[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
H.R. 3355, THE HOMEOWNERS
DEFENSE ACT OF 2007
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
AND THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 6, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-60
39-539 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
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York DEBORAH PRYCE, Ohio
BRAD SHERMAN, California RICK RENZI, Arizona
GREGORY W. MEEKS, New York RICHARD H. BAKER, Louisiana
DENNIS MOORE, Kansas CHRISTOPHER SHAYS, Connecticut
MICHAEL E. CAPUANO, Massachusetts PAUL E. GILLMOR, Ohio
RUBEN HINOJOSA, Texas MICHAEL N. CASTLE, Delaware
CAROLYN McCARTHY, New York PETER T. KING, New York
JOE BACA, California FRANK D. LUCAS, Oklahoma
STEPHEN F. LYNCH, Massachusetts DONALD A. MANZULLO, Illinois
BRAD MILLER, North Carolina EDWARD R. ROYCE, California
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee BLACKBURN, MARSHA, Tennessee
ALBIO SIRES, New Jersey GINNY BROWN-WAITE, Florida
PAUL W. HODES, New Hampshire TOM FEENEY, Florida
RON KLEIN, Florida SCOTT GARRETT, New Jersey
TIM MAHONEY, Florida JIM GERLACH, Pennsylvania
ED PERLMUTTER, Colorado JEB HENSARLING, Texas
CHRISTOPHER S. MURPHY, Connecticut GEOFF DAVIS, Kentucky
JOE DONNELLY, Indiana JOHN CAMPBELL, California
ROBERT WEXLER, Florida MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan
C O N T E N T S
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Page
Hearing held on:
September 6, 2007............................................ 1
Appendix:
September 6, 2007............................................ 77
WITNESSES
Thursday, September 6, 2007
Echeverria, John D., Executive Director, Georgetown Environmental
Law & Policy Institute, Georgetown University Law Center....... 58
Evans, Hon. Thomas B., Jr., Chairman, Florida Coalition for
Preservation................................................... 19
Joyce, Robert, Chairman and Chief Executive Officer, The
Westfield Group, on behalf of the Property Casualty Insurance
Association of America......................................... 54
Malta, Vince, Malta and Company, on behalf of The National
Association of Realtors........................................ 53
Nutter, Franklin, President, The Reinsurance Association of
America........................................................ 51
Ozizmir, Danyal, Head of Asset Back Securities-Insurance Linked
Securities, Environmental and Commodity Markets, Swiss Re...... 48
Patrick, Hon. Matthew C., State Representative, The Commonwealth
of Massachusetts............................................... 18
Schmidt, Hon. J.P., Insurance Commissioner, State of Hawaii, on
behalf of The National Association of Insurance Commissioners.. 16
Seo, John, Co-Founder and Managing Member, Fermat Capital
Management, LLC................................................ 49
Spiro, Steven J., CLU, ChFC, Spiro Risk Management, Inc., on
behalf of the Independent Insurance Agents & Brokers of
America, Inc................................................... 56
Swagel, Hon. Phillip, Assistant Secretary for Economic Policy,
Office of Public Affairs, U.S. Department of the Treasury...... 15
APPENDIX
Prepared statements:
Brown-Waite, Hon. Ginny...................................... 78
Kanjorski, Hon. Paul E....................................... 79
Mahoney, Hon. Tim............................................ 81
Maloney, Hon. Carolyn B...................................... 87
Echeverria, John D........................................... 88
Evans, Hon. Thomas B., Jr.................................... 95
Joyce, Robert................................................ 99
Malta, Vince................................................. 108
Nutter, Franklin............................................. 120
Ozizmir, Danyal.............................................. 131
Patrick, Hon. Matthew C...................................... 138
Schmidt, Hon. J.P............................................ 141
Seo, John.................................................... 153
Spiro, Steven J.............................................. 155
Swagel, Hon. Phillip......................................... 164
Additional Material Submitted for the Record
Biggert, Hon. Judy:
Written responses to questions submitted to Hon. Matthew C.
Patrick.................................................... 167
Written responses to questions submitted to Hon. J.P. Schmidt 170
Brown-Waite, Hon. Ginny:
Statement of ProtectingAmerica.org........................... 172
Kanjorski, Hon. Paul E.:
``Coastal Disaster Insurance in the Era of Global Warming,
The Case for Relying on the Private Market,'' a report by
the Georgetown Environmental Law & Policy Institute,
Georgetown University Law Center........................... 178
``In Nature's Casino,'' a New York Times article dated August
26, 2007................................................... 238
Mahoney, Hon. Tim:
Statement of Ms. Leanne Finnigan............................. 251
H.R. 3355, THE HOMEOWNERS
DEFENSE ACT OF 2007
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Thursday, September 6, 2007
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
and Subcommittee on
Capital Markets, Insurance, and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to notice, at 2:13 p.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the Subcommittee on Housing and Community
Opportunity] presiding.
Present from the Subcommittee on Housing and Community
Opportunity: Representatives Waters, Cleaver, Green; Biggert,
Capito, and Campbell.
Present from the Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises:
Representatives Kanjorski, Sherman, Moore of Kansas, Sires,
Klein, Mahoney, Wexler, Marshall; Pryce, Capito, Baker, Castle,
Putnam, Brown-Waite, Feeney, Campbell, and Roskam.
Ex officio: Representatives Frank and Bachus.
Chairwoman Waters. This joint hearing of the Subcommittee
on Housing and Community Opportunity and the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order.
Good afternoon, ladies and gentlemen. I want to thank
Chairman Kanjorski for joining me to co-chair today's hearing.
I would also like to thank the ranking members, Judy Biggert
and Deborah Pryce, and each of the members of the Subcommittees
on Housing and Community Opportunity, and Capital Markets,
Insurance, and Government Sponsored Enterprises, who have
joined us for today's hearing on H.R. 3355, the Homeowners
Defense Act of 2007.
Without objection, all members' opening statements will be
made part of the record.
I look forward to hearing from today's witnesses on H.R.
3355, the Homeowners Defense Act of 2007, introduced by
Representatives Ron Klein of Florida, and Tim Mahoney of
Florida, both of whom are members of the Capital Markets
Subcommittee, and are here with us today.
As you know, the full Financial Services Committee recently
passed the Flood Insurance Modernization and Reform Act of
2006, H.R. 4973, because of the urgency related to the need for
flood insurance reform and modernization, particularly in
conjunction with the National Flood Insurance Program.
This bill recognizes a similar urgency related to the need
to spread risk associated with natural catastrophes. Our most
recent experience with Hurricanes Katrina and Rita, where
billions of dollars in losses were sustained, put a new twist
on natural catastrophes. No one had predicted a storm of the
magnitude of Katrina or Rita or anticipated the staggering
financial costs of the storms: $40.4 billion in insured losses.
Of course, no one knows what the financial cost of the next
catastrophe will be, as catastrophic risk models have been
wrong to date. Businesses and homeowners in many States cannot
buy insurance. We know when insurance can be purchased, it is
unaffordable for most people.
I think it is a plausible idea for catastrophic risk to be
shared, pooled, or absorbed by capital markets. As one expert
said, ``There is a need to spread the risk as widely as
possible across the investment world, and in the process,
minimize the cost of insuring potential losses from
catastrophes.''
Natural catastrophe bonds have grown in private capital
markets, from a few billion dollars to more than a $14 billion
market since Katrina, and the market is expected to continue to
grow, as large investors become more actively involved in the
market.
H.R. 3355, the Homeowners Defense Act of 2007, provides
Federal encouragement or support for States that choose to
develop State-sponsored re-insurance programs designed to
enhance the efficiency by which catastrophic risks are
transferred to the capital markets.
We all know Florida has a State-subsidized pool of $32
billion in catastrophic insurance coverage. While other States
have been slow to move in this direction, the question is
whether a specific amount is sufficient for the next
catastrophe in Florida, California, or elsewhere. If not, how
can we encourage risk pools to be created so there is ample
coverage for future catastrophes?
This bill will enable the States to have greater latitude
to provide insurance for homeowners against catastrophic risk
by passing the risk on to our capital markets. Under the bill,
States could decide to join the National Catastrophic Risk
Insurance Consortium, for the purpose of transferring
catastrophic risk to the capital markets through the issuance
of risk-linked securities, or reinsurance contracts.
In addition, the bill creates a national homeowners
insurance stabilization program with the Treasury, to ensure a
stable private insurance market by extended low-interest
Federal loans to State-sponsored insurance programs in States
that have been impacted by severe natural disasters.
Further, the bill allows for the consortium to develop
capabilities related to catastrophic risk analyses, which is
active largely in the domain of the private sector.
I am pleased that a debate is centered on this issue,
because of the potential for natural catastrophic catastrophes
anywhere in this country. As such, I look forward to hearing
the witnesses' testimony on H.R. 3355.
I would like to recognize, at this point, Chairman Paul
Kanjorski, for his opening statement.
Mr. Kanjorski. Thank you very much, Ms. Waters. We meet
this afternoon to consider and review a bill introduced by our
colleagues, Congressmen Klein and Mahoney of Florida.
H.R. 3355 tackles a complex issue: how to address the
growing problem of the availability and affordability of
homeowners insurance around the country, and especially along
our coastlines. I commend my colleagues for taking on such a
difficult task. The Financial Services Committee and its
predecessors have struggled with this topic for many years.
The costs associated with natural disasters continue to
rise. According to the Government Accountability Office,
insured losses associated with hurricanes alone have risen from
$10 billion in the 1980's to $97 billion for this decade. Some
attribute this increase to global warming. Others attribute it
to the higher cost of real estate and increased density of
high-risk areas. Still others attribute it to climatic cycle
where the frequency and intensity of storms is currently on the
upswing, that will eventually subside. Whatever the cause, the
increase in costs is very real, especially for those who own
homes in the areas most affected by natural disasters.
The central question before us today is, therefore: Who
should bear these costs? Should it be those who live there, the
insurance industry, or the government? The answer could also be
some combination of these parties, as well as other sources.
My colleagues have carefully considered these matters in
crafting their solution to the problem. In brief, their bill
would provide States with an opportunity to plan ahead of time
for covering the insured losses resulting from natural
disasters via our private markets. Their plan also offers
emergency relief in the form of Federal loans for those States
that may need access to funds after a major natural disaster.
Specifically, the consortium proposed in Title I of the
bill would encourage States to cede risk to the capital
markets. I look forward to learning more about the increased
role our capital markets can serve in paying for the insured
losses of natural disasters. We should, to the extent possible,
maximize the risk-bearing capacity of the private sector before
calling on the government to assist. Additionally, Title II of
the bill creates a Federal loan program that would provide
loans to any State facing a significant financial shortfall
following a natural disaster if capital is not readily
available by any other means.
The bill also aims to avoid the problems that have stalled
previous efforts to mitigate the cost of catastrophic disasters
for homeowners. States would voluntarily participate in the
bill's programs, thereby hopefully avoiding cross-subsidization
from States that do not bear similar risks. Additionally, the
bill aims to mitigate the transfer of risk to the Federal
Government. These important provisions ought to help the
legislative prospects for the bill.
In sum, I look forward to hearing from our witnesses today
on how H.R. 3355 may affect homeowners, businesses, insurers,
reinsurers, investors, and all levels of government. I am also
very interested in learning about any recommendations that
experts may have about how to improve and refine the bill, as
the committee continues to consider it. Thank you, Madam
Chairwoman.
Chairwoman Waters. Thank you very much. I would like to
recognize Ranking Member Biggert for 5 minutes, for an opening
statement.
Mrs. Biggert. Thank you, Chairwoman Waters and Chairman
Kanjorski, for holding today's joint subcommittee hearing on
H.R. 3355, the Homeowners Defense Act of 2007.
I commend the authors of this bill, Congressmen Klein and
Mahoney, for their very good intentions. They are two members
from Florida, a State that has found itself in a difficult
position when it comes to insurance. Because their State has
failed to produce a workable solution to its insurance needs,
my colleagues naturally want to do something to help.
While I applaud their intentions, I'm not convinced that
this bill is the best idea for Floridians or for taxpayers from
Illinois or other States across the country, who will likely
end up paying for it. At this time I question if the
legislation we discuss today is the right solution, and would
work as successfully as the authors envisioned. Unless evidence
convinces me otherwise, I cannot support this bill, and believe
that this issue should continue to be addressed at the State
level.
And once again, I will say that, like in Illinois, free
market pricing should be the model for other States, including
Florida. At the same time, I do think that we need to continue
to more closely examine the insurance availability and
affordability problems that exist in some areas of the country,
like we had with the Gulf Coast and with Florida.
However, I am also convinced that even if a majority of our
witnesses today testify that H.R. 3355 is a bad idea, my
colleagues on the other side of the aisle may, nonetheless,
support the legislation. This was the case when the committee
took up reform of the National Flood Insurance Program. We held
a hearing on a new version of the Flood Insurance Reform and
Modernization Act that added wind to the program, and 9 of the
13 witnesses said, ``No, don't add wind.'' But 9 days later,
this committee disregarded that advice, and passed a bill that
added wind to the NFIP.
With that said, I am very interested in hearing from
today's witnesses about the best solution to the insurance
dilemma of States like Florida. How have regulatory systems
influenced insurance availability and affordability? Why is
there availability and affordability in some States, but not
others? Are insurers allowed to price for the true risk a
particular property faces?
I have to admit that I am biased. In Illinois, free market
pricing benefits consumers, ensuring that they will have
choices, since insurers are encouraged to compete for their
business. I am also interested in discussing ways we might
lessen the regulatory burden, boost private market
participation, and spur more affordable rates for consumers,
without putting taxpayers on the hook.
I look forward to the testimony of today's witnesses as we
continue to encourage a more robust market for catastrophic
insurance. I yield back.
Chairwoman Waters. Thank you very much. At this time, I
would like to recognize the chairman of the full committee,
Chairman Frank, for as much time as he would like.
Mr. Frank. I thank the chairwoman. I thank members on both
sides for letting me do this. I am going to have to leave. We
did have a bill on the Floor today, and I have other things I
have to get to.
I did want to, first, welcome--I think I may be the only
member here who served with Mr. Evans, so we have some
continuity here. I was just joining the committee when Mr.
Evans was up here on the top row, and it's nice to work again
with him. He was always a very important and useful member of
the committee.
And I am proud to have a representative from the district
of my colleague, Mr. Delahunt, Representative Patrick from my
neighboring Cape Cod. I think that's important, because this is
not just a Florida issue. We have a representative of Cape Cod
here. We have members of this committee from Long Island, who
are very concerned about this.
I would hope we would take the approach that a problem
doesn't have to exist equally in all States before we address
it at the national level. There are varying issues. You know,
Illinois doesn't have floods, but Illinois has a lot of
agriculture that gets subsidies that we don't get.
I don't think we say that everything has to get on an
absolutely equal basis. We are one country, and there will be
parts of the country that will face one set of dangers, and
parts of the country that will face another set of dangers. And
there are parts of the country that have one set of needs, and
not others. A lot of programs that we support have only a
partial impact.
I also want to address the issue--which the gentlewoman
sort of noted with dismay--that we did not follow the consensus
of witnesses. I am a great believer in democracy, but polling
witnesses at a committee and then using that as a basis for
deciding public policy does not seem to be the best way to go.
I am always interested in what the witnesses have to say, and
the substance.
I noticed--I apologize, I may be mispronouncing Mr. Seo,
whose--I read that interesting New York Times article. And he
was a great witness, because he closed--he said he asked
himself three questions, then answered them. So, if people
would follow that rule, we could take the day off. And I don't
mind that, maybe, after a busy day. He asked and answered his
own questions in a very useful way. It is the substance of what
they say--not necessarily the ``yes'' or ``no''--that we want
to listen to.
Finally, I just want to say that this is a difficult
problem, and I think when people criticize a proposed solution,
they ought to be required to take into account the difficulty
of the problem. It is very hard to get solutions that are a lot
more elegant than the problems they seek to remedy. And the
more difficult the problem, the messier the solution will be,
the less perfect.
So, I am very much prepared to listen to alternatives. I
must say I have been very impressed with the work done by our
colleagues, the two gentlemen from Florida, Mr. Klein and Mr.
Mahoney. I have been listening and watching and our staffs have
participated, also. They have done as good a job as I have
found so far it is possible to do.
Now, it may be that someone could come up with a better
proposal than they have. I haven't seen one, but I would say
this: I will not be persuaded by people who say, ``We don't
think the Mahoney-Klein bill is perfect, so let's do nothing.''
If people tell me that they don't think the Klein-Mahoney
approach is as good as approach ``X,'' ``Y,'' or ``Z,'' then,
fine, I will look at the other approaches.
