program, which, of course, this legislation is based
upon. And so, I would say that we do have the expertise to
provide the information that we did in our testimony.
Mr. Cleaver. Well, do you have data available that would
demonstrate or show that incentives were undermined as a result
of the National Flood Insurance Program?
Mr. Maurstad. I think that we can certainly provide you
with information and data on mitigation activities and the
extent that mitigation activities are pursued when required,
versus when they're just voluntarily taken. I mean, part of
that point that was attempted to be made there was that without
incentives to mitigate one's property, most folks are not going
to make that economic decision.
We will have a discussion with you and try to provide you
with the data you are looking for to back up that statement.
Mr. Cleaver. But you do have it?
Mr. Maurstad. I believe we either have it or will provide
it for you. Again, I am not sure what the actuary who helped
develop the testimony--and provided that advice as we were
crafting our testimony--used as his basis. I will find that out
and provide that to you.
Mr. Cleaver. Okay, that was exactly where I was going, that
if we don't have the data, then the statement would be at least
baseless. Right? I mean, if the statement was developed without
this data, then the statement is baseless.
Mr. Maurstad. Sure.
Mr. Swagel. Thank you, Mr. Cleaver. I apologize for jumping
in, and thank you for--
Mr. Cleaver. You are going to help FEMA out?
Mr. Swagel. I was going to mention just the sense of the
second half of your question about the incentives undermined by
the NFIP--and obviously, I'm not blaming Mr. Maurstad here. You
know, it is well-known that a portion of the properties covered
by the Flood Insurance Program are done so at subsidized rates.
This is intentional. Essentially, part of the properties were
grandfathered in and a disproportionate part of the expenses of
the program, the benefits they pay, relate to those properties.
In a sense, it's a set of properties that have recurring
losses, so they suffer damage and are built again and suffer
damage again. That's the sort of incentives that the testimony
has in mind.
Mr. Cleaver. This is very interesting. I mean, who wrote
the statement for FEMA, then?
Mr. Maurstad. We wrote the statement, sir. Because he
helped to answer the question, I don't think--
Again, you're asking me to criticize my statement, which I
am unwilling to do.
Mr. Cleaver. I wouldn't do it either. Believe me, if I were
over there, I would defend the statement, even if it was wrong.
Mr. Maurstad. Thank you, sir.
Mr. Cleaver. And it is wrong, but I mean--
Because I don't understand. Describe the NFIP actuarial
sound.
Mr. Maurstad. The actuarial soundness of the NFIP?
Mr. Cleaver. Yes, soundness.
Mr. Maurstad. Currently, 75 percent of the policies--
Chairwoman Waters. The gavel slipped.
Mr. Maurstad. Okay. Currently, 75 percent of the policies
are risk-based, actuarially rated as the discussion that we've
had earlier; 25 percent of the policies are discounted as a
result of the way that the legislation is written and the
program was designed. So the program loses about $800 million a
year in foregone premium if that 25 percent that is discounted
were, in fact, charged risk-based, actuarially sound premiums.
Mr. Cleaver. Thank you, Madam Chairwoman. Thank you, sir.
Chairwoman Waters. Thank you very much.
Mr. Green?
Mr. Green. Thank you, Madam Chairwoman. And I thank the
witnesses for their time. Unfortunately, we do have to vote
from time to time, and thank you for staying over.
A few questions, and I trust that you can provide some
ocularity on something that is of great concern to me. The
first question is, are you for the status quo? Yes or no.
Mr. Maurstad. No.
Mr. Green. Okay. If you are not for the status quo, what
have you proposed to change?
Mr. Maurstad. Relative to strengthening the National Flood
Insurance Program, we've testified before on essentially, five
guiding principles to strengthen the program: protect the NFIP
integrity by covering existing commitments and liabilities;
phase out discounted premiums; increase NFIP participation
incentives; improve program enforcement; and increase community
risk awareness by improving information quality and
distribution.
Mr. Green. Let me intercede and ask this. How would that
help a person who was situated as was the case with Mr. Taylor?
Mr. Maurstad. Strengthening the NFIP--
Mr. Green. What does that mean?
Mr. Maurstad. That means providing a National Flood
Insurance Program that better serves its designed purposes.
Strengthening it is certainly not addressed.
Mr. Green. I think that's what we are attempting to do.
Terms without definition are sometimes meaningless; and to
say ``strengthen,'' and not give real substance to what that
means doesn't necessarily give Mr. Taylor a lot of comfort;
Congressman Taylor, excuse me. And it seems to me that while
you give words, I don't see the ocularity in them such that I
can understand how Mr. Taylor or the persons who are similarly
situated will benefit.
Mr. Maurstad. Our position is that adding wind coverage to
the NFIP is not the appropriate way to address the problem that
Congressman Taylor has raised.
Mr. Green. Do you agree that Mr. Taylor had wind coverage
in his policy?
Mr. Maurstad. I'm not sure what coverage Mr. Taylor had on
his home. He indicated that he had a homeowner's policy, and
most homeowners policies certainly have wind coverage, so there
is no reason for me not to believe that he had wind coverage.
Mr. Green. If we assume that he had wind coverage with his
policy, and we assume that he did not get immediate
satisfaction--in fact, he had the threat of litigation to get
satisfaction, are you of the opinion that this is a good way
for the consumer to have to do business? To have to threaten
litigation, hire a lawyer, and pledge a portion of whatever
return you might receive in terms of damages? Are you of the
opinion that this is the way the consumer should have to do
business?
Mr. Maurstad. I believe that litigation should always be a
last resort.
Mr. Green. So you would have this as a resort of first
impression as opposed to last? Because that's what Mr. Taylor
had to do, and that's what many people along the Gulf Coast had
to do. They had to sue.
Now, this new plan would propose to give people the
opportunity to have coverage that's certain so that we take out
the notion that they have to have some degree of consternation
as to whether they're covered or not. And in so doing, they
then can buy additional coverage.
Would you agree that under the new plan, we, in essence,
would have a $500,000 deductible for insurance companies? Would
you agree with this under the new plan?
Mr. Maurstad. As I understand the legislation is written,
sure.
Mr. Green. Okay, so an insurance company would have a
$500,000 deductible. Why would a company oppose doing business
in a State wherein they get that deductible and where they
don't have any loss until there's a $500,000 loss. They have no
loss. Why would they oppose that? Doing business in that State?
Mr. Maurstad. Yes, Mr. Green, they certainly may provide
the excess coverage over that.
Mr. Green. But that's what this plan would propose. Excess
coverage and a degree of certainty for consumers so that they
don't find themselves in a position that the Congressman
Taylors of the world were in, not knowing whether they would
get coverage; having to hire lawyers, bring experts in,
threatening to sue, having the Attorney General a part of the
litigation process. This is not the way we want to treat
American citizens, consumers, is it?
Would you have Mr. Taylor go through this again?
Mr. Maurstad. I would hope that no one would have to go
through that scenario.
Mr. Green. Okay, well, then if you wouldn't want him to go
through this again, isn't it logical to provide a means by
which we can be sure that persons who seek to have wind
coverage will have in fact wind coverage without litigation. We
have thousands of people who are now entangled in litigation
when they should have had an opportunity to simply present the
damages and go on.
If they have the wind coverage and the flood coverage, then
they have the coverage necessary to avoid litigation. Do you
see this as a reasonable premise?
Mr. Maurstad. Mr. Green, I certainly understand your
support for the legislation.
Mr. Green. No. No. Let's not talk about my support of
legislation because my time is almost up.
Do you agree that with this bill, consumers will be
protected if the bill provides the $500,000 ceiling in coverage
and then insurance companies can pick up excess damage?
Mr. Maurstad. No. I'm not sure that would be the outcome.
Mr. Green. Are you not sure that if Congress writes a bill
to provide the coverage, that the coverage will be there? So
you doubt the credibility of Congress to write the legislation?
Mr. Maurstad. I don't believe that's what I did.
Mr. Green. Okay, then, so you assume that Congress can do
what it says it will do. Yes or no.
Mr. Maurstad. Well, yes.
Mr. Green. Okay, if Congress does what it says it will do,
and then that only leaves excess coverage, do you agree that
the person who benefits from the $500,000 worth of coverage
will in fact have coverage?
Mr. Maurstad. Sir, I don't mean any disrespect to you or
the institution, but there are many cases where unintended
consequences have occurred because of legislation that's
adopted.
Mr. Green. I agree. Let's talk about intended consequences
for a moment, however. Unintended consequences could cause a
plane to land on this building right now. Hopefully, that won't
happen. But the intended consequence, do you agree that if it
occurs the consumer would have coverage?
Mr. Maurstad. The consumer may have coverage at the expense
of the Federal Treasury.
Mr. Green. But the consumers are having coverage at the
expense of the Federal Treasury right now based on claims that
they filed that they can't have fulfilled without litigation.
The consumer is put in a position where either he or she has
the courage and the ability to sue or they don't get the
coverage. They get nothing.
So is that what you would have for consumers, an all-or-
nothing proposition?
Mr. Maurstad. No, I don't think consumers should ever be
placed in an all-or-nothing position.
Mr. Green. I yield back. Thank you, Madam Chairwoman. You
were quite generous.
Chairwoman Waters. Thank you very much.
The gentleman from California, Mr. Miller, for 5 minutes.
Mr. Miller. This is a really complicated issue. I remember
your testimony before. We heard from the Attorney General of
one State that I believe should have been suing the insurance
commissioner of his own State because he disagreed with what
the insurance commissioner allowed. And it's kind of difficult
when you get in a situation like that and for years, I have
been saying that we perhaps need an optional Federal charter
for insurance companies so we can forego the State requirements
today and have a Federal charter that is somewhat all-
inclusive.
But in your previous testimony, Mr. Maurstad, before the
Oversight and Investigations Subcommittee, you said that FEMA
did not find any pattern of abuse in write-your-own insurance
companies. Would you give me an update?
Mr. Maurstad. At this point, as we continue to review the
circumstances, there has been no uncovering of a concerted
conspiracy or attempt by the write-your-own companies to shift
wind coverage onto the National Flood Insurance Program. As we
continue to evaluate our claims, we go out and we assess and we
do audits of those claims.
Was the damage by flood and was the appropriate amount
compensated to the policyholder for the damage by flood? And we
are finding that is what occurred.
Mr. Miller. When you were here last time, I think we had
the facts that about 98-plus percent of the claims had been
paid.
Is it in excess of that today?
Mr. Maurstad. I believe it's a little over 99 percent at
this point.
Mr. Miller. Does FEMA have a way to ensure that write-your-
own insurance companies don't have the ability to defraud the
NFIP?
Mr. Maurstad. Sure. There are a number of processes in the
control system, the auditing process.
Mr. Miller. So when wind and flood damage occurs, they have
the ability to do that?