But the problem again I want to reiterate is that it is a
difficult problem, and the solution cannot totally transcend
the problem. It is a national problem. I have heard from people
in Massachusetts and people in New York; we have a lot of
people living on the coasts.
So, I hope we will go forward. And if people want to
suggest some improvements in this proposal, of course we will
look at it. That's why we have hearings and mark-ups. But, if
the answer is, ``This is a very difficult problem, so let's do
nothing at all at the Federal level,'' I don't find that to be
an acceptable approach, and I would hope people would feel some
obligation not simply to be critical of this, which is
relatively easy, because it's a difficult problem that they're
addressing, but come up with alternatives.
So for me, at this point I am impressed with the work that
Representatives Klein and Mahoney have done, and until somebody
comes up with something better--and I haven't seen it--I intend
to be supportive. And I have looked at this.
I thank the witnesses for coming. I will give them this
consolation. If, in fact, we do not follow the opinion of a
majority of the witnesses, I hope they will feel free, in their
own lives, to disregard opinions of mine whenever they think
that's appropriate. And I thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. Congresswoman
Brown-Waite, for 3 minutes.
Ms. Brown-Waite. Thank you very much, and I thank you,
Madam Chairwoman, along with Mr. Chairman, for holding this
hearing today. I also appreciate the witnesses who will be
appearing before the committee.
This hearing is long overdue for the residents of the Gulf
Coast who have been abandoned in the property insurance crisis
they're facing. I have been working to bring relief to these
residents for over 3 years, and I thank my colleagues from
south Florida, Representatives Klein and Mahoney, for joining
me in this fight.
But let me emphasize this very, very clearly: It is not
just a Florida problem. I will be listening closely to learn
how constituents in various areas of our great country are
actually going to benefit from such an approach offered in H.R.
3355.
I also ask unanimous consent that a statement from
ProtectingAmerica.org be submitted for the record. Madam
Chairwoman? I ask unanimous consent that a statement be
submitted for the record.
Chairwoman Waters. Without objection.
Ms. Brown-Waite. Thank you. And, again, I thank you very
much for holding this hearing, and I look forward to hearing
what our witnesses have to say here today. I think that there
are many valid ways to approach this issue that certainly is
nationwide, not just in Florida, and not just on the Gulf
Coast. Thank you. I yield back the balance of my time.
Chairwoman Waters. Thank you very much. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. It seems a bit
weird for a representative of Missouri--and sitting next to my
friend and colleague from Kansas, Dennis Moore, to be here at a
meeting dealing with legislation sponsored by two people from
Florida. The ocean dried up near Missouri about a million years
ago.
But 3 years ago, my wife called our son, who was a student
at Dillard University in New Orleans, and said, ``Look, we've
heard that there is a hurricane warning for New Orleans, and
you need to go.'' But my son said the basketball coach wanted
them to stay. He was on the team--and I must also unnecessarily
say the captain of the team--and so the coach said, ``We're
going to stay. We get these warnings all the time.''
The threat came and left. And so, on August 24, 2005, when
tropical depression number 12 began to hit the news, I didn't
think much about it, because I had bought into what happens in
New Orleans, which is that you ignore it. I had no idea that
tropical depression number 12 would eventually destroy $70
billion of insured property.
And because I saw what happened then, I am starting to pay
a little more attention to history. On December 16, 1811, an
8.0 magnitude earthquake hit New Madrid, Missouri. It was so
powerful that bells began to ring in downtown Boston,
Massachusetts.
And so, I am in the middle of the country, but nonetheless
concerned about what the Federal Government is going to do in a
similar catastrophe. And I am concerned about the fact that we
do need, I think, a backstop that would help provide coverage
for individuals, even in the middle of the country. I yield
back the balance of my time.
Chairwoman Waters. Thank you very much. Mr. Castle?
Mr. Castle. Thank you very much, Chairwoman Waters,
Chairman Kanjorski, and Ranking Member Biggert. This is a very
interesting hearing. We have not dried up in Delaware. We have
25 miles of oceanfront, and a lot of bay and riverfront along
the Delaware River, so we are very concerned about this.
But I wanted to take my time, if I may, to introduce
somebody who probably doesn't need introduction to a lot of
people in the room, and that is former United States
Congressman Tom Evans of Delaware, who is here to testify
today. He currently serves as--and this is shortened from a
much longer bio--he currently serves as the chairman of the
Florida Coalition for Preservation. The Florida Coalition for
Preservation is a not-for-profit organization that promotes
responsible growth and protection of barrier islands along our
coast.
Congressman Evans was a member of the former House Banking
Committee, which is now our committee, the Financial Services
Committee; the Merchant Marine and Fisheries Committee;
chairman-elect of the Environmental and Energy Study
Conference; and vice chairman and chairman-elect to the Arts
Caucus. He also serves as a delegate to the UN Law of the Sea
Conference.
He was well known for putting coalitions of Democrats and
Republicans together, and as a result, he was able to achieve
major legislative victories. For example, he was the author of
the Coastal Barrier Resources Act that curtailed Federal land
development funding in environmentally sensitive barrier
islands. His legislation has saved the American taxpayers
billions of dollars.
He served as the Republican Floor leader for the Alaska
Lands Act, he was the Republican leader for U.S. funding for
multi-lateral development institutions, and was co-chairman of
a coalition encouraging enactment of the Caribbean basin
initiative, and other trade measures.
He also served as leader of a congressional coalition to
eliminate funding for pork barrel projects, in order to reduce
the deficit, and was co-author of the first successful bill to
ban dumping of sewage sludge in the Atlantic.
Mr. Evans has served on numerous corporate, educational,
and charitable boards, and has received national awards from
the Nature Conservancy, the Sierra Club, and Americans for the
Coast, and Alaska Wilderness League for his leadership in
preserving millions of acres of wilderness.
I thank both of the Chairs for holding this important
hearing today. I look forward to hearing from the experts, such
as Tom Evans, on the impacts of this legislation. I think it's
a very significant hearing. I yield back the balance of my
time.
Chairwoman Waters. Thank you very much. Mr. Scott?
[No response]
Chairwoman Waters. Mr. Scott is gone. Who is next?
Mr. Green. I believe I am, Madam Chairwoman.
Chairwoman Waters. Mr. Green.
Mr. Green. Thank you.
Chairwoman Waters. Thank you.
Mr. Green. Thank you, Madam Chairwoman. And I also thank
Chairman Kanjorski for the two of you working together to host
this hearing, as well as the ranking members.
I am honored to have this august panel today to give us
some insight and I look forward to hearing what they have to
say. But my belief is that we have a de facto policy in place,
currently. The de facto policy is that in a national crisis,
the Federal Government does step in.
9/11 was a national catastrophe, and we did step in, and we
did the right thing. Katrina was a national disaster. We
stepped in, and we spent more than $100 billion. I happen to
think that we have done the right thing, notwithstanding the
fact that some of the money has not been used as judiciously,
in my opinion, as it should have been. But I think that the
government, right now, is in a de facto position of, when we
have a national crisis, of being a hand in a time of a national
crisis.
So, I think that my colleagues from Florida--both of whom I
commend highly--have merely codified a sensible methodology by
which we can plan a response, as opposed to doing it on a case-
by-case basis, and having a de facto policy. They have
thoughtfully and prudently given us at least one means by which
we can involve private enterprise before the event, before the
occurrence of the event, and also allow government to play a
role.
I really don't know that we can do it much better than they
have codified it. But I, too, look for a better strategy, a
better methodology. And if it is available, I would gladly
review it and would embrace it, if it's better. But in the
interim, given that we do have--and we do know that we will
have--additional circumstances that are unpleasant to deal
with, I thank them for having the vision to give us a means by
which we can at least embrace a process beforehand. I yield
back the balance of my time.
Chairwoman Waters. Mr. Feeney.
Mr. Feeney. Well, thank you. One thing we know in Florida
is that hurricanes are not a partisan issue, and I want to
thank Congressman Klein and Congressman Mahoney for coming
forward with a proposal. And Representative Brown-Waite--and I
know this because before our freshman colleagues joined us, we
have had bipartisan proposals in the Congress, I think
Congressman Wexler knows that, as well.
And I am mindful of, I think, the chairman of the full
committee's chastisement that criticizing people who come
forward with answers to complex questions is, in some ways,
inherently unfair. But the corollary to that is that just
because you have a complex solution to a complex problem, it
doesn't mean the solution will improve things.
And so, I think it's fair, with a very difficult problem to
deal with that Floridians know a lot about, that we struggle in
a bipartisan way to get a solution that will improve things.
And I am mindful that the consortium that this bill
contemplates is not mandatory. It doesn't necessarily require
that anybody participate. States that want to participate in
the risk of one disaster or another are permitted. But that
would be permitted under current laws the Treasury testimony
provides.
What this bill does do is to suppose that if there is a
consortium that is started, that there is an implied guarantee
of subsidized loan rates in the event of certain events. I
think Mr. Evans points out in his testimony one problem with
that is that it may incentive risky behavior. I think the
Treasury Secretary also talks about the FAIR system that
encourages people to remain in vulnerable areas which are
attacked by natural disasters over and over again, and that
seems to violate one of the principles that good insurance
policy would want to contemplate.
Florida has developed a very enhanced building code. I know
that Congressman Klein and Congresswoman Brown-Waite and I were
there at the time, and we required homeowners to do those
things. This bill doesn't require that.
This bill doesn't make any--it doesn't provide any
insistence to insurance companies that enhance reserve
requirements, as Congresswoman Brown-Waite's bill would do.
Representative Wasserman Schultz and I have a bill that would
encourage individuals to put aside money for very high
deductibles, which we have in Florida that other States may not
have experienced.
And so, I think this is a fascinating proposal that needs a
lot of discussion, and it is a complex solution to a complex
problem, which doesn't necessarily mean it's going to make
things better. And so, this member will stay tuned, and
continue to participate. With that, I will yield back.
Chairwoman Waters. Thank you very much. Ranking Member
Pryce just came into the room. I would like to recognize her
for 5 minutes.
Ms. Pryce. Why, thank you. I appreciate that very much. But
in the interest of time, until we get to the meat of things, I
will waive my opportunity and look forward to the testimony.
Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. The next member to
be recognized is one of the authors of this legislation. I know
how hard he has been working, and I know how anxious he is to
share with us his deep feelings about what he has embarked
upon. And it gives me great pleasure, and I am very proud, to
ask one of our newer members to please give us 5 minutes'
presentation on his bill.
Mr. Klein. Thank you very much, Madam Chairwoman. And I
would first like to thank Chairman Frank for his guidance and
support. And, of course, Chairwoman Waters and Chairman
Kanjorski and the Republican leads on both subcommittees, for
holding this hearing today to discuss H.R. 3355, the Homeowners
Defense Act of 2007.
This is a bill that Congressman Mahoney and I have been
working very hard on, and I want to pay special tribute to the
expertise that Congressman Mahoney has, and that he brings to
the Congress in the financial services area, because it has
been extremely valuable in thinking through this issue over the
last several months.
It has been suggested by the prior parties that were
introducing their comments that this is a complex issue, and it
is. We know that we want to address the concerns of displaced
homeowners, protect the financial solvency of States, and to
stimulate the insurance markets.
It is also important to understand that insurance
availability and affordability problems have become a national
issue. Congresswoman Brown-Waite has already stated this, as
well as Congressman Feeney, and I think we all understand that.
Hundreds of thousands of homeowners across the country have
already had their insurance coverage dropped, or are currently
slated for non-renewal by their insurance company. Those who
remain, in many cases, are confronted with crippling premiums,
which, in some cases, is forcing homeowners to make tough
decisions about whether to go without property insurance or
not--which, of course, those people who have mortgages, and
most people do, don't have that alternative.
Insurance problems are not limited to Mississippi,
Louisiana, or Florida. Last year, property insurers indicated
that they planned to stop offering new coverage in parts of
Maryland and Virginia's coastal markets. They have also stopped
in certain areas of Delaware, New Jersey, and Connecticut, no
matter where the property is located within the State, not just
on the coast.
Furthermore, tens of thousands of homeowners in
Massachusetts, New York, North Carolina, South Carolina,
Alabama, and Texas have already been dropped, as well. Added to
that is, even with California's known record of seismic
activity, over 85 percent of California homeowners currently do
not have earthquake insurance. That's a pretty substantial
number for us to consider.
It is unacceptable for property owners not to be able to
get reliable coverage in their markets. And it's precisely this
reason that we have moved to come up with some solutions. Our
legislation aims to take a two-fold approach, by establishing a
program to help States responsibly manage their risk before
disaster strikes, while also providing financial assistance to
ensure that they can quickly and efficiently respond to
homeowners' insurance claims following a natural catastrophe.
Specifically, the bill provides a venue for State-sponsored
insurance funds to voluntarily pool their catastrophe risk with
one another, and then transfer that risk to the private markets
through the use of catastrophe bonds and reinsurance contracts.
The legislation also allows for the Federal Government to
extend low-interest loans to cash-strapped State insurance
funds after a large-scale natural disaster, so that they can
meet their obligations to homeowners.
By utilizing these new strategies, and an innovative,
flexible capital market approach, this bill allows investors to
assume some of the risk currently held by the States in return
for an interest payment or a premium payment.
The voluntary nature of this program, coupled with the use
of the capital markets, ensures that homeowners in less
disaster-prone States will not be on the hook if a disaster
strikes a neighboring State. I want to emphasize that the opt-
in nature of this plan creates no obligations or burdens
whatsoever on States that do not wish to participate; this is a
very significant new way to approach this.
The total economic impact accompanying natural disasters
resonates throughout the entire Nation. Total economic damages
from the 2005 hurricanes will likely exceed $200 billion, with
the Federal Government responsible for paying out an excess of
$109 billion, and probably a lot more, for disaster relief.
Although we all agree that it's necessary, as was suggested
already, this Federal spending has drawn equally from taxpayers
in every State of our country, not simply from those of the
affected regions. Through this legislation, we are looking to
take a proactive approach where States responsibly plan in
advance of a disaster rather than a reactive approach where the
Federal Government opens the Treasury after a catastrophe.
I want to note that, although we have a bill in front of
us, we will continue to work with all of you who have an
interest in this, who are stakeholders, who may want to find
ways to improve the text, as was already suggested by our
members and our Chair. In striving to produce the most
effective bill possible, we welcome any suggestions that would
help us fulfill our underlying goals, utilizing the framework
that we have established.
But I would like to make one thing clear that I think we
all feel very strongly about; the status quo is no longer an
option. We have to work together, in a bipartisan way, with the
industry and with our consumers to establish a system where
property insurance is both available and affordable for hard-
working families and those most in need. We feel this is a good
piece of legislation in that direction, and I thank the
chairwoman for the time.
Chairwoman Waters. Thank you very much. Ms. Capito?
Mrs. Capito. Thank you, Madam Chairwoman. In the interest
of time, I will waive my opening statement, and listen intently
to the hearing. Thank you.
Chairwoman Waters. Thank you very much. The other author of
this bill, a gentleman who had a hearing earlier today on a
great piece of legislation for seniors, and who has put a lot
of time, also, on this bill, and I know how important it is to
him, Mr. Mahoney?
Mr. Mahoney. Thank you, Chairwoman Waters. It has been
great spending the day with you, working on these many issues.
And it's always tough going after my colleague, Congressman
Ron Klein, and I want to thank him for his great leadership,
and all the years that he has spent in the Florida legislature,
dealing with this issue. His experience and knowledge of this
matter has been tremendous, in terms of coming up with this
legislation. I would also like to thank Chairman Kanjorski, for
his leadership, as well as Chairman Frank.
Before we begin summarizing the natural catastrophe
insurance crisis affecting Florida, I want to reiterate that
this is a national problem. And let me be clear, the Federal
Government has been forced to act, because private markets for
homeowners insurance have failed.
The issue, ladies and gentlemen, is not industry's ability
to pay claims, it is an American's ability to purchase
affordable homeowner's insurance. This legislation is
essential, as the investment in a home is the single biggest
investment an average American citizen has, and it is vital
that we protect the American dream of homeownership.
I am proud that this bill preserves the private homeowners
insurance industry. It recognizes that no one got into business
to underwrite a nuclear devastation which--made by man, or made
naturally. This bill is voluntary, so States can choose to
participate or not.
However, it sets a principle that no longer will the
American taxpayer foot the bill for a natural disaster with an
expensive bail-out. We know that these catastrophic events will
happen, and this bill ensures that we plan for them in a manner
that is cost-effective and recognizes personal responsibility.
In 2004 and 2005, natural disasters resulted in
approximately $89 billion in privately insured catastrophic
losses. These disasters and population growth in areas prone to
natural disasters have caused the insurance industry to adjust
their models for insuring these events. As a result, insurers
and reinsurers are pulling out, or reducing their exposure in
disaster-prone areas of the country. Today, in my home State of
Florida, the citizens of my State are the owners of the biggest
homeowners insurance company, with over 30 percent of the
market.