Mr. Maurstad. Sure, the adjustor that's on the ground is
the first individual who works with the policyholder to
determine what caused the damage to what. Then there are, of
course, ways that we go through by random inspection, by field
audits, a number of other oversight responsibilities by the
general adjustor of the program.
If claims were brought to my attention, we review them.
There are a number of ways in which appropriate oversight is
provided for the handling of claims.
Mr. Miller. Mr. Swagel, I think that currently there are
probably $19 trillion worth of policies written from Texas to
Maine for tornadoes and wind and those types of things. And
currently the U.S. taxpayers are in debt for about $18 billion
from the NFIP, currently today.
Don't you believe adding this wind coverage to the National
Flood Insurance Program exacerbates the problems and adds
additional risk to the taxpayers that the private sector should
be able, through a competitive marketplace, to deal with?
Mr. Swagel. Thank you, Mr. Miller.
Yes, that is really our view, that the private capacity as
you say does exist, and the Federal taxpayer is already on the
hook for such a large debt that it's hard to see the program
paying off. And adding this new program to it would just make
the situation worse.
Mr. Miller. I do understand my good friend Mr. Taylor's
situation, and he is my friend. We talk about a situation of
rebuilding his home, and we joke sometimes. But it's joking in
serious. I understand the situation he goes through. I haven't
had it happen to me, but I can associate with what they're
having to go through. But we're dealing with something here
that we're looking at taking the market away from write-your-
owns and placing it on the Federal Government and the
taxpayers, when the testimony we received in the last hearing
clearly showed that there was a major disagreement between
attorneys general in States with what the insurance
commissioner with their own State did and approved in insurance
policies.
And that's very difficult for write-your-owns when they
present a policy to the State and the State approves it through
the insurance commissioner, then the AG comes back and wants to
sue everybody to change it. How do you think changing this to
the Federal Government would benefit anybody?
Mr. Swagel. No. It's hard to see how a change to the
Federal Government would do anything but put the Federal
taxpayer at risk. And, there's a long tradition, of course, of
State regulation of insurance markets. And when you have the
disputes, like you said, that's a source of uncertainty in that
insurance companies looking to provide new coverage will look
at those disputes and want a certain regulatory environment
before they--
Mr. Miller. I'm not asking you to approve or agree that an
optional Federal charter is good. Would not the concept of an
optional Federal charter where we have a charter that's
approved in statute by the Federal Government that the
insurance companies have an option to go in. And if they want
to be an optional Federal charter or not, would that not be
better and more of a market approach than going to the
government and providing insurance?
Mr. Swagel. I think it would be. One of the strengths of
the insurance system in the United States is the competition.
It's what the ranking member had said existed in Illinois and
we see that in the whole Nation, and giving the optional
Federal charter would foster enhanced competition in many
places.
Mr. Miller. The problem I had with expanding the flood
insurance program, and Ms. Waters and I have suffered the same
situation by expanding it to the 100-year historic plain or
500-year historic plain--we don't even know what a 500-year
historic plain is--would include the entire City of Los
Angeles, and would include all of Orange County--people who are
not currently at risk trying to create solvency in a Federal
system that has lost a tremendous amount of money in a given
area.
But by doing that, you're passing a burden onto a
tremendous amount of people who aren't at risk, and I'm just
concerned that, and I sympathize with my friends who had losses
due to the catastrophe we faced. But by doing that, I believe
we're spreading the burden to people who are not at risk
requiring them to pay for policies that they would not benefit
from to create solvency in high risk areas. And that is the
opposite of a free market system and that's my main concern,
that we get away from competition in the free market system
where if you want to write a policy in the State and no matter
what insurance company you are, you're taking a risk. You're
rolling the dice.
If you win, you make money. If you lose, you lose money.
But placing the burden on the taxpayer is a risk that would be
inappropriate, and I'm having a difficult time understanding
it. But I thank you for your time and your input.
I thank you for the time, Madam Chairwoman, and I yield
back.
Chairwoman Waters. You're welcome.
Mr. Taylor?
Mr. Taylor. Thank you, Madam Chairwoman, and let me begin
by asking for your consent to submit for the record a list of
insurance companies that have pulled out of coastal American in
the 2 years since Hurricane Katrina.
Mr. Maurstad, what percentage--
Chairwoman Waters. Without objection.
Mr. Taylor. What percentage, according to the National
Oceanographic and Atmospheric Administration, what percentage
of Americans live in coastal America?
Mr. Maurstad. If my memory serves me right, which usually
fails me at times like this, I'd say 65 percent.
Mr. Taylor. Okay, it was probably closer to 52 percent. So
wind damage might be just a little bit more than as you said,
something that effects some people in some places if it's more
than half of all America. Would you agree to that?
Mr. Maurstad. I think my comments were I think on the heels
of your comments that you acknowledged that.
Mr. Taylor. Your quote was that wind only affects a portion
of some States.
Mr. Maurstad. Yes, 52 percent of all Americans is a lot
more than a portion of some States.
Mr. Taylor. The second part is, you say that the private
market already provides wind insurance. Those five people, and
I could probably supply 8,000 more, if time would permit, who
have not been paid in 2 years, would certainly disagree.
The fact that after their company didn't pay them, that
their company completely left the State and said, we're not
even coming back, would certainly be contrary to what you said.
But there are some things that you said that I'm really having
trouble comprehending because listening to you would have me
think that our Nation in no way ended up paying these wind
bills, that you're afraid our Nation is going to get stuck with
wind bills and that somehow we haven't.
But I would remind you that according to a memo that you
gave out on September 21, 2005, talking to the national write-
your-own insurance companies about what to do after Katrina,
you said that FEMA will not seek reimbursement from the company
when a subsequential review identifies overpayments resulting
from the company's proper use of the FEMA depth data and a
reasonable method of developing square foot value and
concluding claims.
Later on, when Ms. Waters, in the follow-up hearing on
February 28th of this year, asked you a direct question, her
question was, as I understand it, you could have damage that
occurred from both; some by water, some by wind. Are you
telling me you do the assessment, you have the information, and
you just pay the water. You don't pay the wind or you don't
take any of that into consideration. If you have some coverage
there, you pay everything.
Your answer, and I'm quoting: ``If there's damage that's
caused by both flood and wind, we're obligated to pay for that
damage.'' That means all the damage. So you send out a memo in
effect giving the insurance companies a get-out-of-jail-free
pass. You say before this committee that when there's both,
we're going to pay. You argue that you don't want people to pay
premiums for the coverage that they're apparently getting.
But I think what interests me after hearing all this is
that there were obviously tens of thousands of Katrina claims
where we let the private sector go out and adjudicate that
claim, adjust it, and decide which is wind and which is water.
So I'm curious after those thousands of claims written by human
beings that we know are imperfect, how many times since Katrina
have you gone back and found fault with those claims?
How many times have you said no, the government shouldn't
have paid that? You should have paid that, Allstate or
Nationwide or State Farm. Because I'm reading some really
interesting stories in the New Orleans Times-Picayune, where
they're naming street addresses. They are naming the people's
names. They are giving instances of eyewitnesses who said, ``I
didn't have any flood damage, and yet I got an $80,000 flood
insurance check.'' So how many times have you sought
reimbursement?
Mr. Maurstad. Well, we can institute an audit for cause at
any time when any irregularities are brought up. We've gone
back direct.
Mr. Taylor. How many times, sir?
Mr. Maurstad. I don't know the exact number.
Mr. Taylor. Is there one?
Mr. Maurstad. Sure, there have been a number of times we've
gone back.
Mr. Taylor. Is it ten?
Mr. Maurstad. More than ten.
Mr. Taylor. Is it more than a hundred?
Mr. Maurstad. Probably.
Mr. Taylor. Well, give me a rough idea.
Mr. Maurstad. I'll get you that number.
Mr. Taylor. Okay.
Mr. Maurstad. I know that we reviewed 10 percent of the
claims that were handled from the expedited claim-handling memo
that you referred to, so that in itself was about 1,600 times
we went back and reviewed claims.
Mr. Taylor. So, how many times have you sought
reimbursement?
Mr. Maurstad. Well, during those times we discovered that
they paid $5 a square foot for something instead of $4.50, we
go back and we recover that. We do that, but I don't have the
exact number.
Mr. Taylor. Okay, would you supply that for the record?
Mr. Maurstad. I'll see if I can provide it for the record.
We'll do our level best to provide you the answer.
[The following information was provided for the record:]
``As a result of Hurricane Katrina, FEMA has conducted
5,294 re-inspections. We have discovered 148 cases of
overpayment, totaling $3,704,000. To date, we have
recovered approximately $1,826,000.''
Mr. Taylor. So when you came before this committee and said
that when there's both, we pay for both, did you misspeak?
Mr. Maurstad. No, sir. I think that people are
misinterpreting my comments. What I am indicating is that the
standard flood insurance policy says that if there is property
that is damaged by flood, we are obligated to pay that. If wind
is a part of that damage also, that is not relevant in our
determining what the flood insurance policy owes that
policyholder.
Mr. Taylor. Mr. Swagel, I'm curious in your concerns about
this. Let's compare this to the founding of the original
National Flood Insurance Program. At any time when the National
Flood Insurance Program became law, was there ever a
requirement that it pay for itself?
Mr. Swagel. You know, I have to apologize. I don't know the
entire history. So I don't know in 1968.
Mr. Taylor. The correct answer, sir, is ``no.'' Okay, I'll
let you go back and check.
Mr. Swagel. Okay, yes. I am sorry. I know what the status
is today.
Mr. Taylor. Are the rates set by law? Is there a legal
statute that says how much those rates can be raised in an
individual year?
Mr. Swagel. Well, Mr. Maurstad would probably know the
details like that.
Mr. Taylor. The correct answer is ``yes.'' Now, this
contrast is with what we're trying to do, which under the Rules
of the House can't even be brought to the Floor unless it pays
for itself under the pay-go rules, number one.
Is there a provision in that bill that limits the amount of
increase in rates, should there be a short-fall? The answer is
``no.''
Mr. Swagel. In your bill, no, there isn't.
Mr. Taylor. So how can you wax eloquently about the beauty
of one that has no provision that has to pay for itself; has no
provision to catch up; but yet condemn the other one that is
trying to establish itself in a fiscally responsible manner?
Chairwoman Waters. Thank you very much. We're going to move
on to the other panel.
I thank you for being here today, and I thank you for your
patience. Again, we know that you were terribly inconvenienced
by the time that we took on the Floor, but I thank you for
remaining.
All right, we will call our third panel now. Our first
witness will be Ms. Pam Pogue, vice chair, Association of
Floodplain Managers. Our second witness will be Ms. Sandy
Praeger, commissioner, Kansas Insurance Department, on behalf
of the National Association of Insurance Commissioners. Our
third witness will be Mr. Ted Majewski, senior vice president,
Harleysville Insurance, on behalf of the Property Casualty
Insurers, the American Insurance Association, and the National
Association of Mutual Insurance Companies.