In addition to lost insurance capacity, homeowners have
seen their premiums skyrocket. The toxic cocktail of rising gas
prices, healthcare costs, and homeowners' insurance has created
a vicious cycle of terror for our seniors living on fixed
incomes, and middle-class families struggling to provide for
their children.
Recently I received a letter from one of my constituents
detailing the difficult choices she had to make in order to pay
her homeowners' insurance bill. Ms. Leanne Finnigan, a single
mother of two from Stuart, Florida, was dropped by her
insurance company in 2006.
She eventually found another insurance company which
charged her more than 3 times what she had been paying for
similar coverage. As a result, she has been forced to work
overtime on Saturdays, and to give away one of her family pets
and reduce her weekly grocery budget. Unfortunately, Ms.
Finnigan's story is not unique. Thousands of families across
Florida have been forced to make similar difficult decisions.
The Financial Services Committee has held numerous hearings
on this same issue. During these hearings, several facts became
clear: the risk posed by natural catastrophes is not going
away; the damage caused by disasters will keep growing; and the
insurance premiums have remained high, despite the 2006 storm
season being relatively calm.
The Homeowners Defense Act of 2007, which Congressman Klein
and I introduced, is a two-prong approach, designed to address
the property insurance crisis, ensuring a stable insurance
market that will give States impacted by severe natural
catastrophes the ability to help their citizens rebuild their
homes and their lives.
Title II of the National Homeowners Stabilization Program
extends low-interest Federal loans to States impacted by
several natural disasters. These loans, which will be paid back
by the States, will allow a State catastrophe fund to cover its
liability in the event that it is not fully funded at the time
of the disaster, and assist in covering damages that exceed its
liability.
Because the legislation utilizes private capital markets
and a loan program that requires repayment by affected States,
it eliminates cross-subsidization. Taxpayers in Nebraska no
longer have to bear the risk of those living in Florida. This
legislation is responsible, fair, and returns stability and
competition to the private insurance market.
I look forward to working with the members of this
committee and key stakeholders, to ensure that this legislation
adequately accomplishes its intended goals. And again, I would
like to thank Chairman Frank, Chairwoman Waters, and Chairman
Kanjorski for holding this hearing today, and I look forward to
hearing the comments of our witnesses. Thank you very much.
Chairwoman Waters. Thank you very much, Mr.--
Mr. Mahoney. Oh, one other thing. I would like to ask
unanimous consent to add Ms. Finnigan's letter to the record.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Mahoney. Thank you very much, Madam Chairwoman.
Chairwoman Waters. Mr. Roskam?
Mr. Roskam. Thank you, Madam Chairwoman. In the interest of
time, I waive my statement, and I look forward to the
witnesses' testimony.
Chairwoman Waters. Thank you very much. Mr. Wexler.
Mr. Wexler. Thank you, Madam Chairwoman. I will be brief. I
just want--as an original co-sponsor of Mr. Klein and Mr.
Mahoney's bill--to point out a few things that I think are
quite relevant. Mr. Klein and Mr. Mahoney and I held a hearing
this past week in West Palm Beach, and heard from, I think, a
wide array of business community leaders, industry leaders,
regarding this issue last week.
And what I think deserves repetition is that Mr. Klein and
Mr. Mahoney, even though they are new to this body, have done
an extraordinary thing in, one, persuading the leadership that
homeowners insurance is a proper venue for Federal action. And
we are extremely grateful to Speaker Pelosi, to Chairman Frank,
to Chairwoman Waters, and the others, for enabling Mr. Klein
and Mr. Mahoney to put forth the legislation that they have.
This is a private sector solution. And this is a meeting of
extraordinary, and at the same time, competing demands, but
doing it in a rational and responsible way. I will close by
simply following, I think, an argument that Mr. Feeney, our
friend from Florida, makes, which is a very deserving point,
and that is that States like Florida have already adopted many
meaningful reforms, both in terms of requiring building codes
and individual action, as well as significant insurance
reforms.
But even though the State of Florida, led by a Republican
Governor and a Republican legislature--and, I believe, acted in
earnest, and did their very best--and I think Mr. Feeney would
agree--they took their best shot at resolving the homeowners'
insurance crisis in Florida. It didn't stop the bleeding.
Still, tens of thousands of homeowners in Florida continued to
lose their policies.
So, for all the people who argue for State action, for all
the people who argue for individual responsibility, for all the
people who argue that the Federal Government may not have a
role, well, Florida has done exactly what you said. We have
implemented it, and we still have a huge problem.
So, I would respectfully suggest that Florida is actually
the best example of why Federal action on homeowners insurance
is not only advisable, but it is absolutely necessary, because
even when a State legislature acts responsibly, as the Florida
Governor and the Florida legislature has done, it is still not
enough.
And why isn't it enough? Because even a large State like
Florida, with all of the resources that it brings to this
problem, cannot affect the private market in a way big enough,
like the Federal Government can. And that's what Mr. Klein and
Mr. Mahoney's bill designs to do, bolster the private sector,
so that it is financially responsible for investors to again
participate in the homeowners insurance market. And that's what
we attempt to do. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. I would now like to
introduce our first panel of witnesses, including: the Hon.
Phillip Swagel, Assistant Secretary for Economic Policy, U.S.
Department of the Treasury; the Hon. J.P. Schmidt, insurance
commissioner, State of Hawaii, on behalf of the National
Association of Insurance Commissioners; the Hon. Matthew
Patrick, State Representative, Masssachusetts House of
Representatives; and the Hon. Tom Evans, chairman, Florida
Coalition for Preservation.
I would like to thank all of you for appearing before the
subcommittee today, and, without objection, your written
statements will be made a part of the record. You will now be
recognized for a 5-minute summary of your testimony.
Mr. Swagel?
STATEMENT OF THE HONORABLE PHILLIP SWAGEL, ASSISTANT SECRETARY
FOR ECONOMIC POLICY, OFFICE OF PUBLIC AFFAIRS, UNITED STATES
DEPARTMENT OF THE TREASURY
Mr. Swagel. Chairwoman Waters, Ranking Member Biggert,
Ranking Member Pryce, and members of the subcommittees, thank
you for inviting me to testify again to the committee.
The Administration opposes H.R. 3355, the Homeowners
Defense Act of 2007, because its provisions are at odds with
the goal of ensuring that there is a stable and well-developed
private market for natural hazard insurance and reinsurance.
Recent increases in insurance rates in coastal areas have
been difficult for many homeowners. This, however, is
fundamentally a reflection of the risk involved, not a defect
of the market. Instances of reduced availability of private
insurance likewise present a challenge. Generally, these can be
traced to State regulatory actions.
H.R. 3355 would create a federally-chartered natural
catastrophe risk consortium to issue risk-linked securities and
enter into reinsurance contracts. But State-sponsored programs
are already free to pool risks and they have access to
competitive reinsurance in capital markets, designed to pool
risks, globally.
Reinsurance contracts and financial instruments entered
into by a consortium with a Federal charter would be seen as
carrying an implicit Federal Government guarantee. This would
mean subsidized coverage for the participating States, but a
hidden cost to all taxpayers that puts the Federal Government
at risk for future liabilities.
H.R. 3355 would also establish the National Homeowners
Insurance Stabilization Program, through which the Treasury
would provide loans to State insurance programs at below-market
rates before and after catastrophes. This would reduce the need
for States to purchase private reinsurance and charge adequate
rates to maintain capital reserves--again, at a cost to the
Federal Government and to all taxpayers.
The subsidies provided by the consortium and the
stabilization program would encourage State-sponsored programs
to offer subsidized insurance and reinsurance. This would
result in the displacement of private coverage, lead to costly
inefficiencies, and retard innovation in the private sector.
Lower insurance premiums would reduce incentives to
mitigate risks and make taxpayers nationwide subsidize
insurance rates in high-risk areas. The Federal Government
would face potentially large liabilities since it might be
expected to step in to support the operations of the consortium
and face pressure to forgo full repayment of stabilization
program loans.
Allowing private insurance and capital markets to fulfill
their roles is the best way to maintain the economic
sustainability of communities at risk of natural catastrophes.
Federal Government interference would crowd out an active and
effective private market for natural catastrophe insurance,
increase the incentive for people to locate in high-risk areas,
result in potentially large Federal liabilities, and be unfair
to taxpayers. For these reasons, the Administration opposes
H.R. 3355.
[The prepared statement of Assistant Secretary Swagel can
be found on page 164 of the appendix.]
Chairwoman Waters. Thank you very much.
Next, we will hear from the Honorable J.P. Schmidt.
STATEMENT OF THE HONORABLE J.P. SCHMIDT, INSURANCE
COMMISSIONER, STATE OF HAWAII, ON BEHALF OF THE NATIONAL
ASSOCIATION OF INSURANCE COMMISSIONERS
Mr. Schmidt. Chairwoman Waters and Chairman Kanjorski,
Ranking Members Biggert and Pryce, and members of the
subcommittees, I thank you for the opportunity to testify here
today on H.R. 3355, the Homeowners Defense Act of 2007, and I
thank you for addressing this very important issue. My name is
J.P. Schmidt, I am the insurance commissioner for the State of
Hawaii, and I am here today on behalf of the National
Association of Insurance Commissioners.
Last month, in the span of just 24 hours, my State was hit
with a magnitude 5.4 earthquake while we watched Hurricane
Flossie, at the time a category four storm, head towards our
islands. In addition, at the same time, an earthquake in Peru
generated a tsunami warning. A lava flow from Kilauea Volcano
began winding its way toward old Hilo Town, and we were midway
through a week-long brush fire, burning thousands of acres on
the Waianae Coast.
Fortunately, the recent earthquake and the weakening
hurricane were relative modest, in terms of insured losses. The
tsunami didn't develop, and the fire was kept from buildings
and residences. However, we are still keeping an eye on the
lava flow. But it is safe to say that Hawaii knows something
about living with and managing the threat of natural disasters.
Representatives Klein and Mahoney have put forward a bill
intended to help States and insurers better manage the threat
of natural catastrophes. We commend them for their leadership
and for recognizing the important role States play in managing
the threat of natural disasters.
In those areas where private market property coverage is
either unavailable or unaffordable, States have stepped in to
fill the gap with wind pools, insurance incentives, reinsurance
funds, and, in the case of Hawaii, a hurricane relief fund that
provides coverage after the occurrence of an event.
The NAIC has adopted guiding principles for evaluating
Federal catastrophe insurance proposals, and has used them to
consider H.R. 3355. The full evaluation is included in our
written statement. Generally speaking, we are encouraged that
the Homeowners Defense Act meets many NAIC guiding principles.
However, the proposal's viability will ultimately depend on how
it is implemented, and on the willingness of States, insurers,
and investors, to all participate.
The NAIC sees the risk consortium as a possible mechanism
to help lower potential losses to State catastrophe funds by
extending them to the capital markets. The capital and surplus
of the residential and commercial property insurance market is
approaching $500 billion, while the global securities is over
$50 trillion. The financial impact of a $50 billion storm would
be relatively small, then, if absorbed in the securities
marketplace. This risk transfer mechanism for States would
create another avenue to cede risk, similar to the role of the
reinsurance marketplace.
Another beneficial aspect of the consortium is the process
of cataloging the various risks of its participants. With
better information about underlying risks, market participants
would have greater confidence in projected outcomes, and a
better sense of a fair price. Although securitization is an
important tool to spread risk, it is not a panacea. We see it
as a vehicle that augments, but does not replace, the
traditional reinsurance market.
A key unknown that will determine the impact of this type
of approach is the appetite of the investment community, and
the impact of consortium products on the attractiveness of
those securities already on the market.
The loans created by Title II of the bill help spread the
timing risks associated with large natural disasters. The loans
leverage the capacity of the Federal Government to allow State
funds, for those States that choose them, to better manage risk
and help reduce volatility in the market, by giving insurers
less exposure to truly catastrophic events. This approach
allows States to tailor their programs to allow the private
insurance and reinsurance markets to be the first line of
defense, but recognize the inevitability of government
obligation for catastrophic events.
The loan approach will work best in an area when all the
insurance entities in that area can take advantage of it. For
that reason, a reinsurance type facility would be a better
structure for managing the flow-through for loans than a
residual market wind pool. A wind pool, as a direct writer of
insurance, does not have the ability to provide a backstop to
insurers in a region.
For all consumers to benefit, States would either need to
create a separate reinsurance entity, or restructure their
residual market entity to take on this additional role.
Although we cannot anticipate which State will choose to take
advantage of this program, the Federal backstop aspect seems to
provide an incentive for States with an affordability problem
to consider this approach.
The insurance and reinsurance markets have a significant
amount of capacity, and access to that capacity for events that
are small yet frequent is generally affordable. But for those
who live in areas where events can be infrequent yet
catastrophic, access to insurance capacity is either
unavailable or unaffordable. This is the dilemma that
regulators and legislators must face together.
Again, we commend Representatives Klein and Mahoney for
their leadership on this important issue, and we thank the
subcommittee for the opportunity to testify.
[The prepared statement of Mr. Schmidt can be found on page
141 of the appendix.]
Chairwoman Waters. Thank you very much.
The Hon. Matthew Patrick, State of Massachusetts.
STATEMENT OF THE HONORABLE MATTHEW C. PATRICK, STATE
REPRESENTATIVE, THE COMMONWEALTH OF MASSACHUSETTS
Mr. Patrick. Thank you, Madam Chairwoman. I am
Representative Matt Patrick, from the third barnstable district
in Massachusetts. The third barnstable district is on Cape Cod,
that arm that sticks off of Massachusetts into the Atlantic
Ocean. I am accompanied by my colleague, Sarah Peake, from the
fourth barnstable district, who is on the financial services
committee in the legislature in Massachusetts.
I am here to speak in favor of H.R. 3355. We have a problem
in the Commonwealth of Massachusetts, as was stated before. We
can help ourselves, with a little help from the Federal
Government, and I think H.R. 3355 will do just that.
Back in 2003, our constituents started complaining. I feel
like we are your colleagues that are closer to the people, in
that regard. When I go to the supermarket, I hear from people
exactly what's bothering them, and homeowners's insurance is
the biggest problem on their minds since 2003.
Insurance companies have left--or have increased rates from
$700 in 2003 to roughly about $1,700, on average. The Mass FAIR
plan, which is the insurer of last resort, has gone from 3
percent of the market to 44 percent of the market on Cape Cod,
Martha's Vineyard, and Nantucket Islands. They have also
increased rates 25 percent, with approval from the insurance
commissioner, and have applied for another 25 percent increase.
The free market is not working.
And I want to also reinforce the fact that you may not
realize this, but not all of us are rich on the Cape and the
islands. Sixty-three percent of the workers who are employed on
the Cape and the islands work in retail trade or the service
sectors. The average wage is $20,000, according to the 2000
census. That may have increased slightly, but it's still not up
to what the Crittenton Women's Union estimates that a family of
four needs to live without any frills, which is about $58,000.
Twenty-five percent of our residents on the Cape and the
islands are senior citizens on fixed incomes. Many of them have
canceled their homeowners insurance. They don't have mortgages,
so they can do that, but it puts them at an incredible risk,
because they're at risk of fire, or anything else. But they
simply can't afford the increases. All of this is driven by
reinsurance, computer models--private computer models--and
global warming.
The FAIR plan expenses for reinsurance--just to give you an
example--have increased dramatically. In 2005, the FAIR plan
spent $17.5 million for $500 million worth of reinsurance. In
2006, they spent $43 million for $455 million in reinsurance.
And this year, 2007, the FAIR plan spent $75 million for $979
million in reinsurance. That's all money that could be going
into our own reinsurance pool, to build it up.
Right now, we are having trouble getting the legislation
passed. We have a senate bill, 624, which would maintain the
private insurance companies, give them the backstop with our
reinsurance pool, and also help us establish our fund in 7 to
10 years.
But we need that 7 to 10 years to establish our own fund.
And with H.R. 3355, we will be able to give our colleagues the
reassurance that we will be able to--we will have the backstop,
we will have some guarantee that we won't have to increase the
assessment on all insurance policies across the State, if we do
have a catastrophic event before the fund is built out. So, it
would be politically helpful to us to have H.R. 3355 to get our
bill passed to create a catastrophic insurance fund in the
Commonwealth of Massachusetts.
We would also like to see this tax-exempt status--and I
know that's beyond your purview--but we would like to see that
clarified, so it's a definite. But, again, we think it's a good
bill. It definitely would help us.
And thank you for this time to testify. I appreciate it.