Our fourth witness will be Ms. Cheryl Small, policy
advisor, National Flood Determination Association. Our fifth
witness will be Mr. W. Anderson Baker, III, CPCU, Gillis, Ellis
& Baker, Inc. Our sixth witness will be Mr. Robert Hartwig,
Ph.D., CPCU, president and chief economist, Insurance
Information Institute, and our final witness will be Mr. David
Conrad, senior water resources specialist, National Wildlife
Federation.
Without objection, your written statements will be made
part of the record. You will now be recognized for a 5-minute
summary of your testimony. Thank you.
Ms. Pogue?
STATEMENT OF PAMELA MAYER POGUE, IMMEDIATE PAST CHAIR,
ASSOCIATION OF STATE FLOODPLAIN MANAGERS, INC.
Ms. Pogue. Thank you, Madam Chairwoman. My name is Pam
Pogue and I am actually the immediate past chair of ASFPM, and
I am also the State floodplain program manager in the State of
Rhode Island.
ASFPM is pleased to comment on the legislation proposed by
Representative Gene Taylor and co-sponsored by a number of
members of the committee, the Multiple Peril Insurance bill.
The Association of State Floodplain Managers and its 26
chapters represent over 12,000 members--State and local
officials and other professionals who are engaged in all
aspects of floodplain management, including mitigation
management, mapping, engineering, planning, community
development, hydrology forecasting, emergency response, water
resources, and insurance.
Many of our members worked with communities impacted by
Hurricanes Katrina and Rita, or worked with organizations that
continue to support these very important rebuilding efforts.
All ASFPM members are concerned with working to reduce our
Nation's flood-related losses. Our State and local officials
are the Federal Government's partners in implementing flood
mitigation programs and we are working to achieve effectiveness
and mitigate in meeting these shared objectives.
Because we have been directly involved in aiding recovery
from the hurricanes of 2005 that devastated the Gulf Coast, we
are very much aware of the difficulties in resolving insurance
claims differentiating between damage caused by flood waters
and wind. We note the validity of the problem and respect
Congressman Taylor's commitment to address the associated
issues, which led to the introduction of H.R. 920. However,
before enacting this legislation, it seems appropriate that
Congress work with FEMA to seek administrative means to address
these concerns.
We would also like to note the problem of private insurance
availability in coastal areas. Companies have been changing
their policies on where to offer coverage, following major
losses and in light of predictions of more intense storms that
will frequent the Gulf and Eastern coasts of the United States.
We suggest that this problem needs thoughtful analysis in the
development of recommendations, perhaps in the context of
overall provision for catastrophic losses.
Offering Federal wind coverage without analysis of the
effects on consumers, the insurance industry, and the National
Flood Insurance Program can result in a significantly
detrimental impact. At this time, the House Financial Services
Committee is considering H.R. 1682, the National Flood
Insurance Program Reform Act of 2007. That bill has a number of
key provisions that we and others believe should be enacted
promptly.
With regard to H.R. 920, we respectfully suggest that the
committee act quickly on H.R. 1682 with the following
additions: require that FEMA report on policies and procedures
used to adjust claims when damage to insured property results
from a combination of wind and flood water damage; and require
a study of the premise and implications of the proposal in H.R.
920, including all questions that will be needed to be answered
before a new insurance program is undertaken. So, therefore,
what we'd like to do is pose a number of questions related to
H.R. 920 and the Multiple Peril Insurance bill.
One: Congress created the NFIP to fill a gap. The private
insurance industry declined to offer flood coverage. H.R. 920
makes wind coverage available in all of the Nation's
floodplains, not just coastal floodplains in direct competition
with the private sector. Is that the appropriate role for the
Federal Government?
Two: how big is the potential market for wind and flood
insurance; what is the potential new loss exposure? How high
would premiums have to be to be actuarial? Is the new wind
coverage supposed to cover wind damage, even if there is no
associated flooding? If no flooding was involved, would a
floodplain home and tornado--
Mr. Cleaver. [presiding] Ms. Pogue, if you would like, you
could just submit that to us.
Ms. Pogue. I have a few more questions and I'm done.
Mr. Jones. All right.
Ms. Pogue. The point is, there are a lot of questions.
Would the private insurance industry be likely to develop a
homeowners' policy that excludes wind damage, or would the
homeowners buy two policies: one homeowners' policy with wind
included; and one for wind and flood. What insurance would
there be that the combined coverage would be comprehensive?
Under the NFIP, actuarial rates are charged on structures
that are built after the adoption of a flood insurance rate
map. To rate policies for these post-FIRM buildings, homeowners
provide surveyed elevation data so that the insurance agent can
write the policy based on the risk. Does the bill anticipate
the owners of the older buildings will have to provide some
form of certification that the home meets certain wind-
resistant construction methods in order to determine
appropriate, actuarial rates for wind coverage? Would it cost a
homeowner or business more to have such a certification
prepared by a qualified engineer and architect?
Finally, Section 5 calls for the director to determine
appropriate land use, zoning, and wind damage prevention
measures. This would seem to call for a new Federal building
code. Would communities be required to adopt such a Federal
building code to require construction to meet certain wind
resistant standards? How would a community handle conflicts
between a new Federal building code and currently adopted State
or local building codes?
We appreciate the opportunity to comment on H.R. 920 and
look forward to continue the discussion on the ways the NFIP
and the private insurance industry can improve adjusting
practices, while also looking for ways to reduce future damage
and flood damage to strengthen the NFIP.
Thank you for this opportunity.
[The prepared statement of Ms. Pogue can be found on page
89 of the appendix.]
Mr. Cleaver. Thank you.
Ms. Praeger?
STATEMENT OF SANDY PRAEGER, COMMISSIONER, STATE OF KANSAS
INSURANCE DEPARTMENT, AND PRESIDENT-ELECT, NATIONAL ASSOCIATION
OF INSURANCE COMMISSIONERS
Ms. Praeger. Thank you, Congressman Cleaver, Ranking Member
Biggert, and members of the subcommittee. Thank you for the
opportunity to testify here today on behalf of the National
Association of Insurance Commissioners. My name is Sandy
Praeger and I am the elected insurance commissioner for the
State of Kansas. I also serve as the president-elect of the
NAIC.
As a citizen and public official of a State that has just
suffered massive flooding and millions of dollars in losses, I
applaud you for focusing attention on improving insurance
coverage. The recent storms and flooding in Kansas pale in
comparison to the devastation of Hurricane Katrina, but there
are some alarming similarities as insurance claims come in.
Private insurers have stepped in to pay millions in wind
claims, but there are some flooded communities where the number
of people with flood insurance can literally be counted on one
hand. With regard to flood coverage, we have a national problem
of the uninsured and underinsured. The current system of
coverage is just not good enough. Congressman Taylor has first-
hand experience with that and we commend him for raising the
issue of how comprehensive coverage is delivered to consumers.
Consumers expect all perils insurance coverage and too
often they wrongly assume they have it. The NAIC recently
conducted a survey of homeowners and found that despite the
extensive media coverage of Hurricane Katrina and the insurance
problems that followed, 33 percent of households still
incorrectly believe that flooding is covered by the standard
homeowner's policy; and 35 percent incorrectly believe that
earthquakes are covered. The results are alarming, but I would
argue that they are really not surprising.
A single policy for a single price should be available to
those who want it. Congressman Taylor has proposed one approach
that deserves consideration. His bill addresses two main perils
affecting his constituents: wind and water. But the outcry over
wind and water could just as easily be heard over earthquake
and fire in another region of the country. As this subcommittee
considers flood insurance reform, we believe it should do so
with all natural catastrophes in mind, so that solutions to
these problems are comprehensive in nature.
Insuring one's home currently requires several policies
that still may leave some residents underinsured. This approach
has led to gaps in coverage and room for potential bad actors
to shift their obligations from one policy to another. These
gaps in coverage can result in costly litigation or taxpayer
obligation if the Federal Government steps in following a
natural disaster.
The burden of managing the mechanics of multiple insurance
policies has effectively been placed on the shoulders of
consumers. Seamless, all perils insurance can and should be an
option for those who want it. Providing this type of coverage
may raise issues of affordability, but addressing affordability
without first closing gaps in coverage is not in the best
interest of consumers. With respect to H.R. 920, this approach
does address the issue of wind and water, but moved the line of
contention to other perils. Homeowners would still have to buy
fire, theft, liability, and potentially excess wind coverage if
their home value exceeds the NFIP coverage limits.
The bill ultimately seeks to improve the quality of
coverage for consumers; and we support that goal. But we think
there are some alternatives to consider that place the private
market as the first line of defense and close gaps in coverage
while addressing concerns about affordability. For example, the
NFIP could be restructured as a reinsurer to provide first
dollar reinsurance to companies writing flood coverage into
their standard homeowner's policy. This would allow companies
to offer their customers a more attractive product, but it
shifts any debate over the cause of loss to the insurer and the
NFIP, leaving the consumer with a seamless product.
In the event of a loss, the consumer receives only one
check, only deals directly with one adjustor and one insurance
company. While this approach does not address every peril, it
is an alternative to H.R. 920 that keeps wind coverage in the
private market. Another concept is to eliminate the flood
program and have the private market offer all perils coverage
directly in exchange for comprehensive coverage and as a way to
manage affordability, the Federal Government could provide a
backstop or a credit line over a certain magnitude of loss.
This would cap catastrophic exposure for the insurers, but
would leave the government out of the vast majority of insured
events.
Such an approach would have to be structured to encourage
participation by insurers of different sizes and would need to
work in tandem with State-run catastrophe programs that have
been designed to address the risk of a particular region.
Insurers in States would be the first and second lines of
defense, while the Federal Government would utilize its ability
to spread risk over time.
Federal involvement is inevitable when a major catastrophe
strikes, but if better insurance is more widely held by
consumers, that involvement would be less frequent and flow
more as risk-based insurance dollars than as relief dollars.
Insurers could also factor in this involvement to their pricing
and spread their capacity more broadly.
Congressman Taylor had shed light on the gaps in insurance
coverage as it's offered today, and we commend him for that and
hope our alternatives will be met with an open mind and
recognized as an effort to move toward a common goal. Providing
all perils insurance will require a collaborative effort. There
are challenges of affordability that are serious considerations
for public policymakers.
Given the complexity and the scope of this issue, the NAIC
continues to strongly endorse the concept of a national
commission on catastrophe preparation to weigh all the options.
Thank you for inviting me here today to testify and for
considering our views. State insurance officials stand ready to
assist Congress as you consider this important national issue.
[The prepared statement of Ms. Praeger can be found on page
95 of the appendix.]
Mr. Cleaver. Thank you very much.
Mr. Majewski.
STATEMENT OF TED A. MAJEWSKI, SENIOR VICE PRESIDENT,
HARLEYSVILLE INSURANCE GROUP, ON BEHALF OF THE PROPERTY
CASUALTY INSURERS (PCI), THE AMERICAN INSURANCE ASSOCIATION
(AIA), AND THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE
COMPANIES (NAMIC)
Mr. Majewski. Thank you, Mr. Chairman.
My name is Ted Majewski, and I am senior vice president of
Harleysville Insurance Group, a member of the Property Casualty
Insurers. Harleysville writes homeowners', commercial property
and other property, and casualty insurance, and is domiciled in
Pennsylvania. Harleysville also participates in the National
Flood Insurance Program's Write-Your-Own Program.
Thank you for the opportunity to appear before you today on
behalf of Harleysville, PCI, AIA, and NAMIC, to provide our
comments to this important legislation.
The Multiple Peril Insurance Act of 2007, H.R. 920, is an
admirable effort to resolve issues related to property
insurance coverage disputes that are currently being decided in
our State and Federal courts. However, Harleysville and a
significant portion of the property casualty insurance industry
have concerns about the current provisions of this legislation,
and therefore oppose their being added to the National Flood
Insurance Reformation and Modernization Act of 2007, H.R. 1682,
for the following reasons.
H.R. 920 would dramatically increase the exposure of the
NFIP and the Federal Government to catastrophic losses. The
States along the Gulf Coast and Eastern seaboard contain more
than $19 trillion in insured property values. The majority of
these risks are currently insured in the private marketplace or
in a State residual market program where the private insurance
industry shares in the potential losses. Moving significant
numbers of these properties from the private insurance
marketplace to the NFIP would significantly increase the
exposure of loss to the Federal Government and despite the
provision that calls for actuarially sound rates for the
windstorm portion of this coverage, increase the potential for
a significant taxpayer subsidy.
H.R. 920 would increase the potential losses of the NFIP at
a time when the NFIP is already more $17.5 billion in debt. A
recent Congressional Budget Office report states that the
interest alone on this debt will run about $900 million a year.
The bill purports to eliminate the need to determine whether
hurricane loss is caused by wind or water; however, while the
number of wind-water disputes that occurred after Katrina is
significant, they are relatively rare when compared to the more
than 3 million insurance claims from these events. When
flooding does occur, it is rarely a massive tidal surge as
happened in Katrina. The proposal seems to be adopting a one-
size fits all approach for all States, when the need for such a
program is limited to coastal areas of coastal States.
H.R. 920 would increase the amount of coverage available
above the current NFIP limits, but even these higher limits
would still be inadequate for many properties. Many property
owners would still need to purchase additional coverage from
the private market and integrate two different insurance
policies. One provided by the NFIP and one regulated by State
insurance departments. Policy integration issues would need to
be property addressed in the bill to avoid numerous operational
challenges and the same types of claim disputes that exist
today.
Wind storm residual markets exist in many coastal States.
These pools typically provide wind-only coverage to homeowners
living in a designated coastal area who are unable to obtain
their coverage in the voluntary market. Thus, a private market
mechanism providing such coverage already exists in these
markets. States have designed these residual markets to respond
to their unique geographic and insurance market needs. The bill
does not address how these programs would operate or if they
would be replaced with a Federal program.
As insurers, we understand the Katrina wind and water
disputes that have arisen are a significant problem for
homeowners who have suffered the loss of their home and
belongings. Therefore, these issues are being resolved in
courts based on contracts purchased by individual policyholders
and the decisions that will be made by courts who will guide
how future hurricane claims are handled and will reduce the
number of disputes in the future.
There are additional programs that could help address the
sponsors' concerns and that address the various objections that
are contained in this testimony. For example, it's possible to
put a workable dispute mechanism in place. The current program
can be amended to require the NFIP to participate in State-
sponsored mediations to determine the extent of the damage
caused by wind versus flood as is currently proposed in 1682.
In summary, passage of H.R. 920 would create a program that
if not properly structured has the potential to incur enormous
deficits following a hurricane of any significance. We would
appreciate any opportunity to work with the sponsors of the
bill and Congress on reforms to the NFIP as they are needed and
other potential solutions to the issues raised by these events.
Again, thank you for the opportunity to present our views.
[The prepared statement of Mr. Majewski can be found on
page 82 of the appendix.]
Mr. Cleaver. Thank you very much.
Ms. Small.
STATEMENT OF CHERYL A. SMALL, POLICY ADVISOR, NATIONAL FLOOD
DETERMINATION ASSOCIATION
Ms. Small. My name is Cheryl Small, I am the policy advisor
for the National Flood Determination Association (NFDA), and I
am pleased to comment on the Multiple Peril Insurance Act of
2007, H.R. 920. The NFDA shares the concerns for the viability
of the National Flood Insurance Program and for the homeowners
in coastal regions who need reliable and affordable insurance
coverage to protect against losses from windstorm and flood.
We respect the fact that Congressman Taylor has introduced
H.R. 920, which creates a Federal program that would make these
coverages available to homeowners located in coastal
communities. The NFDA is a professional association of
companies that work with federally-regulated lenders to
facilitate compliance with the NFIP's mandatory purchase
requirements by helping to ensure that structures located in
special flood hazard areas are covered by flood. Lending
institutions provide the compliance mechanism for the NFIP. Our
industry completes approximately 20 to 30 million flood risk
determinations per year, and we respond to approximately
1,250,000 telephone inquiries from lenders, insurance agents,
and homeowners regarding the NFIP and flood compliance matters.
The NFDA recognizes and appreciates the critical place the
NFIP holds by bringing together floodplain management, hazard
mitigation, mapping, and planning of flood insurance. We want
to see the foundation of the NFIP supported and strengthened by
thoughtful action.
Mr. Cleaver. Ms. Small, can you pull the microphone up a
little closer?
Ms. Small. Sure.
While we want to see the foundation of the NFIP supported
and strengthened by thoughtful action, while we support the
motives and spirit behind the bill, we strongly urge the
committee to consider the implications associated with the
creation of a Federal multi-peril insurance program and suggest
that the committee require a study to include a comprehensive
assessment of the loss exposure due to windstorm, the market
for voluntary windstorm insurance, the effect on the NFIP in
the private insurance industry, and the implications on flood
compliance for federally-regulated lenders.
The NFDA's concerns center around the financial and
administrative impact this program may have on the National
Flood Insurance Program, the potential impact of federally-
regulated lenders in the form of inconsistence compliance
guidelines, gaps in coverage, and possible exposure to
litigation. Although actuarial rates will be implemented, they
may not produce sufficient premium income to bear
administrative costs and losses in the event of a natural
disaster.
To continue to articulate our concerns, currently the
write-your-own companies provide a sales channel through
insurance agent networks that conduct training, administer
claims, and provide policyholder services, including policy
issuance.
What mechanism will be used to provide these services
within the multi-peril program?
What would be the extent of the administrative burden to
the NFIP?
Will FEMA require additional staff expertise pertaining to
underwriting actuarial science policy development claims
program oversight and management?
What will be the cost in time and money for FEMA to modify
the NFIP databases and systems to include management reporting
and requirements for statistical and financial reporting of
policies, premiums, and claims?
Would the Federal multi-peril wind and flood program be
authorized to borrow from the U.S. Treasury to cover
shortfalls?
What would be the flood compliance implications for lenders
if a mortgagor, whose property is in a special flood hazard
area, drops an optional windstorm and flood policy?
Will gaps and coverage be created when lenders initiate the
process to place flood insurance?
Will there be a notification obligation for lenders to
inform their borrowers of the availability of this higher limit
coverage?
What additional exposure to liability will lenders face
related to separate policies under the NFIP, standard flood
versus multi-peril?
We are in favor of prudent action which considers the
impact of all the various stakeholder groups, and I hope the
subcommittee continues a dialogue among these groups to develop
a course of action which addresses the problems, but does not,
inadvertently, create new ones.
Thank you.
[The prepared statement of Ms. Small can be found on page
107 of the appendix.]
Mr. Cleaver. Thank you, Ms. Small.
Mr. Baker?
STATEMENT OF W. ANDERSON BAKER III, CPCU, ARM, PRESIDENT,
GILLIS, ELLIS & BAKER, INC.
Mr. Baker. Congressman Cleaver and members of the
subcommittee, I am Anderson Baker, president of Gillis, Ellis &
Baker, Incorporated, one of Louisiana's largest independent
insurance agencies.
I appreciate the opportunity to appear before the
subcommittee today on behalf of Greater New Orleans, Inc. (GNO,
Inc.), a 10-parish economic development organization in
southeast Louisiana.
I would like to extend my personal appreciation to the
chairwoman for the intense interest she has shown in New
Orleans over the past 2 years, and also to acknowledge
Congressman Taylor from our neighboring State of Mississippi
for the leadership he has demonstrated after these intense
hurricanes devastated the Gulf Coast and for his leadership on
H.R. 920.
GNO, Inc., has grappled with the maze of insurance
challenges presented by the post-Katrina environment every day
since Katrina. Our company has handled thousands of Katrina
claims. We have as much experience with the insurance
challenges facing New Orleans and the Gulf Coast as any other
local organization, and have transferred that experience to
advice to GNO, Inc., since Katrina. One of the biggest
challenges to the recovery in New Orleans and along the Gulf
Coast has been the placement of insurance. Prior to Hurricanes
Katrina and Rita, the private insurance market would have
readily provided wind coverage. Now, insurance companies are in
most cases either significantly restricting wind coverage or
are simply no longer providing it at all.
As an insurance agent in New Orleans, I am forced to place
the coverages in the surplus lines markets, place the coverages
with Louisiana's residual market plan, or not provide the
coverage at all. How can we expect homeowners and businesses to
rebuild New Orleans when insurance is either unavailable or not
affordable. It is essential that the Federal Government work
closely with those of us on the ground facing the crisis on a
daily basis to develop common sense solutions to this problem.
The NFIP has been a valuable insurance program to date, but
it must be modernized to reflect the current realities.
Insurers typically do not wish to provide coverage for an event
that can cause significant loss to numerous properties at the
same time and in the same area. They tend to insure random yet
predictable events; and as the hurricanes aptly demonstrated,
there are times when the private industry simply does not have
the capacity to adequately respond to a massive event.
H.R. 920 will provide an incentive for insurers to continue
writing policies in coastal areas by removing the burden of
providing the initial levels of wind coverage. This will
relieve much of the risk of uncertainty that exists in the
current wind versus flood debate. The result will be more
capacity in the private sector, which would hasten the
rebuilding of my city or any other area similarly affected in
the future. Under H.R. 920, insurers could structure their
policies to eliminate the lower level of wind coverage that
currently causes such difficulties in the event of a massive
loss.