[The prepared statement of Mr. Patrick can be found on page
138 of the appendix.]
Chairwoman Waters. Thank you very much.
Next, the Hon. Tom Evans, chairman of the Florida Coalition
for Preservation.
STATEMENT OF THE HONORABLE THOMAS B. EVANS, JR., CHAIRMAN,
FLORIDA COALITION FOR PRESERVATION
Mr. Evans. Madam Chairwoman, thank you. Thank you very much
for inviting me, and a special thanks to Congressman Castle for
his kind words. It was good to see my friend, Barney Frank, the
chairman of this committee now, who served here when I was
sitting on the top row, and he was down here.
I think the approach Chairman Frank outlined earlier is a
very good one, because I think we should look at all the
alternatives. We should advance the process carefully forward.
And I am glad to be here with three gentlemen who represent an
area where I spend a lot of time; I teach at Florida Atlantic
University, and chair the Florida Coalition for Preservation.
The older I get, the more I am concerned about the future,
particularly for my grandchildren and other grandchildren like
them all over this country. And one of the things that concerns
me the most is the amount of money we spend, because it affects
everything that we do. It affects our national security, and it
affects people's lives tremendously. We need to spend tax
dollars as efficiently and effectively as possible.
I remember voting for an increase in the debt ceiling to $1
trillion in 1980. And now, in the last 6 years, we have
increased the debt ceiling by another $1.5 trillion, just in 6
years. That is unacceptable. It took us 200 years to get to $1
trillion. I think we should be doing something about that, and
that brings us to today's hearing on H.R. 3355.
On the surface, especially if you're from Florida,
Congressman Klein and Congressman Mahoney's bill sounds good.
However, in my view, I don't think there should be a rush to
judgement to mark up this bill before considering it, before
looking carefully at all aspects, and before looking at other
opportunities you have, gentlemen, as far as this bill is
concerned. I think there is an appropriate role for government
and the private sector and each should be examined.
But I would like to bring your attention to several
concerns I have about H.R. 3355, because of its complexity. One
is to be careful; don't displace agents and brokers, and don't
replace the private sector's involvement in insuring and
reinsuring. And don't mask the risk involved.
Let me share with you a recent experience that I have had
over the last 4 to 5 months. It involves south Florida, and it
involves a development, a little town by the name of Briny
Breezes. You may have heard about Briny Breezes. Some
developers offered $510 million for Briny Breezes, about 40
acres of land. Briny is an old trailer park.
Now, that's about $13 million to $14 million per acre. And,
ladies and gentleman, the only way you could make that
economically feasible is to go up, way, way up, with high
rises. And in this instance, they suggested on this 40-acre
plot 1,200 condominium units, with high rises ranging from
about 12 to 14 stories to 20 to 22 stories, a 349-room luxury
hotel, and a greatly expanded yacht marina, with retail shops,
restaurants, etc.
Briny was and is a classic example of a barrier island in
south Florida situated between the inter coastal and the
Atlantic Ocean. And what we tried to do with our coalition was
to point out, to educate the people, to make sure that
policymakers at every level understood the complexities
involved. We wanted them to understood that this type of
intense irresponsible development would greatly and dangerously
stress the surrounding infrastructure: transportation; water
supply; the emergency response time for vehicles of all kinds;
evacuation problems, etc.
Our Coalition appeared before the State of Florida to make
our case in Tallahassee. Tom Pelham was the secretary of
community affairs. He has the final responsibility in
determining whether or not a comprehensive plan is or is not
acceptable. And they determined that it was not acceptable.
Now, that was a reasonable decision, but nothing compelled the
State to find the comprehensive plan presented by the
developers unacceptable.
Most of the standards used in Florida's Growth Management
Act are subjective, they are not objective. They are not
codified in law. And the more you reduce the risk, it seems,
ladies and gentlemen, the greater opportunity you have to
access capital markets, and the greater opportunity for reduced
premiums. It just makes good common sense.
The national catastrophe fund envisioned by the legislation
you're considering today does not address the responsibility of
States to reduce risks and mitigate losses that will occur in
the event of a catastrophic storm.
An ounce of prevention--and I will finish in one minute, if
I may, Madam Chairwoman--an ounce of prevention is still worth
a pound of cure. And I hope you will include in this
legislation that you're considering today--and will be
considering, hopefully, for weeks ahead--a requirement that
States demonstrate that they are taking initiatives that will
reduce risks and mitigate damages to the maximum degree
possible: tough building codes, for example, and very
importantly, some standards that prevent intense development on
vulnerable, storm-prone barrier islands.
The Florida legislature could pass amendments to the Growth
Management Act that would take care of that. And you all could
suggest that they do so. This would be tangible recognition
that the States understand that, in accepting assistance, any
form of assistance, they must bear their fair share of
responsibility. We should encourage this type of action. And we
should discourage unreasonable risk-taking.
I hope you all consider that, and I thank you very much for
having me here today.
[The prepared statement of Mr. Evans can be found on page
95 of the appendix.]
Chairwoman Waters. Well, thank you very much. I would like
to recognize myself for 5 minutes for questions. My first
question is directed to you, Mr. Swagel.
Katrina/Rita hurricanes were devastating, and they have
caused a lot of pain to many, many people, not only the people
who were impacted or affected by it, but for those of us who
have tried to forge solutions to the tremendous problems that
have been created.
This problem of the denial of claims by the private
insurers is particularly painful, where the denials are such
that some homeowners are in a state of shock, thought they were
covered both for wind and for flood, only to have the insurance
companies fight them, tooth and nail, to keep from recognizing
or honoring their claims.
We also saw a lot of threats from private insurers to pull
out. They said, ``We're leaving,'' not only in the Gulf region,
but also there were those threats in Florida. And for those who
have stayed, the rates have increased tremendously in some
areas, particularly in the New Orleans area. I was just there,
and went over this.
So, given the problems that we have experienced, the number
of uninsured--and Mr. Klein is absolutely correct-- I'm from
California, and most of us don't have any earthquake insurance.
Given all of these problems, do you still--am I to
understand that your testimony is such that you said the
Administration opposes any Federal role in the natural
catastrophe insurance market, and that Federal Government
interference in a functioning natural hazard insurance market
could crowd out an effective, private market? I mean, is that
what you're saying?
Mr. Swagel. Yes, Madam Chairwoman. The Administration
opposes the provisions of the bill, as written.
Chairwoman Waters. But I would like to know a little bit
more--
Mr. Swagel. Sure.
Chairwoman Waters. --about your opposition to any and all
Federal role in any natural catastrophe insurance market. Is
that a true statement?
Mr. Swagel. No. You know, I was just thinking of what
Chairman Frank had said. And I thought that was a fair way of
putting it, you know, his challenge. You know, ``If you say
no''--and obviously, my testimony says no--``what do you
support?'' So there are things that the Administration
supports. I could go through them, if that--
Chairwoman Waters. Does the Administration recognize the
problems that Americans are faced with in these flood-prone
areas? Well, and all of the perils that we experience in this
country.
Mr. Swagel. Absolutely.
Chairwoman Waters. And, if so, do you have another
solution?
Mr. Swagel. Absolutely, you know, the role of insurance in
rebuilding is critical, and we see that in the Gulf States and
in New Orleans, as you pointed out. And the disagreement, of
course, is what is the best way to foster the insurance market,
and make sure that people have the ability and access to
insurance.
Chairwoman Waters. We have two different approaches that
have been presented by members who are trying very hard to
offer their constituents and our citizens some measure of
protection. Do you have something that we do not know about?
Mr. Swagel. I want to say a few words that--I think this is
responsive about the Administration's approach, and what we
support, and what the Administration is doing.
Starting at the Federal level, with--in the Department of
Homeland Security, efforts to support mitigation, substantial
funding in the President's budget, Federal assistance to help
State and local governments improve their mitigation efforts,
to improve the quality of the flood maps, for example.
At Treasury--you know, obviously, we're a bit removed from
that--the role of Treasury--and this is something Secretary
Paulson has spent a lot of time on--is on the competitiveness
of our capital markets, which, of course, sounds quite removed
from floods and catastrophes. But, of course, that's what this
is all about, is making sure that we can tap into active
capital markets, to foster that reinsurance.
Chairwoman Waters. Well, we all, I think, support--on both
sides of the aisle--mitigation. And, as was represented here
today, we should insist on reducing risk, wherever we can do
that. But meanwhile, it's going to take some time to get the
maps redone for these flood zones. It's going to take time to
get mitigation to the point where it can be helpful.
So, I was just wondering, do you have any other answers? Do
you have any other proposals that you could present to Congress
that, perhaps, would be helpful?
Mr. Swagel. The staff of Treasury have worked with the
staff of the committee in discussing some of the provisions of
this bill to help us understand them, and we're happy to
continue to work with the staff.
Chairwoman Waters. So you have not closed the book on this
legislation? You're still reviewing it? And there is some
possibility that you could support some parts of it? All of it?
You may have some suggestions, but you will work with these
authors, is that right?
Mr. Swagel. We are happy to continue talking to the
committee.
Chairwoman Waters. I am sorry, I didn't hear you.
Mr. Swagel. We are happy, yes, to continue talking to the
committee.
Chairwoman Waters. So, am I to take that to mean that you
will be happy with work with these authors, to try and make
this bill even better, so that you could possibly support it?
Mr. Swagel. As written, the Administration--
Chairwoman Waters. I know, ``as written,'' but what we're
looking for--we're looking for an open door for some
interaction and exchange and cooperation to solve the very
desperate problems of the victims of these disasters. Are you
willing to work with them?
Mr. Swagel. Yes. Treasury staff, we were out talking to the
committee yesterday, exactly to understand the provisions of
the bill. And we are happy to continue--
Chairwoman Waters. All right. Thank you very much. Ranking
Member Biggert?
Mrs. Biggert. Thank you, Madam Chairwoman. Just for the
record, I would like to clarify that Illinois is subject to
flooding. And, as a matter of fact, we had a major flood in
August. It was suggested that maybe we don't have all the
mountains and all the things, or the coastal, but we did have a
major flood in which--it could have been worse, except for the
mitigation, I think, that was in Illinois. But in northern
Illinois it was bad.
I would like to ask, first of all, Mr. Swagel, how could
the risk-based pricing, FAIR risk-based pricing, like we do
have in Illinois, help to temper the growth in Florida?
Wouldn't this help with the availability problem, since
insurers would find a risk-based regulatory regime a more
inviting environment in which to do business?
Mr. Swagel. Yes, that's right. And as we look at the
markets, one of the things that we see is that the places in
which States have tended to interfere with the workings of the
insurance market, there has been the unintended consequence of
reducing the availability.
Mrs. Biggert. Okay. Then, Mr. Evans, you talked a lot about
mitigation, and mitigation at the local level and the Federal
level under the National Flood Insurance Program has been
crucial to reducing damage from flooding and storms,
particularly where there is a repeating event. So I don't think
that H.R. 3355--it doesn't specifically describe mitigation,
does it?
Mr. Evans. As I read it, it doesn't, Congresswoman Biggert.
But it should. You could add that, and that's why I suggest
that you don't rush this through to a mark-up on September the
18th or earlier. You should not consider such a complex bill
after only one hearing.
Mrs. Biggert. Thank you. And then, Commissioner Schmidt, I
understand that the Hawaii State catastrophic fund created
after a hurricane in 1994 was eventually dismantled as
unnecessary. Do you know what factors led to the State to
conclude that that fund was no longer needed?
Mr. Schmidt. That's not quite correct, Representative
Biggert. It was not dismantled. It was wound down, however, and
we still have a considerable amount of money available to
reactivate the hurricane relief fund, in the event of a
hurricane.
The way it is designed is it's intended to go into action
once a hurricane hits, and it's assumed that the insurers, at
that point, will tend to pull out of the market, and not want
to participate, as they determine the losses that they are
suffering. At that point, our citizens still need their
insurance coverage. The hurricane relief fund provides
insurance coverage for everyone. And those insurers that remain
in the market are exempted from the assessments for the
operation. Then, as the market settles down, the hurricane
relief fund is wound down, as insurers come back into the
market, and we have a more settled market for our citizens.
Mrs. Biggert. I don't quite understand what you mean by
``wound down.'' Don't you still have to fund, or do you build
up the fund in the event that there is another catastrophe?
Mr. Schmidt. In the event that there is another
catastrophe, we would have to build the fund up. We have a
certain amount that we are retaining, that will help us get the
funds started.
But then, the fund will be increased through the premiums
collected from the individuals, from assessments of insurance
companies, and then, as I said, provides the primary coverage,
purchases reinsurance, and ensures that our citizens do have
coverage, so that they won't default on their mortgages, and so
that we can get back on our feet quicker.
Mrs. Biggert. Do you have any idea how many States
currently have reinsurance funds that would qualify for Title
II loans?
Mr. Schmidt. I do not know the exact number off the top of
my head. But certainly that is something that we can get for
you.
Mrs. Biggert. I would appreciate that. Do you think that
this bill would incentive more States to form such a fund?
Mr. Schmidt. Yes, I think it would. I think, because it
provides a--you know, one good approach to dealing with a very
difficult situation, a catastrophe, it provides support and a
backstop for the private sector, the private insurance
industry, in its coverage of our citizens.
Mrs. Biggert. Okay, thank you. My time is up. I yield back.
Chairwoman Waters. Thank you very much. Ms. Pryce?
Ms. Pryce. Thank you very much. I want to extend my
appreciation to our panel for your patience, and for your
informative testimony, and I thank the chairwoman for holding
this hearing today. I think it's important that we tackle this
issue.
At the same time, I think we need to do so in a way that
really looks at it carefully, so that it protects not only
policyholders but also taxpayers, and the solvency of the
insurance industry, in general. I am just a little bit
skeptical--but very open minded--about any Federal bill that
includes little in the way of risk reduction and mitigation. I
think we can improve upon this product by looking at that very
carefully--but also, a bill that encourages direct government
involvement at such low levels of loss, and has no guarantee
that the actual savings will be passed on to the taxpayer.
And so, as you answer my questions--and any of you
witnesses--please feel free to address any of those things that
are troubling me.
Specifically, let me ask about the consortium aspect of
this bill. The purpose of that is--part of the purpose of this
bill--is to establish this consortium for interested States
that would be used to buy reinsurance for them, or to issue
catastrophic bonds.
Can any of you tell us how that would work, and whether you
think that this is really a new Federal law that is actually
necessary, or is this already possible among States? Is it
already happening in the reinsurance market? Is it already--
don't we already--haven't we already seen some hedge fund
involvement? And would you compare this to a new government
sponsored enterprise, if we do go this route?
That is a lot of questions in one. Mr. Patrick, you have
your hand up. Go right ahead.
Mr. Patrick. Thank you, Congresswoman. I just want to
remind you that this is in the form of loans. I mean, you would
get a lower interest rate for loans, so the States still do
bear quite a bit of responsibility. They are not going to make
it easy, in my mind, for people to build on the coast, for
example, or to build 20 stories in the air. I think those
things will be regulated on a State level.
But, from my own perspective, it has been difficult for us
to get our bill, our Massachusetts catastrophic fund bill
passed but with assurance from the Federal Government that they
will back us up in the 7 to 10 years that it takes to
establish--I mean, to make our fund self-funding, I think we
can get it passed.
I cited some numbers to you about our FAIR plan. They are
donating--or, they are not donating, but they are paying tens
of millions of dollars for reinsurance every year. And that is
gone. If we don't have a catastrophic event, that is gone. That
money could be going into our fund to build it up.
Ms. Pryce. Tom? You indicated you had something to say
about this.
Mr. Evans. Well, you expressed some concerns that I have,
as well. Is it a new government enterprise? The gentleman who
authored the bill suggests that the Secretary of the Treasury
is going to be the chair of the committee. Two other members of
the Cabinet are involved in that committee. It seems to me that
is fairly close to a government enterprise.
And the other question is, do the States have the
opportunity to do precisely what this legislation suggests that
they should do? I don't have the answer to that, but I think
that needs to be addressed. You need to focus on that and it
cannot be accomplished in one hearing.
Ms. Pryce. Thank you. Assistant Secretary Swagel, Federal
catastrophic reinsurance bills have been introduced many times
over the years, and this bill looks a lot like them, except it
uses the term ``loans,'' rather than ``reinsurance.''
Do you have an opinion as to whether a real solvency loan
bill--wouldn't it kick in at a higher rate of loss than this,
when there is a clearer threat to the industry, or the market,
rather than a way to basically smooth the premium changes from
year to year? It seems like that's what would be accomplished
by this, as opposed to assurances for the market, in general.
Mr. Swagel. Right. We share the concern that you said at
first. This kicks in very quickly.
I share some of the concerns you also stated just before
that, you know, we look at the consortium and don't understand
what is there that can't be done now, and end up in the same
place. There is an implicit government guarantee there.
And you kind of look forward and say the fundamental
problem is the rate suppression, and what does that mean about
the ability of the people taking out the loans against the
Treasury to eventually repay those loans? And that's--you know,
that's the fundamental problem, as we see it.
Ms. Pryce. All right. Thank you, Madam Chairwoman. My time
has expired.
Chairwoman Waters. Thank you very much. Mr. Sherman?
Mr. Sherman. Thank you. I want to thank the Chairs for
holding his hearing, and the authors for authoring this bill.
Our committee has already passed terrorism reinsurance; this is
critical, not only to provide coverage for victims, but also to
make sure that buildings get built, and buildings get sold.
We recognized, with terrorism, that we needed a good
insurance system, and the private sector couldn't do it all by
itself, because the losses were hard to predict, and involved
tens of billions of dollars. It seems like the natural disaster
situation is identical, and even cries out more for Federal
involvement, because the harm is not just that things won't get
built or get sold.
We had a little crisis in my area--I represent Northridge--
where you couldn't buy or sell a home for a few months, or at
least it was very difficult. We need an insurance system that
works. These things are hard to predict. They involve tens of
billions of dollars of cost, and a backstop of a similar nature
seems to be called for.
Mr. Swagel, you are here, in part, to defend the Treasury
of the United States. We pass this bill, you have a contingent
liability to put on our national balance sheet. But at least it
would be scored, acknowledged, admitted to by Treasury.
Right now, we have a different system, and that is we have
absolutely no liability any time we have a natural disaster.
But every time it's big, we pass a supplemental appropriation.
Right now, shouldn't the Federal balance sheet have a little
footnote on it saying, ``We have no legal liability, except the
legal liability to spend the money that Congress forces us to
spend, or appropriates,'' and we would estimate over the next
century, that we're talking between $100 billion and $1
trillion in supplementals that will be passed over the next 100
years.
And does the Federal balance sheet have that footnote, and
shouldn't it?
Mr. Swagel. You know, I agree with what you said about the
approach now, that after a catastrophe, as a nation, we look at
what's happening, and then the Congress decides what to do.
The problem with the approach in the bill that's written is
one of both fairness and incentives. The incentives in the
bill, for people to, unfortunately, put them in harm's way--and
it's something we've seen for the flood insurance--and then,
for the States, it's what I said before to the ranking member,
that it's for the States to essentially suppress the rates,
knowing that the Federal Government is back there as a
backstop.
Mr. Sherman. I would just point out that if we do
absolutely nothing--you have insurance. You don't have
insurance if you're flooded by a small flood, because then it
won't be on the front page of the newspapers right here in
Washington.
But the fact is, all those things exist now. You know that
if your community is hit by a big flood, there is going to be a
supplemental, and it's going to benefit those people who have--
are uninsured. If you incentivize people to buy insurance, then
at least they are contributing something.
You would have to be a very cold-hearted legislator--and
perhaps Mr. Evans can identify--and you may very well become a
former legislator, if you're going to turn a blind eye to
people suffering from a natural disaster, and instead, send
them a letter about how they should have bought insurance and/
or mitigated their risk.
Mr. Evans, I know a lot of attention is focused on building
in a floodplain. There are more floods than there are
earthquakes. Coming from California, I would say, ``Thank
God,'' not that we would--but we would want to have, of course,
fewer of each.
But I would hope that you could work with this committee,
not only to talk about where people build, and how we mitigate
risk--because often the way to mitigate risk from a flood is to
not build in the floodplain--but also focus on earthquakes,
which I realize is the problem less talked about, in terms of
building standards, because, as I mentioned earlier, the
Federal Government is going to get left holding the bag, one
way or the other, with or without this bill.
And if we want to minimize Federal costs, we're going to
have to push States and push individuals, in one way or
another, to build the right way in earthquake zones, like my
entire State, and to build in the right place and in the right
way in flood zones. Does your organization--I mean, you talk
about how--it looks like my time is expiring. I will ask
whether your organization has specific proposals as to how to
mitigate losses, how this bill can be improved.
Mr. Evans. Let me just answer that, Congressman Sherman--
it's good to see you again.
Mr. Sherman. It is good to see you, too.
Mr. Evans. I would be happy to work with these gentlemen.
They live pretty close to me, down there in south Florida, and
I would be happy to work with them on addressing the reason we
need to reduce the risks. I think that is a duty that we have,
and I think it is a duty that the States have, as well. The
States should share in the responsibility.
I agree, that we need to respond to people who are in need,
and respond to people who don't have insurance in a national
catastrophe, whether it's an earthquake, a flood in the
Midwest, or wherever it is. Or, a hurricane in hurricane alley.
We're right in the middle of it. These gentlemen live right in
the middle of it. But I think we also have a parallel duty and
responsibility to do what we can to reduce the risks.
Mr. Sherman. Thank you.
Chairwoman Waters. Mr. Castle?
Mr. Castle. Thank you very much, Madam Chairwoman. And let
me, Mr. Swagel, ask you a question. I may ask Mr. Evans, as
well.
H.R. 3355 contains little in the way of mitigation
directives to States that either join the consortium or apply
for a loan. There is a provision in that bill that states,
``The funds receiving these loans must comply with building
codes designated by the Treasury Secretary,'' which I thought
was a little bit unusual. I don't know that Treasury
Secretaries are necessarily familiar with building codes.
Do you think that is the appropriate agency to set such
codes, or has the ability to designate to do that, or do you
think this is outside of the scope of Treasury's expertise?
Mr. Swagel. No, there is no expertise for this at Treasury.
It is certainly outside our scope.
Mr. Castle. All right. So it's probably something we should
be looking at, if we go forward with the legislation? All
right.
And that sort of ties in, Congressman Evans, with what you
were talking about earlier. I assume that you would agree with
that answer?
Mr. Evans. Absolutely I would, Congressman.
Mr. Castle. Let me go a little further with you. I am very
concerned about some of the--you raised the issue, I don't
remember the name of it, but of a small 40-acre space of
landing, and building--
Mr. Evans. It is called Briny Breezes.
Mr. Castle. --right, and building a great high-rise--I
won't remember now, either--and raising a high-rise there, and
the possible overcrowding that comes with that. And, let's face
it, we see that all along the coastal areas. We see it in
Delaware, we see it throughout. And this concerns me.
In other words, you're putting a lot of dollars into that
kind of housing, and they are charging a lot for it, and there
is a lot of pressure on the local zoning people to do this. But
if there is a tragedy of some sort in the form of a hurricane
or wind damage, or whatever it may be, there are huge cost
implications that I don't think are necessarily taken into
consideration.
And whether it's the plan that we have here, or State
agencies, or insurance companies, it seems to me that we are--
Mr. Evans. You are absolutely right.
Mr. Castle. We are dealing with something that is a little
bit out of hand.
Mr. Evans. You are absolutely correct.
Mr. Castle. I would like your comments on that.
Mr. Evans. You are right, Congressman Castle. What happened
with Briny Breezes is, at the local level, they wanted to do
everything they could to get $1 million per trailer lot. You
know, most of us may have accepted that. But, as I told them--
we want to work with you to bring about responsible development
there, and responsible development in other parts of Florida.
The proposal they accepted is irresponsible.
But--and people say to me, ``Oh, Tom, you can't take away
their right to sell their property.'' I said, ``Yes, but
freedom stops at the end of the other fellow's nose.'' And if
you're destroying a community in the process, then you have to
stop. But you're absolutely right. What we need to do is do
something at the State and national level that will take care
of this. Because, generally speaking, at the local level they
approve permitting, just as we do in Sussex County, for
example, in southern Delaware.
In Delaware, virtually anyone who comes up with a plan at
all will get a permit to build just about anything they want.
And that's why we need something at the national level that I
think does address this problem of mitigation, and reducing
risk, and reducing--minimizing the losses.
Mr. Castle. I assume when you say something at the national
level, you're talking about some sort of general guidelines,
and you're not asking--
Mr. Evans. General guidelines--
Mr. Castle. --the national government to get involved
with--
Mr. Evans. For example, the Coastal Barrier Resources Act
that I authored here a number of years ago had tremendous
bipartisan support. We don't see a whole lot of bipartisan
support anymore, but I think this is an example of where you
could have some Members of Congress working together for a
change.
What I would like to do is to expand the concept of the
Coastal Barrier Resources Act. What we said was, in these
storm-prone, vulnerable barrier islands, if you are going to
develop, do it on your own nickel and not the American
taxpayers. Now, we can't prevent people from building in storm-
prone areas, but we can eliminate subsidies, including flood
insurance. I think we could apply that principle to
redevelopment on barrier islands.
For example, if you had a whole bunch of houses, or three-
story condominiums in the same spot, rather than tearing those
down and building 20-, 25-, or 30-story condos and hotels that
dangerously stress the infrastructure, it would seem to me that
you could have a new bill, or an extension of the principles in
the Coastal Barrier Resources Act that would discourage such
redevelopment.
Mr. Mahoney. Will the gentleman yield?
Mr. Castle. Let me just make one statement, and I will be
happy to yield. I don't know if I'm going to run out of--well,
my time is going to be up. I can't even make my statement. I
yield back, Madam Chairwoman.
Chairwoman Waters. Thank you very much. Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman. I would have
loved to have had the opportunity to work with you, Mr. Evans.
I appreciate your comments, particularly along the lines of--
about bipartisan work. I think we're going to have to get back
to--Congress is going to dip far lower than it is now.
I am hoping my comments don't come across as facetious to
Mr. Swagel, but I am--because I am trying to understand
something. The insurance industry, shortly after tropical
depression number 12, known as Katrina, devastated the Gulf
Coast region, ended up having some of the largest profits ever.
And I am--and it troubles me that with probably $60 billion,
$70 billion in insured--damage to insured properties, that the
insurance industry could have the highest levels of
profitability ever. And at the same time, insurance rates have
increased exponentially.
Help me. Because I think most Americans are not going to
buy that. Most Americans are going to try to get a headache,
trying to understand that. Can you ``un-headache'' me?
Mr. Swagel. Thank you. I will try. You know, as you know,
of course, the insurance industry is regulated mainly at the
State level. So, in terms of profits, I would really have to
look at the State level.
I certainly agree with what you said about--and others have
said this, as well--that after catastrophes in the past,
insurers have withdrawn from markets. And what has been
interesting over time is that phenomenon has become less so,
and the re-entry has been quicker.
And there is a sense in what you say, that the record
profits, and the sort of level of profitability is an
indication of that, that capital does come back into the
insurance markets quickly. And some of this reflects the role
of financial innovation. And, obviously, in the second panel,
you're going to hear from some of the people involved in this
innovation.
You know, I'm sorry, I didn't talk about rates, but I will
stop there.
Mr. Cleaver. Well, I was just going to say that the
headache is still pounding.
Mr. Swagel. Should I--
Mr. Cleaver. Can you say it differently? Maybe it will stop
me from hurting. I mean, I--do you--this is--I wish we were
just two of us in a room--do you actually think most Americans
would hear that and say, ``Oh, well now, I feel better.''
Mr. Swagel. The hard thing is that the rates are going up,
and there is no denying that, and it is very hard for
families--
Mr. Cleaver. Which is what most people are concerned about.
Mr. Swagel. And that's what you start with. And that's
where you start--I think it's exactly right. And the hard thing
is to say--you have to look at the rates and say, ``Why are
they going up?''
And as anyone who read the New York Times magazine story--I
guess it is 2 weeks ago, now--
Mr. Cleaver. Yes, I read it.
Mr. Swagel. Yes, so the--you know, there is a--there has
been a change in the prevalence of catastrophes, and a change
in the modeling of them, and people's beliefs about both the
impact of the catastrophes, and the financial consequences.
And that's what I meant in my statement, that the rates,
while a challenge, are a reflection of the risk. They're not a
defect of the market, it's just part of the market mechanism.
Mr. Cleaver. Madam Chairwoman, I will suppress my desire to
continue this, in the interest of making sure my colleagues
have more time to be involved, dialogically, with this issue. I
yield back the balance of my time.
Chairwoman Waters. Thank you very much. Ms. Brown-Waite?
Ms. Brown-Waite. Thank you very much. Madam Chairwoman, I
want to assure you that the Administration is bipartisan in
their opposition to anything that is going to help the
homeowner. They opposed my bill, and I had mitigation in my
bill. So I want you to know that. They are absolutely
bipartisan in their opposition.
Mr. Assistant Secretary, let me get this straight. I am
also from Florida--I'm originally a New Yorker, so I tend to be
real blunt here, okay, I'm not a sweet southern belle, nobody
has ever accused me of being that.
[Laughter]
Ms. Brown-Waite. I didn't need all that laughter. So,
certainly mitigation is missing from this bill. Your comment
that, you know, we need mitigation and an updating of flood
maps--sir, do you know what an updating of flood maps already
does to the already stressed homeowner out there?
Gee, they are already paying very high insurance bills. And
then, because we update the flood maps, which I agree is
probably, you know, an important thing to do, then they are
also faced with flood insurance. This is not what the homeowner
needs to hear, sir, when we have a slow-down in the housing
market, and you have, not just Florida, but other States having
problems with insurance. The insurance commissioner from South
Carolina sat here last year and said her rates were going up
300 percent. So it is not just a problem in Florida.
You know, in your testimony, you said something like State-
sponsored programs encourage people to locate in high-risk
areas. Do you consider the State of Florida to be a high-risk
area? Could you answer that?
Mr. Swagel. Well, the State of Florida is at a higher risk
of hurricanes than some of the other inland States, yes.
Ms. Brown-Waite. Well, obviously so, because we're a
peninsula. But, you know, without Florida's CAT fund, or
insurer of last resort, nobody in this State could get
insurance, not just those living on the coast. My district goes
just about to the center of the State. Those people couldn't
get insurance, either.
And the Administration's, you know, ``let them eat cake''
attitude does not help any Member on either side of this aisle.
We need to work together to come up with some solutions here,
not just well, let's redo the flood maps; or, let's do
mitigation. Because you know what, sir? There are already 18
million people living in the State of Florida. My district has
grown by over 200,000 people in the 5 years since I have been
representing it, so that is not an answer.
And so, you opposed my bill when it has mitigation in it.
What is your solution? Not in gobbledygook, okay? In plain
English, 50 words or less. Help me out, here.
And also, I would like you to address one other issue, and
that is that, under this bill, there is no limit on the number
of loans that a State can take out, nor is there a limit on the
amount, nor even any requirement that there be a certification
that the loan can be paid back. Is that situation just setting
up a virtual trough for States to go to that might act as a
disincentive to them, having what might be called smart
insurance reforms? I would like to hear your comments on that.
Mr. Swagel. On the first point, you know, I look at last
Friday, with the President's announcement about the
Administration's approach to helping homeowners, very targeted
help, helping people stay in their homes. That's the
Administration's approach, trying to--as plainly as possible,
as directly, not in a confusing way, help the people most at
risk.
Ms. Brown-Waite. Sir, with all due respect, that relates to
the mortgage problem.
Mr. Swagel. Absolutely, absolutely. You asked me what the
Administration's approach is that--the Administration would
never do anything to help homeowners. I'm sorry, that's what I
was answering first.
Ms. Brown-Waite. So, for Floridians, and those on the
coastal areas certainly, that phenomenon was going on, but they
also have the unaffordability issue. So, what would you
support?
Mr. Swagel. Right. The situation in Florida, in some sense,
has two challenges, and they are related. There is the
unaffordability challenge, and there is the lack of
availability. These are related. The State actions to address
the affordability challenge has led, unintentionally, to an
availability challenge.
Ms. Brown-Waite. Madam Chairwoman, may I have 30 seconds?
Chairwoman Waters. You can, and I would be happy to extend
that, but I am getting very concerned about whether or not your
heart can take it.
[Laughter]
Ms. Brown-Waite. I'm from New York, I'm tough.
Chairwoman Waters. All right. Without objection.
Ms. Brown-Waite. Let me break that down. Is what you're
saying that people aren't paying enough for insurance? If
that's what you're saying, I want you to come down to any place
on the Gulf Coast, especially Florida, whether it is the two
gentlemen on the other side of the aisle, or my district, or
somebody from the Panhandle, and I would like to see you get
out of that room alive if you tell those people they are not
paying enough for insurance.
Chairwoman Waters. You don't want to try to respond to
that, do you?
[Laughter]
Mr. Swagel. No, I was thinking about that, and then I think
you helped me out.
Chairwoman Waters. He is all yours, Mr. Green.
Mr. Green. Thank you, Madam Chairwoman. Mr. Swagel, are you
familiar with a highly technical term, ``fish or cut bait?'' I
would beg that you fish or cut bait.