If the revised NFIP program were actuarially priced as
proposed by H.R. 920, it would allow for the build-up of
capital in the program and diminish the likelihood of large
losses incurred after Hurricanes Katrina and Rita. It is a
reality that an increasing number of Americans are now living
in coastal regions. In the event of major windstorms in the
future, the Federal Government will certainly be called upon
for financial assistance. H.R. 920 would allow more people to
pay into a program that will build up reserves for future
losses, and thereby reduce some portion of the Federal
Government's exposure when the next major hurricane hits one of
our coastlines.
I am pleased to add the solid support of GNO, Inc., for
H.R. 920. The economies of hundreds of counties, parishes, and
cities are at stake. In this environment, it is essential that
Congress act aggressively to provide appropriate relief to the
thousands of homeowners and businesses hamstrung by the
insurance crisis along the Gulf Coast. H.R. 920 takes a
significant step in that direction.
Thank you for the opportunity to appear before you today.
GNO, Inc. and its insurance task force look forward to working
with the Financial Services Committee on this important
legislation.
I would be pleased to answer any questions that you may
have or submit additional information that you may require.
[The prepared statement of Mr. Baker can be found on page
58 of the appendix.]
Mr. Cleaver. Thank you very much, Mr. Baker.
Dr. Hartwig?
STATEMENT OF ROBERT P. HARTWIG, PH.D., CPCU, PRESIDENT AND
CHIEF ECONOMIST, INSURANCE INFORMATION INSTITUTE
Mr. Hartwig. Good afternoon, Mr. Cleaver, Ranking Member
Biggert, and members of the subcommittee.
My name is Robert Hartwig, and I am president and chief
economist for the Insurance Information Institute.
Thank you for the opportunity to appear before the
committee today to discuss the economic and fiscal
ramifications associated with the expansion of the National
Flood Insurance Program to cover windstorm losses as proposed
under H.R. 920.
My testimony today will address five major issues: the true
scope of windstorm exposure in the United States; the
historical difficulties that government-operated property
insurers have encountered in implementing a rating system that
is actuarially sound; the distortionary economic effects an
expanded program could have should H.R. 20 fall short of its
stated requirement that rates be actuarially based; recognizing
that even if rates are actuarially sound, H.R. 920 does not
address or correct the fundamental problem of low flood
insurance penetration rates; and the fact that the ability of
the NFIP to offer windstorm coverage at actuarially sound rates
will be undermined by political decisions made by many State-
run insurers to subsidize windstorm coverage, thereby pricing
the Federal coverage out of the market.
In many parts of the United States, wind is the most costly
and frequent cause of catastrophic loss, as you can see in
Figure 1, on the easel to my right.
As Figure 1 shows, wind plays a role in approximately 80
percent of the catastrophe losses paid by insurers. Hurricanes
and tropical storms accounted for nearly half of the $278
billion in insured catastrophe losses over the past 20 years.
Tornadoes accounted for another 25 percent. Severe winter
storms and other strong wind events accounted for another $30
billion or 11 percent in cap losses. It's important to point
out that the vast majority of wind losses today are paid by
private insurers, including those in coastal areas.
There is no question that government-operated insurers play
a vital and necessary role as insurers of last resort, but many
operated deficits, even in years with light catastrophe losses.
The reason: Government-run property insurers are highly
susceptible to political pressure and frequently are not
permitted to charge rates or to adopt underwriting criteria
that are commensurate with the risk being assumed. While H.R.
920 requires that rates be established on an actuarial basis,
the financial consequences of not doing so historically in
other plans have been nothing short of disastrous. The NFIP
itself, as we have heard several times, has a current deficit
of $17.5 billion. Of the 31 State-run Fair Access to Insurance
Requirement Plans for which data are available, 26 have
incurred at least one operating deficit since 1999, while all
seven beach and windstorm plans have sustained at least one
underwriting loss since that time.
In the course of the last decade, the Fair Plans have also
seen a more than 50-fold ballooning in their aggregate
operating loss from $52 million in 1995 to $2.8 billion in
2005. Given this real world experience, it is unclear what
practical safeguards beyond the language in the bill itself
could or would be implemented as part of H.R. 920 and would
prevent deviations from actuarially-sound pricing practices. At
the Federal and State level, legislators and regulators have
almost universally chosen to sacrifice actuarially-sound rating
and underwriting practices for political gain. Though popular
with voters, the combination of artificially low rates and lax
underwriting standards is financially lethal, enabling and
encouraging rampant or substandard development in vulnerable
areas.
Should coastal dwellers be required to pay more to bring
rates to an actuarially-sound basis? This is a politically
unpopular question to ask, which is precisely the reason why it
is seldom answered. Instead, legislatures tend to search for
ways to spread the cost of financing deficits well beyond the
policyholders who actually incur the losses, to include
property owners who have never filed a claim, inland dwellers,
and people who take every precaution to protect their homes
against storm damage. Even auto insurance and commercial
liability policyholders can be assessed.
Practical experience has demonstrated repeatedly that
government property insurers rarely operate on an actuarially
sound basis. So a fundamental question to ask is whether
expanding the NFIP to include optional windstorm coverage will
solve the problem associated with discerning wind from water
damage. There are several reasons to suspect that it will not.
Low flood penetration rates, as I have already mentioned on
Chart 2, that you will see up here in a moment--you will see
that fewer than half of homes and even flood zones have
coverage, and only 1 percent outside of those zones. Consumers
generally skip optional coverages. For instance, we could take
another example of California. Only 12 percent of homeowners
have earthquake coverage in that State, and of course again the
minority of homeowners have flood coverage.
And again, the subsidies that I mentioned earlier price
H.R. 920 windstorm coverage out of the market. To give you an
example, Florida Citizens Property Insurance Corporation in
2006 became the State's largest insurer of homes and is growing
rapidly today in large part because the State has consciously
decided to subsidize every single, new policy written. Despite
having accrued deficits over the 2004-2005 hurricane seasons
totaling some $2.3 billion, Governor Charlie Crist earlier this
year ordered that Citizens' rates be rolled back and then
frozen through 2008.
So, in conclusion, the proposed expansion of the NFIP to
provide windstorm coverage as specified under H.R. 920 is risky
and potentially an enormous financial undertaking.
Thank you very much for the opportunity to address the
committee today. I would be happy to answer any questions that
you have.
[The prepared statement of Mr. Hartwig can be found on page
68 of the appendix.]
Mr. Cleaver. Thank you, Mr. Hartwig.
Mr. Conrad.
STATEMENT OF DAVID R. CONRAD, SENIOR WATER RESOURCES
SPECIALIST, NATIONAL WILDLIFE FEDERATION
Mr. Conrad. Thank you, Congressman Cleaver, Ranking Member
Biggert, and members of the subcommittee.
The National Wildlife Federation is the Nation's largest
conservation, education, and advocacy organization. We
appreciate the opportunity to share our views on H.R. 920, the
Multiple Peril Insurance Act of 2007. In general, while we
understand there are substantial issues raised regarding the
insurance adjustment process when there are both flood and
wind-related damages, the National Wildlife Federation is
deeply concerned that adding a wind peril dimension to the NFIP
could substantially undermine the Program's already precarious
financial position, would add greater risk and uncertainty,
especially for the taxpayers and the public, and would
distract, we believe unnecessarily, from the critical missions
of the NFIP.
We applaud Representative Taylor and other members
especially for their continuing efforts to raise the Nation's
awareness of the increasing risks associated with coastal
storms. Current science is predicting that these storms could
become more powerful and of longer duration, due especially to
rising sea levels and warming of the climate. The
Intergovernmental Panel on Climate Change and many prominent
climate scientists are warning that such storms are likely
results of global warming, due to buildup of greenhouse gases.
It is clear also that Hurricanes Katrina, Rita, and Wilma
in 2005, plus powerful hurricanes that struck Florida in 2004,
have increased the public's concerns. At the same time, the
rash of storms have driven the National Flood Insurance Program
into the most dire financial condition in its history, now with
a virtually insurmountable U.S. Treasury debt of approximately
$18 billion. We are strongly urging Congress to make the
critically necessary changes in the Nation's energy systems to
directly address causes of global warming. Yet, we believe it
would not be appropriate or wise to add to the current
liabilities of the National Flood Insurance Program the
potentially very large additional liabilities that would be
associated with coverage of wind peril, especially given that
the Nation has a long history of this peril being served by the
private sector.
Recent insurance industry estimates of major storms
potentially striking a number of the more populated coastal
areas show that the costs of storms like Hurricane Katrina that
were in the $15- to $20 billion range for the NFIP today could
be 3 to 5 times more, if wind perils were included. Such costs
could potentially overwhelm the program and the costs to
taxpayers could balloon to staggering levels. This could
undermine the ability of the NFIP to accomplish its other
established goals.
The National Wildlife Federation has been concerned for
years that the NFIP is having severe difficulties managing the
growth of flood-related risk. We see a continual buildup of at-
risk development, with little to suggest that our programs are
not in many ways increasing disasters. That was not how the
NFIP was supposed to work. Nearly 10 years ago, the National
Wildlife Federation released a report called, ``Higher
Ground.'' On the problems of repetitive losses where in
thousands of communities, buildings were experiencing repeated
flood-related losses, only to be reconstructed again and again
with little or no mitigation of risk, in part for lack of
incentive to move out of harm's way.
The lack of incentive for mitigation was driven by rates
that are below, some of them far below, true actuarial rates,
flood hazard maps that are inaccurate or out-of-date, and
failure to consider changing conditions, and failure of
communities and FEMA to enforce even minimum standards of the
program, let alone set higher standards to reduce or avoid
risk. Today, we still find that after Congress passed the 2004
amendments and provided funding to address repetitive losses,
the new program is still largely not implemented and has failed
to spend much of the funds made available to reverse that
trend.
In the intervening decade since our report, the number of
repetitive loss properties has grown from 74,500 to now over
135,000 properties, and the cost to the NFIP of these buildings
has more than tripled to over $8.5 billion. The NFIP continues
to face enormous challenges, and the public's confidence is
lacking in the program's ability to reduce risks, manage costs,
and protect the environment. Given this context, if the NFIP
were subject to the additional burden of wind perils, it could
so tax the program's capabilities that many other functions
would be slowed or lost.
As the committee knows, the NFIP is engaged in a major
effort to modernize maps that have fallen far out-of-date.
Currently, staffing at the NFIP is straining to carry out these
and other functions. Yet, we do not believe that the NFIP is
equipped to analyze and rate wind-related risks as well,
whereas the private sector has devoted substantial resources
for decades to these issues--both rating and hazard mitigation
technologies.