Let me ask you simply if we incorporate mitigation as you
have embraced it, and update the flood maps, would you then
support the bill?
Mr. Swagel. No, sir. The Administration--
Mr. Green. You would not.
Mr. Swagel. --opposes the bill.
Mr. Green. Right. Let me ask you this. Is there anything
that we can do, such that you would support the bill? Anything?
Mr. Evans has given us a road map. He has said, ``If you
will do these things, then I will give consideration to it,''
and I greatly appreciate your comments, by the way.
So, I ask you, Mr. Swagel, sir, is there anything that we
can do that would cause you to say, ``The Administration will
support the bill?''
Mr. Swagel. You know--
Mr. Green. Mr. Swagel, permit me to say this. Sometimes
when people finish, I don't know whether they have said yes or
no. So I will ask you to kindly say yes or no. That would help
me, immensely.
Mr. Swagel. It--
Mr. Green. Yes or no?
Mr. Swagel. There is no yes or no answer. You know, it's
like I said before, we have talked--the staff at Treasury has
talked to the committee staff, and are glad to keep going. The
Administration--
Mr. Green. I will take it that your answer is no. Let me go
to another area. You are familiar with wind damage versus water
damage, and how this became an issue in the Gulf Coast,
especially in Louisiana and Mississippi.
Mr. Swagel. Yes, I am.
Mr. Green. But, for edification purposes, we had insurance
companies--not all, but some--that would collect premiums, and
when the damage occurred, would contend that it was water
damage, as opposed to wind damage, which, if they could prevail
with this premise, would mean that they would not have to pay
for the damage. Did I state that fairly accurately?
Mr. Swagel. That was the issue discussed at the hearing
before, yes--
Mr. Green. All right. Given this proposition, the insurance
companies under your de facto program will continue to collect
premiums, and they then--not all, but some will do it, and if
one does it, it's too many. And then, when the time comes for
them to fish or cut bait, they will make the argument that it's
the Federal Government's responsibility, notwithstanding
premiums collected: ``It's the Federal Government's
responsibility, because it was flood damage.''
And in some of these circumstances, we would have houses
right near each other, wherein one company concluded that it
was wind damage, and the other concluded that it was flood
damage.
So, the company keeps the premiums, the Federal Government
does what governments ought to do in times of catastrophes, and
it steps in, and it helps its citizens. That's what we will
continue to do, if we continue with the de facto policy that
you have embraced.
Now, it just seems to me that there is something wrong with
that picture. It just seems to me that if we can find a way to,
beforehand, before the event occurs, make reasonable steps to
have a program such that people can spend some of their money,
such that the marketplace can participate, and that the
government does have some role, it just seems reasonable.
Because, right now, the insurance companies will place you
in long-term litigation. For edification purposes, that can be
3 to 5 years. And while you're in long-term litigation, your
home is not being repaired. You are living, literally, in
trailers. Have you been to the Gulf Coast, by the way?
Mr. Swagel. No, not--
Mr. Green. Have you been to New Orleans?
Mr. Swagel. I have been to New Orleans, but not since the--
Mr. Green. I would invite you, if you could, to please
visit and see what people are actually experiencing. If you get
a chance, sir, and you can see what it's like to lose
everything and not know what the future holds for you.
Finally, I will tell you this. There are many people, Madam
Chairwoman and Sir, who are still at a point where they cry
when they talk about this. They literally break down and cry.
The government hasn't been there, as they see it. The private
market wasn't there for them. And these were people of means.
We're not talking about people who were in poverty. And they
have not been able to recover, to this day.
So, this is but a means by which we can use good will to
try to mitigate and to try to be of help. I just hope that you
would see it that way, and take a visit down to the Gulf Coast.
I believe that it could be of benefit to you. I thank you for
coming in and testifying today, and I yield back the balance of
my time.
Chairwoman Waters. Thank you very much. Mr. Roskam?
Mr. Roskam. Thank you, Madam Chairwoman. First of all, I
want to commend my freshman colleagues for stepping up to the
plate with a substantive bill that is not renaming a post
office, and it's really real, and you're doing your best here.
I come representing an adjacent district to Mrs. Biggert,
and I am actually, very interested in this, because I feel like
I'm kind of representing the people who are invited to dinner
and we're going to have a fabulous meal, and at the end of the
dinner, maybe Mrs. Biggert and I are going to be there with our
taxpayers going to be paying the tab.
So, I think the great challenge going forward--and I've
always looked at the challenge here--is the people who are
proposing change are those people who have the burden of moving
forward. It is not people who come with a little bit of a
skeptical eye that have the burden of figuring it all out, it's
the proponents of bills who have the burden of answering all
the questions, and satisfying the critics.
So, my wife and I recently bought a dog, much to my dismay.
I thought we were going to get through all four children
without owning a dog, but we were worn down. And when we
finally got the dog, friends who are also dog owners said a
very simple thing. They said to me, ``Look. You get what you
pet. When the dog jumps up on you, don't say to the dog, `You
bad dog,' and kind of ruffle its ears. You get what you pet.''
So, I'm thinking to myself as I'm listening to this, we're
going to get what we pet. We're going to get--as taxpayers,
we're going to reward the type of behavior that we subsidize.
And the great challenge, I think, moving forward, is how do you
create the environment where you're not rewarding inherently
illogical behavior?
It is not logical to expect Illinois taxpayers, or other
taxpayers, to subsidize a lifestyle living on a glorious Gulf
Coast somewhere--which is great living, if you can get it--but
please don't ask the taxpayers of the Illinois sixth district
to subsidize that choice.
Now, I realize that I am overly simplifying that. I realize
that there are some subtleties to that. But it was instructive
for me, the way Mr. Evans characterized this, in that the local
folks on the ground in that development that he described a
couple of minutes ago were very eager for the development.
Great idea, you know, ``We're going to open up this, we're
going to get property tax revenue from this, we're going to
enhance our community from this.''
But there is a logical disconnect between that purchase
decision, that decision to develop that property, and the
ultimate liability that is sometimes hidden in this whole
thing, and that is what rolls in, in a catastrophe.
So, I come with an open mind. I come with a district that
recognizes we have a national responsibility here, and that
we're all Americans, and we're all in this together. But let's
not characterize this as a private sector solution. It's not a
private sector solution, it's an invitation for the Federal
Government to play a very big role in this whole thing.
And I understand the desire, when States fail, and are
unable to come up with solutions to try and go to Washington. I
mean, that's great. If I were representing an area, I would try
to be a proponent of that, too. So I am not criticizing anybody
for advocating for their district.
But what I am saying is that I think we need to change the
tone of the conversation somewhat, and that there may be
opportunities for us to work together, but let's call it what
it is. This is a massive federalization. But I think we really
need to creep and crawl and walk. Thank you.
Chairwoman Waters. Thank you. Mr. Mahoney?
Mr. Mahoney. Thank you very much. Mr. Swagel, you say the
Administration believes that the private insurance markets for
insurance are active and effective, is that correct?
Mr. Swagel. Yes, sir.
Mr. Mahoney. Are you saying that, in the opinion of the
Administration, that the citizens of the State of Florida
owning the biggest private insurance company, 30 percent of the
market, are you saying that the Administration considers that
to be active and effective?
Mr. Swagel. No, this is a case where--
Mr. Mahoney. Thank you. Does the Administration believe
that every--well, let me ask you this. Does the Administration
believe that it is--should be a goal of every American citizen
to be able to try to buy their own home?
Mr. Swagel. Yes.
Mr. Mahoney. Okay. Let me ask you something. What do you
see as the cost of $1 billion worth of reinsurance? Could you
give me an answer for that, please?
Mr. Swagel. Well, it depends on the purpose of the
reinsurance.
Mr. Mahoney. For homeowners insurance. Let's say a 1 in 10-
year event, what's the cost of $1 billion worth of homeowners
reinsurance on a 1 in 10-year event? Do you know?
Mr. Swagel. No, I don't know--
Mr. Mahoney. Do you know what it is on 1 in 100 years?
Mr. Swagel. No, I do not.
Mr. Mahoney. Okay. If I told you it was anywhere from $550
million to $100 million per billion, do you think that that's
reasonable?
Mr. Swagel. You know, again, it reflects the underlying
risks.
Mr. Mahoney. So you do think that that's reasonable?
Mr. Swagel. You know, I don't have enough information to--
Mr. Mahoney. Is that--so you don't know?
Mr. Swagel. Yes, there is not enough information to
answer--
Mr. Mahoney. Okay. Do you know what the State of Florida
would have to pay--you know, they have a State catastrophe fund
that's being paid for. And, in fact, this bill doesn't ask
people to not walk away from personal responsibility. This says
every State has the option. And, should they have the option,
they would have a State catastrophe fund that would be
actuarially sound, so that every State would have to take the
responsibility for where their citizens lived. Did you
understand that in the bill?
Mr. Swagel. That's in the bill, yes.
Mr. Mahoney. Yes. Then my question is that in the State of
Florida, where we have had a $28 billion fund that has been
whittled down to $6.8 billion, do you know that it was--$650
million would have been the cost from Goldman Sachs to get a
commitment letter to raise the other money to fill out the
fund? Did you know that?
Mr. Swagel. I didn't know that specific--
Mr. Mahoney. Do you think $650 million for a piece of paper
from an investment bank saying they will raise the money, is
that a reasonable amount of money to pay?
Mr. Swagel. You know, I don't have the information to
evaluate that.
Mr. Mahoney. Well, I would suggest that I was very
disappointed, because it wasn't 15 seconds after we dropped the
bill that we had a statement from the Administration saying
that they were not going to support the bill. And I am very
disappointed that we are having testimony from somebody here
today who really isn't prepared to discuss this seriously.
Because when you take a look at what is going on here in
the State and the country--and it's not just Florida, sir, it's
all across the country--the issue here is affordability and
availability.
So, with that, I will go on to Mr.--Congressman Evans. I
would like to first point out to Congressman Evans, if you were
to come back to Congress today, we would be happy to welcome
you as a Blue Dog Democrat, as you are somebody who is
obviously concerned about runaway debt and fiscal
responsibility.
But I would like to point out very quickly that in Title
III, section 301(a)4 of the bill, it does talk about
mitigation. And in that bill, it does--in the bill, what it
says is that the Department of Treasury will have the
responsibility, prior to extending any loan, to make sure that
they are satisfied that there are reasonable programs in place
to mitigate, and to make sure that we're not reinforcing
unreasonable behavior.
So, my question is--really quick, because I'm running out
of time--what are the things that we could do in this--the
Department of Treasury could do--that could enhance mitigation?
Because I agree with you. We can't reinforce bad behavior. And
this bill doesn't reinforce bad behavior. Matter of fact, it
makes mitigation a requirement in order to be able to get a
loan from the Federal Government.
Mr. Evans. I would like to see you a little more specific
about what the mitigation would be, and I would be happy to
work with you on that, Congressman.
Mr. Mahoney. Okay. As far as my colleague, Mr. Roskam, who
has left, he is a dear friend of mine. And he makes a good
point. You have to be careful what you pet.
And coming originally from the State of Illinois, born in
Aurora, Illinois, what I would like to point out is that, you
know, we have an illogical situation right now. What we are
petting is a situation where people do not have insurance
coverage to protect for catastrophic funding.
It is every American's belief, in the case of a natural
disaster, that the Federal Government will come in and will
give a bail-out. And a bail-out is a situation where every
taxpayer in this country pays in money and gets nothing back.
What this program proposes is a loan where every State has the
responsibility to get paid back by the State, so there is no
hand-out.
And in the State of California, where only 14 percent of
the people have earthquake insurance, where the insurance is
available, you're seeing that we're petting bad behavior, as
Mr. Roskam says.
So, I would make a point that, as this bill is totally
voluntary, it requires each State to have a catastrophe fund
that is actuarially sound, that requires each State to step up
and take responsibility for the likelihood of disaster in the
State, and requires everything to be paid back 100 percent,
that this is a far greater situation, a far enhanced situation,
than what we have now, which is, as was mentioned before, a
bail-out situation, which means that we have a contingent
liability on our balance sheet of between, you know, $100
billion and maybe $1 trillion over the next 50 years. With
that, I will yield back the rest of my time.
Chairwoman Waters. Thank you very much. Mr. Baker?
Mr. Baker. Thank you, Madam Chairwoman. Mr. Swagel, I want
to take another run at this from a slightly different
perspective. If one were to come to south Louisiana and enter
into the insurance business today, and assume the risk for
insuring a $200,000 structure somewhere near the coast, I am
told by my commissioner that rates in Baton Rouge, pursuant to
Katrina, are about $1,000 a year on a $200,000 home.
In the Orleans area, it's about $2,000 now for a $200,000
home. I am told by market activists in the region, however,
that those are quotes, they're not real, that you may actually
pay $4,000 to $5,000 a year to insure the $200,000 home.
Even if the figure turned out to be $10,000 a year, and it
was a $200,000 home, you know, I wonder how many people on the
committee would want to put $200,000 worth of insurance out
there for anybody on the belief that you were going to get your
money back at $10,000 annual premiums, given the fact that out
of a 20-year exposure, what's the likelihood of getting a storm
that would adversely impact that insured risk?
In other words, if you're really going to price your
coverage based on the business risk you're going to assume,
isn't that the way the market is supposed to work, that
government shouldn't be involved in artificial--the barriers to
the performance of a free-working marketplace? And the answer
is yes.
And, secondly--you're doing well--that in going forward and
analyzing part of the problem in the market function today, and
for those looking for remedies, it is currently 54 different
varying regulatory entities which you must get approval from,
in some form or fashion, before entering into the market and
selling the product you design to the consumers you choose to
sell to.
And what we have is a collage of regulatory standards from
forms and functions, to using paper clips or not, to stapling,
to using right colors, to prior approval. So it is not an
unregulated market, where someone merely shows up and says,
``I'm an insurance guy, here is my product, do you want to buy
it,'' there is a process which you must go through.
Some of this is entirely responsible, in light of
protection of consumer interests and not to permit fraud. But
one of the contributing factors to the distortion of market
function is government regulation keeping persons from offering
product at a competitive rate, where many companies will come
to a marketplace--it's my observation that almost 50 percent of
Americans live within 50 miles of the coastline. It's a huge
market. Lots of value. Lots of big condos going to get built,
lots of hotels. A big chunk of business.
And if you could get it to where you would have 20
companies in any State writing policies to homeowners, where
there might be some competitive opportunity, I would almost
guarantee you that the result of that effort would yield a
cheaper product for the consumer than an artificial guarantee
of a Federal Government reinsurance payment system that we are
contemplating today.
It's almost like we are taking the Federal Flood Insurance
Program, a governmentally-created intervention into that
marketplace, which has sort of worked--not well, and now we're
going to put the wind program into effect under the Taylor
proposal, but only, of course, where flood insurance is sold,
which is all 50 States and every city in the country, but it's
a limited thing, and we're going to be surprised when the wind
program doesn't work the way we hope, because of the great
success of the flood program.
Private market function should assume the risk. They should
be free to price. And they should, therefore, compete with
others in a similar market to give consumers choice. Now, all
of the other ancillary points, to provide for evaluation of
safety, and whether or not you're behind the levee or under sea
level, all of those things should certainly be considered.
In fact, on the flood insurance maps within the City of New
Orleans, it is plainly stamped. You live behind a levee, if the
levee fails, you may be subject to inundation. ``Please be
advised, you may wish to acquire flood insurance.'' It's on the
flood maps, for those who have come to New Orleans and not
looked at the flood map, look at it.
And, interestingly enough, a letter out in the press today
from the Levee Boards Association of Louisiana, they took great
affront that the Administration is going to require that that
type--FEMA is going to require--that continued pronouncement
on--to homeowners--that if you live behind a levee, you might
want to have flood insurance, too. An amazing position for an
organization engaged in flood protection.
The point here is that much of the dysfunction in the
insurance market today comes from State and local regulatory
barriers which preclude involvement from private market
participants and result in a high-priced, inefficient system.
And in order to cure that problem, the suggestion is being
made, ``We should put government in the mix, and make it,
therefore, more efficient.'' I find this a striking
recommendation.
I would refer members who have not had the opportunity to
go back and look at a bill in prior sessions that has been
before this committee on many occasions, the SMART Act, which
proposed not to take away consumer advocacy from the State
level, but to allow the ability to price and sell product,
without limitation, across the country.
I have suggested in other meetings that we should have a
national product, authorized by this Congress, sold by the
private market, that would be priced by the private market, but
not be subject to State pricing controls. And I have few
takers, because it would allow the free market to work, and for
an insurance product to be sold and meet the needs of consumers
in a much more efficient way.
Thank you, Mr. Swagel, for your persuasive testimony.
Chairwoman Waters. Mr. Klein?
Mr. Klein. Thank you very much, Madam Chairwoman. And I
think this has been very helpful today, for those of us who
have been working on this bill for many months.
The mitigation issue, absolutely, is part and parcel of
where we're going to move and continue this, because the reason
I am very proud to have the National Association of Insurance
Commissioners--representing 50 States--supporting this, is
because there is a partnership here. Insurance is regulated at
the State level. The Federal Government has limited
responsibility, and has only jumped in when there was market
failure, such as flood insurance and such as TRIA, you know,
the terrorism risk issue.
But, generally, it is a State issue, and we certainly want
our States to continue to have that full responsibility. This
whole mitigation idea, it's going to be different mitigation in
Florida than it is in California, or in maybe a part of the
country that has some other type of natural disaster risk.
There is a great opportunity--and the reason the idea was
initially having the Treasury Secretary in there and his staff,
was to involve the consortium to work with the States, and come
up with that mitigation. There is not one mitigation plan that
is going to be as good for New York City as it is for
California. It is going to have to be developed. And if you
want to be eligible to opt into this plan, then you have to
participate in a mitigation that is customized for that State
that will be developed.
This is very common sense, and well reasoned. And, you
know, to the extent that none of you have ideas of who should
be part of that discussion, we're all ears. I mean, this is
just a very common-sense thing. You want to give every
incentive to have people who live in a particular State, and
governments in those States, to work together to reduce the
exposure and the risk. I agree. Congressman Evans, exactly, we
agree on that, and again, we're going to want to fully develop
that in our manager's amendment.
The second thing I want to point out. There is definitely--
some people have not read this bill, based on the comments that
I am hearing today.
The idea of where we're at right now--and I think it was
expressed by some of the members up here--is right now you have
Congress and the taxpayers of the United States fully funding
large-scale natural disasters. That's where we're at right now.
Most of the time, it's not getting paid back. It's a gift that
goes out, and that's it. Every taxpayer in every State is
paying for that.
What we're proposing is a much better way of dealing with
that. Number one, we want to make insurance more available,
using the private--the private market piece of this is Wall
Street selling bonds not guaranteed--and Mr. Assistant
Secretary of the Treasury, if there is some confusion--because
I know he had some notion here that there is a Federal
guarantee, or implicit guarantee--there is no intention of
that. You can help us craft language which will make that
crystal clear.
This is private bonds that are offered by private issuers--
private underwriters, I should say--through the consortium as
an issuer. No Federal guarantee, nothing on the Federal books
to create any obligation. And that is very--by design. We don't
want the Federal Government being involved. We think there is a
very big capacity--and our next panel will probably talk about
this a little bit, what kind of potential capacity. Without
having to assess, you know, higher premiums, we can do this in
the form of this additional means. So, that's the first piece.
The second piece, if the Federal Government comes in with a
loan in this natural disaster, where we, as Americans, want to
stand and help a local community, it's a loan. It gets paid
back. Sounds like a better deal to the American Treasury, and
for every American taxpayer, to be a loan that gets paid back
in some form or fashion, than a gift or a grant. I mean, that
just sounds logical to me.
So, it seems like we're addressing and doing it the right
way, instead of having this gift, and every time there is a
natural disaster.
I would just--Mr. Swagel, in your comments, you say
specifically, ``Government actions that interfere with well-
functioning private insurance markets have unintended
consequences,'' and you went on to say, ``Federal Government
interference in a functioning natural hazard insurance market
would crowd out an active and effective private market.''
I think you heard from Congresswoman Ginny Brown-Waite, and
I think you will hear from a lot of people around the United
States, and I ask that you really go out and look into this.
And we will be glad to bring you into parts of the country
where the market is not functioning. Example, 30 percent is
through a government-backed program.
The big issue? Affordability and accessibility. People
can't buy insurance. That's not a functioning--we all want
competition, but what we're trying to do here is to create
competition. If you create a higher end of liability and limit
with the private bonds, you will hopefully get competition.
That's what we are being told by many people, many experts in
the field here.
But, you know, the notion here is to try to fix it, create
a solution. I am going to offer, on behalf of Mr. Mahoney and
me, to meet with you and the Treasury Secretary and the
President, if necessary, to go over all the fine points and the
details, to make sure that we can get all your best advice, and
so you understand, as opposed to a bunch of us suits in
Washington here saying, ``Oh, there's not a problem out
there.''
There is a problem. There is a very big problem in the
United States right now, and it needs to be addressed. And we
want to try to do it in a very commonsense way that promotes
the private market, keeps insurance companies stable and
competitive, brings more competition in, will allow
affordability and accessibility to homeowners.
Your home is usually the biggest investment you have, and
what we're doing right now, because the market is not
functioning in many places, we're driving people out. So I hope
that you will agree to meet, and you and your senior colleagues
will agree to work with us, and to come up with some specific
suggestions, and really try to address some of the points that
have been stated today.
Mr. Swagel. Sure. We have been working with you, and we
will be glad to continue to do so.
Mr. Klein. Thank you.
Chairwoman Waters. Thank you very much. Mr. Putnam.
Mr. Putnam. Thank you, Madam Chairwoman. Mr. Swagel, I
guess you've probably had better days. You know, to my friends
from--mostly from Florida, but also from other parts of the
Gulf Coast, I can see by the lack of interest from around the
country that we have a pretty steep hill to climb, in terms of
persuading non-hurricane areas of the need for some form of
recipe for correcting what is a failing private marketplace in,
particularly, Gulf Coast States, but especially in Florida.
And Mr. Swagel, in your testimony, quoting almost the same
line that Mr. Klein quoted, you say that, ``Allowing private
insurance and capital markets to fulfill their roles is the
best way to maintain the sustainability of communities at risk
of natural catastrophe. Government interference in a
functioning natural hazard insurance market would crowd out
active and effective private market.''
First of all, it's not an unfettered marketplace, because
you have to go before State-elected politicians to get rates to
go up or come down. So it's not--it is not a responsive
competitive marketplace, it is subject to externalities that
are particular in even-numbered years.
Secondly, if that's the Administration's position, what's
the defense of the flood insurance program? I mean, if there
should not be government interference in natural hazard
insurance, then should the Federal Government get out of the
flood insurance program?
Mr. Swagel. Well, the flood insurance program, you know, it
is what it is. There is no proposal to get rid of it. The
Administration supports reforms of it. You know, there is all
the bad incentives I discussed before to build and rebuild, and
then there is the legacy of subsidized rates. So the
Administration does support reforms addressing those problems.
Mr. Putnam. But you're already pregnant, right? I mean,
there is already government interference in the Federal
marketplace--in Federal insurance, right?
Mr. Swagel. Well, certainly in flood.
Mr. Putnam. I mean, I'm an advocate for reform of the flood
insurance program, too. I'm just saying you can't make sweeping
statements in your testimony when you recognize that there is
already some significant intervention in that marketplace.
And then, finally--I mean, I think all of us are trying to
find the right recipe here. I hope that you're trying to find
the right recipe here, because if you look at Katrina as a
model, the amount of money that the taxpayers were on the hook
for anyway is enormous.
And I think that the collective thinking, on a bipartisan
basis, whether it's this particular instrument or some other,
is that, implicitly, the Federal taxpayers will rally to
respond to a major natural disaster in the country. And,
explicitly, the risk models out there on the right earthquake
in the right part of California, or the right hurricane
striking the right portion of the Gulf Coast or the Eastern
Seaboard, would bankrupt every insurance company and
reinsurance company in the world. Right?
Mr. Swagel. Depending on the damage, there would be--
Mr. Putnam. I mean, wouldn't--
Mr. Swagel. A great amount of damage--
Mr. Putnam. Going back to 1992, wasn't Hurricane Andrew
within 20 miles of bankrupting all of the companies? And, even
hitting the Everglades, it almost put them down, and drove most
of the companies out of the State of Florida.
So, my fault, your fault, nobody's fault, the pace of
development and the value of that development around the
country--not just in Florida, not just on the Gulf Coast, not
just on the Eastern Seaboard, but in particular areas that are
vulnerable to a variety of natural disasters, the market value
of those losses could potentially eliminate every private
marketplace that's out there.
And so, it seems to me that there is a role here for some
blended private/public solution that thinks prospectively about
how we can create some kind of risk pool, how we can create
some kind of a reinsurance marketplace that does not reward bad
behavior, but does recognize that these occurrences will be
expensive, and that, ultimately, the taxpayers will be on the
hook.
And it seems to me that we have been talking about this now
at least since Andrew, and we have gone through a number of
Administrations, a number of Congresses in that period of time.
And ``no'' is not an adequate answer. It seems like there ought
to be some appropriate mechanism for us to have this
discussion, other than the blanket rejection of any of the
proposals that are out there. So I yield back.
Chairwoman Waters. Thank you. Mr. Wexler?
Mr. Wexler. Thank you, Madam Chairwoman. I think Mr. Putnam
makes some very important points, in terms of the--I certainly
don't speak for Mr. Putnam, nor would he allow me to--but the
sweeping nature, Mr. Swagel, Secretary Swagel, of your
testimony is astonishing. The sweeping nature of the
callousness and the brazenness is astonishing, only because you
represent the President of the United States.
And if I can analyze the President of the United States's
position, it essentially is, as you stated at the beginning of
your testimony, that the unavailability and the excessively
expensive nature of homeowner insurance is largely a result of
State regulatory actions.
So, I'm curious, being that I represent the State of
Florida, or a portion of it, what State regulatory actions
during the last 8 years of Governor Jeb Bush's Administration
did we do or not do in Florida that resulted in the
unavailability and the excessively expensive--when it was
available--homeowners insurance throughout the State of
Florida, not just on the coast, but in every internal area in
Florida? What State regulatory actions have we committed in the
last 8 years that have resulted in this situation?
Mr. Swagel. Just to be clear, the affordability challenge,
as I said, reflects the risk. Availability is what I see as the
result of the unintended State actions. And, here again, I
would point to the role of the State insurer in displacing the
private market with the rate suppression leading to--
Mr. Wexler. So this goes back to Ms. Ginny Brown-Waite's
question to you. So it's your position that people are not
paying nearly enough for insurance? So your--the President's--
response to the homeowners insurance crisis in America is that
people must pay exceedingly more for their homeowners
insurance, correct?
Mr. Swagel. No, sir.
Mr. Wexler. No? So they must pay less?
Mr. Swagel. No one wants--
Mr. Wexler. No? They must pay the same?
Mr. Swagel. No one wants to pay more.
Mr. Wexler. I'm not asking about what people want to pay. I
am asking what the President of the United States--what the
Administration's position is. Should people pay more? Should
people pay less? Or, is it just right?
Mr. Swagel. The Administration wants a well-functioning
market that supports people's ability to have access to
insurance. And in States such as in the Gulf, to have the
insurance they need to rebuild, and move on with their lives.
Mr. Wexler. Is the market functioning well in Florida
today?
Mr. Swagel. As the result of State actions, it is not.
Mr. Wexler. Which State actions in Florida have created the
inability of the market to function?
Mr. Swagel. The State insurer has largely displaced the
private market, to become the largest insurer in the State, and
is substantially undercapitalized.
Mr. Wexler. Ah, so the State of Florida had dozens and
dozens of insurance companies that were writing policies left
and right, and the State insurer in Florida said, ``We want in
on this business,'' and crowded out the private market. That's
what we did, apparently, correct?
Mr. Swagel. I wouldn't put it quite that way.
Mr. Wexler. How would you put it?
Mr. Swagel. You know, as has been discussed, insurance
regulation is at the State level. So--and one aspect of the
regulation is on rates. Obviously, there are other aspects.
Over time, a pattern of suppressing rates will have the
desirable property of lowing the price that people pay, but
will affect insurance companies' willingness to write policies.
And that--
Mr. Wexler. So how do you propose--apparently Mr. Klein and
Mr. Mahoney, their prescription isn't good enough for you. So
how do you propose to create this well-functioning market? Is
it simply redrawing the flood maps? Is that going to carry it?
Mr. Swagel. I don't have a proposal to create--
Mr. Wexler. Oh, you don't have a proposal.
Mr. Swagel. To solve the problem in Florida. I certainly--
Mr. Wexler. Do you have a proposal to solve it in
Louisiana?
Mr. Swagel. I have a diagnosis, which--
Mr. Wexler. Can we hear--how do we solve the market problem
in Louisiana?
Mr. Swagel. When--
Mr. Wexler. Do you have a plan?
Mr. Swagel. In these two States, the State regulatory
action to suppress rates--
Mr. Wexler. Oh. So in Louisiana, too, they did something
wrong at the regulatory agencies that created the inability to
get homeowners insurance. Louisiana is guilty, too?
Mr. Swagel. These are the two States in which--
Mr. Wexler. Florida and Louisiana.
Mr. Swagel. --in which the State insurer has crowded out
and displaced the private market.
Mr. Wexler. You used the words, I believe, ``People have
put themselves in harm's way.'' I thought we were at the Iraq
hearing.
So, is it the Administration's position, essentially, ``If
you move to Florida or you live in Florida, you have put
yourself in harm's way, so we can't help you, and nor should
you expect any help?''
Mr. Swagel. No, sir.
Mr. Wexler. No? So why would you use the terminology,
``People have put themselves in harm's way,'' in the context of
homeowner insurance availability in Florida, in Louisiana? How
is it relevant?
Mr. Swagel. People who build a home in locations
susceptible to natural catastrophes such as hurricanes--
Mr. Wexler. Florida.
Mr. Swagel. --such as Florida, face high insurance
premiums. They face great risks.
Mr. Wexler. And they have put themselves in harm's way,
which, therefore, necessitates a response from the Federal
Government that says, ``Sorry, we will redraw the flood maps,
you're on your way.'' Correct? That's your position, isn't it?
Mr. Swagel. That's not my position, no.
Mr. Wexler. Then what is? Thank you, Madam Chairwoman.
Chairwoman Waters. I'm not going to save you. You have to
answer that one.
Mr. Swagel. Just looking for permission to go on. I will be
very brief.
You know, people have to face the consequences of the
decisions they make. And one of the unfortunate consequences of
living in a place with high risk is facing high insurance
premiums. And it's not for me to tell people what to do, but I
can diagnose and say that this is the consequence. If we want
to help people, you want to make sure you--
Mr. Wexler. Madam Chairwoman, if I may for 10 seconds, the
President of the United States, the position as you enunciate
it, is that people in Florida must pay a much higher rate for
property insurance. That's your plan.
Mr. Swagel. That's not my plan, no.
Chairwoman Waters. Mr. Wexler?
Mr. Wexler. Yes, Madam Chairwoman?
Chairwoman Waters. Your time has ended, and I think--
Mr. Wexler. Thank you.
Chairwoman Waters. --the young man did not say it was his
plan. He said he had a diagnosis, not a plan. Thank you very
much.
Mr. Wexler. That is true.
Chairwoman Waters. All right. All right, with that, I am
going to call on Mr. Kanjorski to raise whatever questions he
would like to raise. And upon completion of Mr. Kanjorski's
questions, we will end this panel and then Mr. Kanjorski will
take over for the second panel that we will have today. With
that, Mr. Kanjorski.
Mr. Kanjorski. Thank you, Madam Chairwoman. It has been an
interesting discussion. I am certain that we have a lot of
answers, but I almost feel compelled to come to the
Administration's rescue. Would you like me to do that? Take
some of the pressure off of you?
Mr. Swagel. Oh, sure.
Mr. Kanjorski. I would feel really bad if it had some
impact on you in the future days.
In reality, as I understand what you are indicating, is
really the problem that we have always faced in the coastal
States and the high-risk States, and that is virtually
recognizing that we had an unusual increase in population,
because of the pleasures and benefits of living, as Mr. Evans
does, in Florida. People go there from all States; I think half
of Pennsylvania went to Florida, so I am acutely aware of that
fact.
But the reality is that Florida, unlike Pennsylvania, has
disasters, climatic disasters, periodically that we can almost
trace. And so, as a result, if you look at it purely from a
private market situation of supply and demand, the demand for
property is excessive, the prices are high, the people arrive,
and shortly thereafter the storms arrive, and the replacement
and repair of the properties are huge, and the people find
themselves incapable of buying private coverage.
And the State officials, incidentally, find it very
difficult to allow them to buy in an expensive private market,
because it is very unpopular, politically. So, as a result,
more government intervention occurs on the State level,
premiums are driven down, private market sellers want to leave,
and ultimately the void or vacuum gets filled by the State.
I often raise the question in my mind--as a matter of fact,
I am one of the least supporters of catastrophic insurance, but
my two gentlemen friends from Florida are starting to convince
me that we have to do something. And we probably do have to do
something, and it is going to be a hybrid that may work out in
the end.