Even when the focus has been on managing risk in the more
defined area of floodplains, it is clear that the NFIP has a
long way to go. New standards must be developed to provide
higher levels of protection. Flood risk mapping needs to be
substantially expanded to support the varied goals of the NFIP,
and the NFIP needs to be integrated much better with other
flood-related programs of the government.
The addition of the wind-related perils would expand the
flood program's footprint far beyond the present level and
greatly complicate the potential for success. For this reason,
the National Wildlife Federation would oppose H.R. 920 as
written.
Chairwoman Waters. Thank you very much.
Mr. Conrad. Thank you.
[The prepared statement of Mr. Conrad can be found on page
65 of the appendix.]
Chairwoman Waters. I thank the panelists for your
participation, and I will recognize myself for 5 minutes for
questions to this panel.
To tell you the truth, I am a bit frustrated with the lack
of solutions that have not been presented to us. I joined Mr.
Taylor in support of his legislation because I thought that he
came up with a solution that made good sense, particularly
since we have learned that the private insurance companies have
been trying every way that they possibly can not to pay, when
clearly they should be paying.
And it seems as if the Federal Government has been picking
up the tab, the Flood Insurance Program, that perhaps should
have been paid by some of the private insurers. Then, of
course, we are constantly threatened by the private insurers
that they are not going to insure anymore. They are going to
pull out. They are not going to provide coverage. But when
there is a solution developed based on some of the comments and
unhappiness of the insurance company, then all of a sudden we
hear from the private sector, private insurance companies that
that's not the way to go.
So what are we to do? Are we to say to the private
insurance companies, we don't have any alternatives. Please
don't pull out. Please pay the claims. Please don't abandon the
areas that desperately need coverage. What is a compromise
solution to this problem? And I'm sorry I didn't hear all of
your testimony. One of you may have given a compromise
solution. If you did, would you please just reiterate it a bit
for me and the rest of the members who may be left?
Ms. Praeger. Madam Chairwoman?
Chairwoman Waters. Yes.
Ms. Praeger. I did suggest on behalf of our national
association that perhaps Congressman Taylor's proposal should
be more inclusive. We recognized the conflict between wind and
water, but we pointed out that you could have the same conflict
between earthquake and fire, should there be a major earthquake
in your home State.
Our proposal was multi-faceted and certainly not thought
out yet. We are putting on the table some suggestions, and one
of them is to have homeowners' policies be all-perils policies,
so that you don't have that dispute. And perhaps then cap the
catastrophic loss with a Federal, first-dollar reinsurance
coverage. We have had a major tornado hit in Kansas that
literally wiped a small community off the face of the map. That
was wind. Companies were quick to come in. People were paid
policy limits, and we have had now major flooding in Kansas.
And most of our homes did not have flood insurance. Many of
them were in communities where they could participate, but
chose not to, and mistakenly thought that their homeowners'
policy covered floods.
So I think moving to an all perils policy with Federal
participation in some form, whether it be with bonds that
companies buy, or with a reinsurance model, we think should be
studied.
Chairwoman Waters. Without knowing how much participation
from the Federal Government or the ways in which the private
sector and the Federal Government may interact, how many of you
on this panel agree that we should have something that would be
an all perils approach to dealing with these disasters?
How many disagree?
Would you tell me why you disagree? I can't see the name.
Mr. Majewski?
Mr. Majewski. Ted Majewski.
One of the things that insurance is out there for is
private enterprise to go out and write insurance. If you put
the Federal Government out there doing all-perilall-peril being
theft, fire; I mean all peril is everything--you have taken
something out of the independent market, and I think that is
bad for business.
Chairwoman Waters. But my question was not all-perils
solely as a government response. My question was, could it be a
combination of private and government? But do you believe that
the homeowners, the citizens of this country, should have a
policy of some kind that covers all perils, whether it is wind,
water, as was mentioned, tornado, or earthquake?
Do you think there is something to that?
Mr. Majewski. I think that is an admirable thing to do, to
try and provide as much coverage as you possibly can provide,
with the policy. But there would be costs involved with that. I
mean, you could bring that also to terrorism. You are already
working on a TRIA Act, currently, and you know the problems
that are involved with that. So I mean there are a number of
perils.
Chairwoman Waters. I just want to deal with natural
disasters right now.
Mr. Majewski. Yes, I believe natural disasters could be
covered. There would be a cost involved with it.
Chairwoman Waters. Do you envision that there's some way
that the government and the private sector could participate?
Mr. Majewski. Absolutely.
Chairwoman Waters. And what is that?
Mr. Majewski. I believe that what Congressman Taylor has
put together is a very good attempt to get started on this. I
think that there are a number of things that were mentioned at
this panel or on prior ones that if we started to take pieces
of those and put them together, they would make a lot of sense.
For example, one of the things that I've been thinking
about was from a catastrophe standpoint. Instead of covering
every dollar from a FEMA standpoint, and from a Federal
Government standpoint, if you were to take a Category 3 storm
and above, which rarely happens but is really what this whole
thing started over, was major, major storms, not necessarily
the small ones, but the largest storms that are out there,
which from a probability standpoint will occur, but not as
often as smaller storms, and starting a program that began with
a category, say, 3 or 2 storm and above and have participation
from a Federal Government standpoint there.
If you could meld something like that into your bill, that
would then eliminate the need to look at the smaller claims
that are out there and the smaller storms, and then let the
insurance companies handle those, you know, that would be one,
I believe, compromise that would be certainly from my
standpoint and my company's standpoint worth working on and
worth solving.
Chairwoman Waters. Thank you. I think Mr. Watt alluded to
something like that.
Mr. Majewski. Exactly, he did, and that's why I said it was
mentioned earlier. And it makes a lot of sense to take that
approach.
Chairwoman Waters. All right, thank you very much.
Ms. Biggert?
Mrs. Biggert. Thank you, Madam Chairwoman.
Could I ask you, before I ask a question, what your
intentions are in moving this bill forward? We are scheduled to
mark-up H.R. 1682 at the end of the month. Are you looking at
Mr. Taylor's bill as being an amendment or do you plan to
introduce a new bill?
Chairwoman Waters. I am sorry. Would you repeat that?
Mrs. Biggert. I just wondered what your intentions were
with regard to moving this bill forward if we mark-up H.R. 1682
at the end of this month. Are you planning on including this
bill within that bill, are you going to introduce a new bill,
or how does that fit in with this bill?
Chairwoman Waters. I am not sure how we are going to do it.
I am going to talk with Mr. Taylor, with Chairman Frank, and
with you, and we are going to decide.
Mrs. Biggert. Okay, thank you.
Chairwoman Waters. Thank you.
Mrs. Biggert. All right, then I have a question for each of
the panel.
Chairwoman Waters asked you about a multi-perils bill and I
would just like a yes or no answer from each of you.
Would you support the addition of wind coverage to the
National Flood Insurance Program?
Ms. Pogue?
Ms. Pogue. No. One of the--
Mrs. Biggert. Just yes or no.
Ms. Pogue. No.
Mrs. Biggert. Ms. Praeger?
Ms. Praeger. No.
Mrs. Biggert. Okay, Mr. Majewski?
Mr. Majewski. No.
Mrs. Biggert. Okay. Ms. Small?
Ms. Small. No.
Mrs. Biggert. Mr. Baker?
Mr. Baker. Yes.
Mrs. Biggert. Mr. Hartwig?
Mr. Hartwig. No.
Mrs. Biggert. Mr. Conway?
Mr. Conway. No.
Mrs. Biggert. Okay, thank you.
And Ms. Pogue testified and she set forth several questions
about H.R. 920 that I think at this point remain unanswered.
Would you all consider, do you think? Would you support a
GAO study to examine such questions, and I think you have all
raised several questions, in order for Congress to proceed in a
more informed manner before we would consider such legislation.
Ms. Pogue, yes or no?
Ms. Pogue. Yes.
Mrs. Biggert. Okay, Ms. Praeger?
Ms. Praeger. Yes.
Mrs. Biggert. I'm not going to even try to pronounce your
name again.
Mr. Majewski. Yes.
Mrs. Biggert. Ms. Small?
Ms. Small. Yes.
Mr. Baker. No, but I would love to elaborate.
Mrs. Biggert. I don't have time. Dr. Hartwig?
Mr. Hartwig. Yes.
Mr. Conway. Yes.
Mrs. Biggert. Okay, thank you, and I am sorry. I have
another meeting, so that's why I have to hurry. I appreciate
you all coming, and I yield back my time.
Chairwoman Waters. Thank you very much. Mr. Green, for 5
minutes.
Mr. Green. Thank you, Madam Chairwoman, and I thank the
ranking member as well.
Let me start by saying that this really, while it
references Mr. Taylor, is not about him. He is symbolic of many
other persons who are not here to represent themselves, and
quite candidly, I thank God that he's here. I regret that it
happened to him, but I am grateful that he was available to
shed a lot of light on a situation that probably would not have
received the attention that it has received if nor for the
Taylors of the world who have the wherewithal to make the issue
available for all of us to see.
Having said this, let me continue the trend. We call this
voir dire, or voir dire, depending on where you're from when we
take you en banc and we ask questions. Voir dire is a French
term that means to speak the truth, so this becomes the truth-
telling portion of this hearing for members of the venire. That
would be you, the witnesses.
Now, having said this, which is what we have been doing,
let me ask in this way. If the private sector were taking care
of this problem in its entirety, do you agree that there would
be no need for involvement of the public sector. If your answer
is yes, you need not say anything. Your silence will indicate
consent.
All right. Do you agree that if the private sector refuses
to provide any wind coverage at all, the public sector should
get involved in these coastal areas? If the private sector
refuses to provide any wind coverage at all, zero, should the
public sector get involved?
If your answer is yes, you need not say anything. Your
silence will be consent. Now because this is so critical, I
would like to get your actual consent. Do you agree? We will
start with the first lady to my left. And is your answer yes?
Ms. Pogue. My answer is no.
Mr. Green. If the private sector provides, refuses to
provide, any wind coverage at all, you would not want the
public sector involved?
Ms. Pogue. Oh, I was answering your first question.
Mr. Green. No, as to my second now.
Ms. Pogue. Your second question?
Mr. Green. Yes. Private sector, zero coverage; would you
want the public sector involved in providing wind coverage?
Would you?
Ms. Pogue. My answer--
Mr. Green. If the private sector is providing zero wind
coverage, would, yes.
Ms. Pogue. Yes. You have me thoroughly confused, yes.
Mr. Green. All right, it's not going to be tricky.
All right, let's go to the next lady. If the private sector
provides zero wind coverage, would you want the public sector
to step in?
Ms. Praeger. At that point, I don't believe we'd have a
private sector market, sir.
Mr. Green. Okay, without explanation, would you want the
public sector?
Mr. Majewski. Yes.
Mr. Green. Ma'am?
Ms. Small. Yes.
Mr. Green. Sir?
Mr. Baker. Yes.
Mr. Hartwig. Yes.
Mr. Green. Sir, if the private sector refuses to provide
zero coverage, any coverage, would you want the public sector
to step in, or would you want people to simply be at the risk
of the wind, at the risk of nature, and those who have their
homes destroyed, that is just tough luck. Life is like that.
It's unfortunate that it had to be you. Thank God it wasn't me.
Is that your attitude, or would you want the public sector
to step in?
Mr. Conrad. I think the public sector would need to step
in.
Mr. Green. Excuse, me. Sometimes, when people finish, I
don't know whether they said yes or no. So I have to pressure
you to say yes or no. If the private sector provides zero
coverage, would you want the public sector to step in?
Mr. Conrad. To step in, in some form, yes.
Mr. Green. Okay, now, so the question becomes really how
many companies will have to leave Louisiana and Texas or
perhaps Mississippi, before we decide that we need to do
something, that's really where we are, because if we know that
if we have zero help from the private sector, then the public
sector should do something. The question becomes, where is it
between zero and 100 percent coverage. Where is it that we
should be involved in this process?
And the contention is that many of these insurance
companies are leaving the Gulf Coast area or they are
threatening to leave, one or the other. And at some point, we
have to consider the people who are left behind, not only
because of their homes, but also because of the economic
infrastructure that's in place there.
If we are not careful and we can continue to dilly-dally to
the extent that we could impact the economic order, not only in
the Gulf Coast area because it dominos and it impacts the
entirety of the country, we have to consider the stability of
the economic order as well and insurance is a part of the
stabilizing process. So at some point we have a responsibility
to do something to try to help.
That appears to be what H.R. 920 proposes to do. Now,
friends, I don't know the name of the phobia. Sorry that I
don't, but there is this fear that some people have of leaving
home. They ask themselves, if I go out of that door, will I
trip and fall? And if I go out of that door, and I don't trip
and fall, when I get outside, will a plane fall on me? And they
continue to ask themselves questions, and they do this to the
extent that they suffer from what's called a paralysis of
analysis.
They engage in analysis to the extent that they never do
anything and literally they are people who will stay at home
because they are afraid. My point to you is that we don't have
that luxury in Congress. I believe we have a duty to try to
find a solution so that the economic order receives stability
and so that citizens can know that they will be insured. And I
don't think that we want to put it all on the Federal
Government, nor do I want to put it all on the private sector.
There has to be some balance. H.R. 920 seems to seek that
balance, and I yield back the balance of my time.
Chairwoman Waters. Mr. Miller?
Mr. Miller. Thank you, Madam Chairwoman. I saw you smiling.
It's good to see that we can have some fun once in a while.
When I read the results of a poll, I always look to see how
the question was asked too, you know, before I just accept the
results of a poll. But Mr. Hartwig, why would the insurance
industry in a free market system, and I quote, ``free market
system,'' decide to pull out or refuse business in various
States?
Mr. Hartwig. Well, to begin with, in none of the States at
issue here do we have a free market system. The ranking member,
Mrs. Biggert, actually hails from the only State that has
complete and total flexibility in terms of rates in the entire
United States.
The reality is in States like Florida and other coastal
States, you do have fairly strict rate regulation laws and laws
that govern, of course, the forms that are used. To the extent
that an insurer cannot generate a rate of return that is
sufficient to cover its expected losses, that is the reason why
you have seen most of the pullback that you have seen in
coastal areas.
In some States, in Florida in particular, there is a
deliberate attempt to drive insurers out of the State for
political reasons. Make no mistake about it, that is the reason
why this is a very active issue for the current Governor and he
is underpricing policies deliberately at this point. So
insurers do want to participate in markets, even in risky
areas. And, by the way, insurers do offer and participate in
markets that are extremely risky all around the world in all
sorts of ventures.
But when you have a regulatory environment that prevents
even the opportunity for earning a reasonable rate of return
over extended periods of time, it is impossible to participate.
So if I ask the question to all of you in a different way, if a
free market system existed, do you believe any State would be
without insurance for their people. The advantaged probably
know they would all have it if the free market system existed.
When the Flood Insurance Program was implemented in the
late 1960's, the coverage generally was unavailable from coast-
to-coast, Mr. Hartwig, and how does this rationale for Federal
flood insurance differ from the state of wind coverage today?
Mr. Hartwig. Well, in wind coverage today, wind coverage is
generally available all across the United States with the
exception of some coastal areas where there are some
difficulties that are a combination of both excessive risk and
exposure that insurers do have that has caused them to back off
some of these policies, combined with rate suppression issues
and litigation issues in a number of States.
Mr. Miller. So the rates are being mandated so low that the
insurance companies will not accept the risk-based rate of
return?
Mr. Hartwig. That's precisely it, particularly in States
like Florida. Yes. If you are not given the opportunity to at
least cover your costs and a reasonable rate of return, you
simply can't operate in that environment. No business could
operate.
Mr. Miller. So you think it is probably appropriate for the
Federal Government to be involved in some flood insurance, but
not necessarily in wind insurance.
Mr. Hartwig. The insurance industry has no problem with the
National Flood Insurance Program and the insurance industry
believes there is an appropriate role for government in every
State, particularly a safety valve function, until markets
stabilize.
Mr. Miller. I guess a question for each of you would be, do
most States operate a free market insurance system that allows
the insurer to share a fair price based on their risk. Starting
from left to right, what would your response be?
Do you think the States allow or operate a free market
system for insurance companies that allow the insurer to charge
a fair price that accurately reflects the risk?
Ms. Pogue. Congressman Miller, to be honest with you, I
wouldn't have a basis for answering that question. It would be
more the government's involvement in flood insurance.
Mr. Miller. Sure.
Ms. Praeger. I can speak for my State. In Kansas, if
companies can demonstrate that the rates they are proposing are
actuarially sound, I can't statutorily refuse to allow that
rate increase.
Mr. Miller. Okay.
Mr. Majewski. I would say many States operate in a free
market system. The exception would be on an assigned risk
program, where you're taking like the auto insurance and you're
setting a rate from a company standpoint and from a State
standpoint. It's very difficult for even the State plans to
stay solvent, much less the independent market side.
Ms. Small. Congressman Miller, I don't have a basis from
which to respond to that.
Mr. Miller. Okay.
Mr. Baker. Congressman Miller, in the State of Louisiana, I
can say with almost certainty that I cannot obtain a new
homeowners policy for you in the greater New Orleans area in an
area that has been flooded.
Now, it seems a bit counterintuitive, but because the area
flooded, I can't provide wind insurance. But the controversy is
such that the insurers will not go where there's a chance of
flood if they have a chance of having a court enforce a wind
ruling on that policy.
Mr. Miller. Well, what you are saying is that if they're
not willing to accept the responsibility of flood damage when
they are only insuring for wind damage?
Mr. Baker. The courts are imposing flood damage on them
where they thought they were going to collect on wind.
Mr. Miller. That was my answer. So the insurance companies
are basically saying, we are only writing a policy for wind. We
are not writing it for flood. So, why did we accept liability,
when there's a flood, we're going to get assessed for wind
damage at the same time.
Mr. Baker. Well, what I am saying is they won't take the
risk of the uncertainty.
Mr. Miller. Yes, okay. Mr. Hartwig?
Mr. Hartwig. The majority of the U.S. property casualty and
insurance market operates in an environment that by traditional
terms, at least in terms of rate flexibility, couldn't be
deemed as anywhere near perfect competition.
Mr. Miller. Okay.
Mr. Conrad. And, Congressman, being from the National
Wildlife Federation, I think I will defer to the insurance
folks here.
Mr. Miller. We will save the ducks. How's that?
I am going to ask my last one because I know my time is up.
But based on the testimony at the last hearing, it sounded like
the largest problem we have is an Attorney General who
disagrees with the insurance commissioner. And, Mr. Baker, that
seems to be a problem in your State because the courts are
enforcing policies or mandating things that the insurance
companies didn't believe was their responsibility.
I yield back. Thank you.
Chairwoman Waters. Mr. Taylor?
Mr. Taylor. Well, Mr. Majewski and Mr. Hartwig, you have
certainly earned your paychecks today.
I want you to know that your defense of the folks who told
the Bienvenuttis, with their $600,000 policy, that they weren't
going to pay, has been remarkable.
They told the Haddens, with their $560,000 policy, that
they weren't going to pay. Remarkable.
Your defense of an industry that is exempt from the Sherman
Antitrust Act and the McCarran-Ferguson Act where it is
perfectly legal for State Farm to call Allstate to call
Nationwide and say, we're not going to pay. Well, let's all
raise our rates; or you take Alabama; you take Florida; you
take Texas. No other industry in America can do that. Guys, you
have earned your pay.
You are coming before this committee and saying that it is
available and we work to make it available from the private
sector for the public. You have earned your pay. But you see, I
have a really smart guy working with me. He does research. His
name is Brian Martin.
I am going to read a statement from your company, Mr.
Majewski. This is from your annual report in 1997: ``Our
decision to reduce property exposure along the Atlantic coast
has had the desired effect of decreasing our coastal exposure
by more than $2 billion during the past 2 years. And we have
reduced or eliminated our exposure on 61 percent of the
homeowners' policies we had in force in Atlantic coastal
counties when the program began in January 1 of 1996.''
Now, you just told us you weren't going to make it
available and the Nation doesn't need to do this. But I am
going to go on because the next statement is from your
company's press release announcing their earnings for the third
quarter of 2005, which incidentally is right after Hurricane
Katrina. And this is the part of the statement by Michael
Brown, the current president and CEO: ``Hurricanes Katrina and
Rita had minimal impact on our financial results, in part due
to our ongoing effort to effectively manage our catastrophe and
windstorm exposures, which is a key component of our
disciplined underwriting approach.'' It doesn't sound to me
that you are going out of your way to write these policies. It
sounds to me, based on quotes from your company publications,
that you are going out of way not to write them. You don't want
to do it. I have heard with great interest Mr. Hartwig's
statements that, you know, they can't do this because you can't
generate a rate of return.
The company that told this guy they weren't going to pay on
his $560,000 policy made $3.5 billion the year of Katrina. The
company that told this insurance salesman that they weren't
going to pay on his $600,000 policy made $3.5 billion. You see,
they not only took them at their word that they were a good
neighbor, they bought from their good neighbor who lived down
the street. His wife is driving a Lexus convertible. This guy's
living in a FEMA trailer.
So, Mr. Hartwig is telling me they're a little worried
about the rate of return, I would remind him that the insurance
industry that is exempt from Karen Ferguson had a collective
profit of $44 billion after Katrina. The insurance industry
that you are so worried about having an effective rate of
return had a $60 billion profit last year. The same insurance
industry that told these folks, we're not going to pay, we're
your good neighbor. We'll take your premium, but we're not
going to pay.
Well, Ed Rusk, Jr., who made that decision, he and his
board doubled their own bonuses, which amounted to almost a $9
million bonus for Ed Rusk, Jr., State Farm Insurance Company.
Now I appreciate that you don't see the need for change. I
would invite you to south Mississippi. I would invite you to
Slidell, Louisiana. I would invite you to Bayou la Batre, and I
would remind you that 52 percent of Americans live in coastal
America and the odds of it happening to us again are pretty
slim.
And this, unlike efforts in the industry to paint it about
being about me, it isn't. You see, I was one of those people
who walked into a lawyers office and said, yes, I'll give you
40 percent of what I get because they are not going to give me
anything. So right now, I am getting 100 percent of nothing,
and I am willing to take 60 percent of something because they
are not going to give me anything. And, by the way, if they do
that to a Congressman, what do you think they'd do to a school
teacher or a football coach, or a retired Chief Petty Officer?
You see, I wasn't always a Congressman, and I really did
put myself in that. What if I had just been a corrugated box
salesman that day, and what if guys like Dickie Scruggs don't
take phone calls from corrugated box salesmen? I can't make
everyone I represent a Congressman, but we ought to treat them
like one so that they don't have to call a Dickie Scruggs or
the Merlin Group or any of these other law firms.
And so I want to tell each of you, you have earned your pay
today. To defend this, to defend those profits, to defend the
practice where they can call each other up and say, let's all
raise our rates. You take this date; you take that one. Or,
even better, let's all back out for a little while and then
we'll come back in and we'll quadruple the rates and the people
will be so desperate because they know hurricane season is
right around the corner, they'll pay us anything.
To say that that doesn't need to change; to say that it's
okay, well, you have to live with yourself. And I'm sure, quite
frankly, your financial portfolio probably looks a whole lot
better than these guys. But the bottom line is, it does have to
change. It's not a what-if, it has already happened. So the
question is, when does it happen in North Carolina? When does
it happen in New York? When does it happen in New Jersey? When
does it happen in Connecticut? When does it happen in Georgia?
When does it happen in South Carolina? Because it is going to
happen. The Navy Oceanographic Lab tells us we are in for 10
years of this, and I believe them. We've already had our
licking. The rest of the country still hasn't had theirs.
If you don't think it needs to change, fine; but I know
better. And I very much appreciate the gentlewoman from
California having this hearing so people could get a chance to
say something. I very much appreciate Chairman Frank allowing
her to have this hearing, and I very much appreciate that in
the 15 months after the storm, the guys who used to run this
committee didn't see fit to have one hearing on the kind of
abuses that took place by the thousands in Mississippi.
In the months since the Democrats have taken over, they
have had five, and we have had a promise of a vote. I
appreciate your thoughts on this, if there are some things we
can do to tweak it to make it better. But to sit back and do
nothing would be the greatest wrong of all.
Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much.
Mr. Taylor, would you like to submit those quotes for the
record?
Mr. Taylor. Yes, Madam Chairwoman, I would like to submit
that for the record. I would also like to submit letters from
Nationwide Insurance Company and Allstate Insurance Company, as
well.
Chairwoman Waters. Without objection, such is the order.
We have been joined by Mr. Pearce. Would you like to have 5
minutes for questions, Mr. Pearce?
Mr. Pearce. Thank you, Madam Chairwoman, I would.
First, for Mr. Conrad, one of the criticisms of the Flood
Insurance Program is that it encourages coastal development by
homeowners to purchase flood insurance at subsidized prices. I
would like your observation on that. And again, keep in mind we
have 5 minutes, and I have a couple more questions, so short
observations are better. And then the second thing is, would
adding wind coverage to the Flood Insurance Program do anything
to alleviate that problem? So, first of all, if you would
address those?
Mr. Conrad. Yes, sir. I have spent probably 15 years
looking at some of those questions attempting to from my
vantage point at the National Wildlife Federation, we have done
some statistical work on repetitive losses, which I mentioned
in my testimony. There are a number of aspects of the National
Flood Insurance Program that are providing substantial
subsidies, not only in coastal areas, but also in some other
areas that I think it is getting pretty clear have particularly
managed to maintain high risk properties in those locations.
There just has been not enough incentive to mitigate the
risk, either by elevation or relocation. And, as a result, the
Flood Insurance Program has been hurt financially by that. The
other question, I'm sorry.
Mr. Pearce. Just if we had wind, what's it going to do to
alleviate that current situation that you are describing?
Mr. Conrad. Okay, I don't believe that would have, if you
added wind coverage; it would certainly not lessen the risk
associated with those properties. And in fact I think it would
probably increase the total exposure that ultimately the
taxpayers have to the risks.
Mr. Pearce. Mr. Hartwig, typically insurance companies are
in areas where the market justifies being there. Since the
Katrina catastrophe, tell me a little bit about what's
happening to the market. Are companies staying in those three
States or are they actually pulling out?
If you would, in the principal States affected by Katrina,
insurers have reduced their exposure, generally speaking,
particularly on the homeowner side, less of a difference on the
commercial lines. In other words, the business type of
insurance, and the reason for that is that there tends to be
less regulation on prices in terms of commercial property
insurance policies.
Is that reduction across the board, or are there some
companies, is it some companies are saying we're going to get
that market, let us have the profits there. You all move to
another market. Or is it across the board?
Mr. Hartwig. There are some insurers who reduce their
exposure less than others. There are some who have simply said,
we won't write any new policies, as opposed to outright
reduction. So there are a variety of tolerances of risk within
the insurance industry and a variety of abilities to assume
risk and to distribute that risk across the world with
reinsurance.
Mr. Pearce. If H.R. 920, which is again designed to improve
availability and affordability of home ownership insurance in
coastal States, if this bill goes through, can you give me an
idea about what the market will be like, how the insurance
market itself will respond to that presence, is it going to
have an effect or no effect?
Mr. Hartwig. Well, it is unclear what the effect would be.
In fact, one of the major thrusts of my testimony wasn't so
much with respect to what would happen in terms of private
insurance. What we have as a problem is growing influence in
terms of the State-run insurance. In Florida for example,
Citizens Property Insurance Corporation is the largest
insurance company in the State.
We are talking more about not what is going to happen in
the private sector, but what's going to happen to citizens, and
thereby, that affects the private sector. Let me give you the
dynamics of this. If you have a situation where you have
actuarially sound rates, and under H.R. 920 in terms of a wind
program you wind up with a situation where you have much, much
lower rates for wind being offered through the State-run
insurer.
Is the Governor of Florida going to say, I'm going to force
all of you into this much more expensive program? I don't think
that is going to be the case. You have a case of actually
competition potentially between a Federal and a State entity
with private insurers being caught somewhere in between. I will
say that the long term objective of insurers is consistent with
Mr. Taylor's goal of having actuarially sound rates. This is
something insurers have been asking for, for decades, and have
not yet been able to achieve.
Mr. Pearce. Any reasons why they have not been able to
achieve those actuarially sound rates?
Mr. Hartwig. Well as I indicated in my testimony, in places
like Florida and other coastal areas, it is simply not
politically feasible to allow insurers to charge a rate that is
commensurate with the risk. And even before Katrina, that is
what has caused insurers to reduce their exposure to some
coastal areas.
Mr. Pearce. And so what we face is the evacuation of
private insurance and the government will be left giving any
insurance that's available in the extreme case. If we were to
move to the extreme of what's happening right now, is there any
risk that the private insurers would ever get completely out of
the market?
Mr. Hartwig. That's potentially a danger. It is not what
insurers want to do, but when we see in Florida with the State-
run insurer adding 25,000 policies a week with $600,000 in
exposure, 1.3 million policyholders. They expect to have 2
million next year. You can see where that market is going.
Mr. Pearce. Well, we will stay with Mr. Hartwig. On the
long-term insurance companies nationwide have profitability and
lack of profitability, if we take a look at 15 years and if you
don't know the answer, I mean if anybody on the panel has the
answer. If we take a 15-year look at the industry, what sort of
profitability do we have year-by-year. What sort of losses have
we seen roughly?
Mr. Hartwig. I can answer that question. And mind you,
property casualty insurance is regulated at State levels, so
each State and each type of insurance needs to stand on its
own. So the profits Mr. Taylor cited earlier in 2005 were
earned entirely outside of his State on types of insurance like
workers compensation insurance in Alaska, which I don't believe
should have any relationship or should subsidize homeowners
insurance in places like Mississippi.
But it is the case that in fact for 19 consecutive years,
the property casualty insurance industry has underperformed the
Fortune 500 group for example. The average rate of return has
been somewhere in the 6 to 7 percent range over the period in
question, which is roughly half that generated by the Fortune
500 group. It isn't much more than one could have generated
risk free on a ten-year Treasury note.
Mr. Pearce. So you are telling me that they could have put
the money in the bank and earned as much as they are earning
with their routing of insurance claims and paying of the claims
and the business of insurance?
Mr. Hartwig. That is on average across all their operations
in some States like Florida or Mississippi or Louisiana. The
money would have better invested by putting it under your bed.
Okay?
Mr. Pearce. And what we risk if we keep on adding
requirements is at some point, the insurance market itself will
say, we would rather have no risk at 6 percent, than insure
these risks at 6 percent.
Mr. Hartwig. Insurance, like any business, needs to look at
where it can earn a rate of return that is sufficient to
basically cover its costs with a reasonable profit. In
insurance, we have the added factor that insurers need to
maintain a very significant financial cushion in order to avoid
regulatory sanctions and insolvency. Insurers today have to
basically keep in the bank roughly $1 for every dollar they
earn in premium. And that's a very steep hurdle, and it's not
one that any State-run entity has to face.
Mr. Pearce. Thank you, Madam Chairwoman. I see my time has
expired.
Chairwoman Waters. Well, 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. This
panel is now dismissed and the hearing is adjourned.
Thank you all, very much.
Mr. Pearce. Madam Chairwoman?
Chairwoman Waters. I'm sorry.
Mr. Pearce. I was going to ask unanimous consent.
Chairwoman Waters. That's right, I forgot. I was fairly
warned. Please, Mr. Pearce.
Mr. Pearce. If I could, we have a couple of letters here
from the Consumer Federation of America and the joint letter
from NAMIC and PCI and AIA under the Financial Services
Roundtable. If we could get unanimous consent to put those in
the record?
Chairwoman Waters. Without objection, it is so ordered.
Mr. Pearce. Thank you, Madam Chairwoman.
Chairwoman Waters. You are welcome.
The committee is adjourned.
[Whereupon, at 5:49 p.m., the hearing was adjourned.]
A P P E N D I X
July 17, 2007
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