But it has always disturbed me that, if I were a private
investor, and I wanted to invest $10 million, whether to put
that investment in real estate in Miami Beach or put it in
Kokomo, Indiana. If I put it in Miami Beach, it probably will
appreciate at the rate of 10, 15, or 20 percent a year, so that
as soon as I build my building or real estate, I will have
reaped a benefit. I can easily sell it, and it will constantly
appreciate.
Normally, because I am in a high-risk area, I would have to
compensate for that appreciation by paying a high premium to
cover my risk. But because that is suppressed, I do not have to
pay that premium. So, somebody is subsidizing my position to
make my investment in Miami Beach instead of Kokomo, Indiana.
If I make my investment in Kokomo, Indiana, I would be
extremely lucky at the time I completed the building or piece
of real estate, that it would have equal value to my actual
cost of construction. It probably would drop a little bit, and
it may be worth 80, 85 percent of what I put into the property,
initially.
But, on the other hand, my insurance rate would be
significantly lower, whether it was the private market or the
public-involved market, because there are not a lot of
hurricanes in Kokomo, Indiana.
So, the question poses itself, why do people not build in
Kokomo, Indiana, but build in Miami, Florida? Well, obvious.
One, great weather. Two, their physical assets are going to
appreciate significantly, compared to the investment in Kokomo,
Indiana. You would have to be stupid not to, so the question
is, how does that impact the social economic make-up of the
country?
And this is in your defense now, listen to this. The reason
you want to discourage the subsidization of insurance, and
cause the disconnect in population flow that has already
occurred in this country, and is constantly occurring, is that
it violates basic supply and demand, and violates the free
market system.
The free market system says that if you are going to put an
investment in a place, that benefit or risk is the price to
cover the insurance premium if the loss occurs. If either of
those are not in balance, more people will be more attracted to
living somewhere like Miami Beach than they should be.
And we ought to discourage people from building on sand
bars. That is true, it is self-evident. But the truth of the
matter is, we have to find a way of discouraging people from
building in Miami Beach. Because, as I understand it right now,
if Hurricane Andrew occurred now, the damage would be 2 or 3
times greater than it was when the storm actually occurred. It
would be horrific, in terms of how we would pay for that loss,
if the identical type storm hit the identical place.
Now, if you are going to have a subsidization, it is a
question of who is going to subsidize. And if you leave it up
to the private market to subsidize, they will spread it out
among their policyholders, countrywide, as well as in Florida.
There will be a little higher price in Florida, but in
Pennsylvania, and Kokomo, Indiana, the price is going to be a
little higher, so they can take that money and cover their
losses in Florida if they occur. So, the country would be
subsidizing out-of-State for living on the coast, or living in
dangerous areas.
Is that good public policy? I do not think it is good
public policy for people to subsidize other people, whether it
is done by the government or whether it is done in the private
sector. If you have government subsidization, either by
reducing premiums initially, or by making pay-outs when damages
occur, that also is subsidization. The only difference is that
if you do it from the general taxpayer base, everybody in the
country contributes, probably, therefore, a little bit less,
proportionately, than if you did it on the policy basis because
the policies would have the property owners pay as opposed to
non-property owners.
You can make an argument either way about which is better.
Clearly, having all of the taxpayers in the base is cheaper,
and having the property owners pay is putting the burden on the
property owner class of the country. That may be a slightly
fairer way to do it.
But, clearly, in any way you analyze this problem, there is
no way that you can escape that living in Florida or in the
coastal States, because of the nature of weather, is going to
be more costly than living in the interior of the country, or
in other areas of the country at less risk. And there is no
question as to a need for subsidization, either through
government or through the private sector, using the policy
prices across the country.
So, what we select really does not matter. Now the question
comes down to should we do anything. And the fact that we have
ourselves in this position now, I think, strikes a very
interesting sociological problem and political problem.
We are now at the problem in Florida that we may have
economic discrimination. Poor people cannot pay the insurance,
so they cannot live in the nice weather of Florida, but rich
northerners can abandon the north and go south, and,
incidentally, avoid inheritance tax, which perhaps could be
used to subsidize. I just throw that out there, gentlemen, as
something that has always disturbed me--that we would change
the bankruptcy law of Florida, that you cannot claim your home
as a total exemption, but only $750, as you can in
Pennsylvania.
We always, in the Federal Government, have given a
tremendous subsidy to the State of Florida to allow somebody to
build a $10 million home and not lose it if they go bankrupt.
But in Pennsylvania, if you have a $10 million home and you go
bankrupt, you get to keep $750 and you lose everything else.
That is not quite fair, either.
In one moment, Madam Chairwoman, I will close. My
conclusion is--and one of the reasons I wanted to participate
with this hearing today, and why I wanted to address the panel
on it--it seems no question in my mind that the gentleman from
Florida did the right thing, and tried to make a proposal.
It may not be absolutely the proposal, but I agree with Mr.
Wexler. We cannot take the Administration's position, ``There
is no solution, other than people have to pay and pay and
pay,'' and end up having economic discrimination. We have to
find some hybrid between government, people (rich and poor),
private sector insurance, and public insurance, to cover this
aspect, to ensure that people can continue to live in high-risk
areas. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much. I would like to
thank all of our witnesses who have spent so much time here
today. We really do appreciate it.
The Chair notes that some members may have additional
questions for panel one, 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. Thank you very much.
Ladies and gentlemen, we are about to turn the hearing over
to Mr. Kanjorski, who will carry on with panel two from this
point. Thank you very much.
Mr. Kanjorski. [presiding] We will move through this as
quickly as we can. I know everybody is itching to get started.
We will start with Mr. Ozizmir, head of the Asset Back
Securities-Insurance Linked Securities.
STATEMENT OF DANYAL OZIZMIR, HEAD OF ASSET BACK SECURITIES-
INSURANCE LINKED SECURITIES, ENVIRONMENTAL AND COMMODITY
MARKETS, SWISS RE
Mr. Ozizmir. Thank you, Chairman Kanjorski, and Chairwoman
Waters, for holding this hearing on H.R. 3355. My name is Dan
Ozizmir, and I am manager director of insurance linked
securities for Swiss Re.
The Reinsurance Association of America will speak on behalf
of the reinsurance industry with regard to the legislation
currently before the joint subcommittee. I am here today at the
invitation of the joint subcommittee to provide basic
information about the workings and mechanics of the CAT bond
market. Swiss Re has been a leader of the insurance linked
securities market. We have underwritten more CAT bonds than any
other broker dealer over the last 10 years.
Five years ago, I testified in front of many of you, and
described the insurance linked securities market as a small,
but strategically important source of capital. Today, this
market not only remains strategically important, but has grown
from $7 billion outstanding in 2002, to $32 billion outstanding
in 2007, and plays a meaningful role in making insurance more
affordable and more available.
Today, many major U.S. property insurers have accessed this
market. My comments today will focus only on the current and
possible future direction of the CAT bond segment, which
represents $12 billion of the $32 billion in insurance linked
securities.
Insurers need to hold significantly more equity to
underwrite peak exposures, like Florida hurricanes or
California earthquakes, than it does to underwrite non-peak
exposures, such as a single house fire, or auto accident.
Insurers are motivated to issue CAT bonds, because they provide
additional multi-year reinsurance capacity at a fixed price,
and eliminate default risk.
Why do investors buy CAT bonds? The largest investors
include fixed income money managers, dedicated CAT bond funds,
and multi-strategy hedge funds. By way of geography, over 60
percent of the buyers are based in the United States, one
quarter in Europe, 10 percent in Bermuda, with the remainder
primarily in Asia. Spreading individual risk globally will,
over time, increase capacity and reduce the cost of
reinsurance, as it has in other capital market products.
The primary motivation for investing is to add
diversification to an investment portfolio, and to achieve a
higher risk adjusted return. Adding CAT bonds or fixed income
portfolio reduces the expected standard deviation of the
portfolio, improving the overall risk return profile.
In other words, the return stays the same, but the
portfolio risk goes down. As an example, historically there has
been essentially no relationship between earthquakes and
corporate bond defaults. We have, in particular, seen this
during the recent turmoil in the credit markets, where the CAT
bond prices have remained unaffected.
Here is how a typical transaction would work. First, the
insurer would establish a special purpose vehicle to issuer.
The insurer then enters into a reinsurance agreement with that
issuer. The issuer sells rated bonds, and places the bond
proceeds in trust to collateralize or secure the reinsurance
agreement. The issuer pays interest on the bond, using
reinsurance premiums received from the insurer, and the
investment returns on the asset in trust.
If a catastrophe occurs before the reinsurance contract
ends, the parties will look at the terms of the reinsurance
contract, to determine if the insurer is entitled to recovery.
At maturity, the issuer repays any remaining trust assets to
the investor.
CAT bonds play an important role in making property
insurance in the United States more available and affordable.
Most of this new capacity supports U.S. natural catastrophe
risk. At present, the $12 billion outstanding of CAT bond
issuance offers nearly $23 billion of capacity. The reason this
is possible is due to the overlapping coverage provided in so-
called multi-peril bonds. Of this, $15 billion of the capacity
is used to provide coverage for U.S. CAT risk, and the rest for
other geographies, on a global basis.
We expect the CAT bond market to continue to grow, along
with the broader market for tradeable insurance risk. The
cumulative average growth rate between 2002 and today, as
measured by the total amount outstanding CAT bonds, is 35
percent. If the market continues to grow even half this rate
over the next 5 years, the amount outstanding would be $56
billion.
And there is plenty of room to grow. The $12 billion
outstanding today represents a tiny percentage of the overall
fixed income markets. For example, the outstanding amount of
U.S. dollar denominated bonds equals $27 trillion. Clearly,
these numbers dwarf even the potential insured losses from even
the largest hurricanes and earthquakes.
In conclusion, in our view, CAT bonds and related solutions
play an important role in assuring the continued availability
of affordable insurance. Swiss Re believes this market will
continue to grow, and will assist in growing insurance capacity
throughout the United States and the world. It is Swiss Re's
view that, given time, the private marketplace will adjust,
innovate, and grow.
Thank you for the opportunity to express our views on this
very important matter. Thank you.
[The prepared statement of Mr. Ozizmir can be found on page
131 of the appendix.]
Mr. Kanjorski. Thank you very much.
Next, Mr. John Seo, co-founder and managing member, Fermat
Capital Management, LLC.
STATEMENT OF JOHN SEO, CO-FOUNDER AND MANAGING MEMBER, FERMAT
CAPITAL MANAGEMENT, LLC
Mr. Seo. I thank the Subcommittee on Housing and Community
Opportunity and the Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises for inviting me to testify
at this hearing on the catastrophe bond and risk linked
securities market, which I will simply refer to as the CAT bond
market. My name is John Seo, and I am co-founder and managing
member, along with my brother, Nelson Seo, of Fermat Capital
Management, one of the leading firms in the CAT bond market,
with $2 billion in assets under management.
Wall Street invented the CAT bond market in the mid- to
late-1990's, in the wake of Hurricane Andrew and the Northridge
earthquake. Many people assume that CAT bonds are just
securitized reinsurance, or even just a bond issued by an
established insurance company seeking coverage. But none of
this is true.
Each CAT bond is, in effect, a miniature, brand new
reinsurance company, set up to run automatically. This
automated company structure is intended to be like one big
baseball cap, into which two parties put their money for a
wager. Neutral, third-party professionals safeguard the
baseball cap, and pay out money according to pre-specified
instructions meant to cover every conceivable outcome to the
wager.
This marvelous, automated, arms-length construct is
necessary for large-scale securitization of risk, because if
collateral at risk is not held and dispersed by a third party,
the situation can quickly end up in court if large amounts of
money are involved.
In the 2 years since Katrina became a household name, the
liquid CAT bond market will have tripled in size, from about $5
billion to about $14 billion by the end of this year. Looking
forward, even with things cooling down a bit, we might expect a
$50 billion market in 5 years, and a $150 billion market in 10
to 15 years.
In the long term, the biggest factor that will drive CAT
bond supply is a form of Moore's Law. As you know, Moore's Law,
which says that the number of transistors we can put on a
square inch of silicon doubles every 2 years, is driving the
growth of digital technology. The equivalent of Moore's Law in
CAT bonds is that the amount of property value Americans put
onto every square mile in key earthquake and hurricane zones is
doubling every 10 years.
Yet reinsurance and insurance capital available to U.S.
earthquakes and hurricanes does not double every 10 years. It
doesn't even come close, as far as I can tell. Therefore, this
fundamental and snowballing concentration risk will drive CAT
bond supply in the long term.
Globally, across all traditional markets, investment
returns are increasingly moving in locked step with each other.
This correlation trend threatens to be devastating to
institutional investors, who previously enjoyed a tremendous
diversification advantage over all but the wealthiest
individual investors.
In response to this threat to their supremacy,
institutional investors are adding alternative investments to
their portfolios by hundreds of billions of dollars every year,
in a quest for non-correlation. And, in this regard, CAT bonds
are building a great reputation. In this year's credit crisis,
CAT bonds performed steadily and well, as was also the case
almost 10 years ago, during the long-term capital management
crisis.
This has not escaped the notice of institutional investors,
pension funds in particular. Pension funds can be gigantic,
bold, long-term investors, and they have about $15 trillion in
assets, combined. If pension funds want to put 1 percent of
their assets into CAT bonds--and that is shaping up to be the
case--pension funds alone would end up investing $150 billion
in the CAT bond market.
As a whole, pension funds, like many institutional
investors, tend to act on a rule of tens, which I describe as,
``To be taken seriously, any new market must first be in
existence for at least 10 years, and second, grow past $10
billion in size.'' The CAT bond market achieved both of these
milestones this year.
So, we might consider that the next 10 to 20 years' worth
of CAT bond market growth is likely to be driven by a single
class of investors so large that even a $150 billion insurance
industry loss would cost them no more than 1 percent of their
assets. Thank you for your attention.
[The prepared statement of Mr. Seo can be found on page 153
of the appendix.]
Mr. Kanjorski. Mr. Franklin Nutter, president of the
Reinsurance Association of America.
STATEMENT OF FRANKLIN NUTTER, PRESIDENT, THE REINSURANCE
ASSOCIATION OF AMERICA
Mr. Nutter. Chairman Kanjorski, and Ranking Member Biggert,
thank you for the opportunity to testify. My name is Frank
Nutter, and I am president of the Reinsurance Association. The
RAA appreciates the opportunity to testify on H.R. 3355. While
the RAA does not support this legislation, and has significant
concerns with the provisions of it, because we believe it may
crowd out the private reinsurance market--we do agree with many
of the principles in the legislation, and pledge to work with
the committee to improve it, as it moves through the
legislative process.
I would also like to commend Representatives Mahoney and
Klein for their leadership in exploring solutions that seek to
maximize the resources of both the public and private sector in
addressing coastal insurance issues.
Notwithstanding the extraordinary losses from natural
catastrophes in 2004 and 2005, the private insurance and
reinsurance sector proved exceptionally resilient. The record
losses for insurers reduced insurer earnings in 2004 and 2005,
but U.S. property and casual insurers increased capital in both
years, and again in 2006.
After Hurricane Katrina, an additional $41 billion of new
capital entered the reinsurance business to support and
underwrite U.S. natural catastrophe risk, including $12 billion
to $15 billion of new securities for catastrophe risks issued
by the capital markets.
We are pleased that the principle of utilizing the private
reinsurance and capital markets underlies H.R. 3355. Spreading
the risk of natural catastrophes to the private sector, rather
than State insurance programs, is the best long-term solution
to addressing catastrophe exposure and cost issues.
Most States, in fact, embrace this same goal of
depopulating State programs and residual market mechanisms. The
alternative to competitive private markets are State insurance
and reinsurance programs that encourage State entities to
replace or compete with the private sector, by underpricing
catastrophe risk. These programs serve to concentrate
catastrophe risk in a State, rather than to spread it into the
global, capital, and reinsurance markets.
This, in our view, turns sound risk management on its head.
If government reinsurance programs do not collect premiums
based upon the catastrophe risk of the insurers that transfer
risk to it, those programs will be financed by public debt, and
cannot afford to lay off risk to the capital or global
reinsurance markets, a principle underlying this piece of
legislation.
Reinsurance markets embrace, and in fact, regularly reflect
the principle contained in H.R. 3355. Insured catastrophe risk
can and should be transferred to the private market, rather
than concentrated in these State-sponsored programs. We do not,
in that respect, understand why a federally-chartered
corporation or consortium is necessary to achieve this.
Reinsurance brokers and intermediaries to the capital markets
regularly perform the functions described for the proposed
federally-chartered consortium.
In addition, States, in particular Florida, have explored a
consortium goal of risk transfer of catastrophe exposure among
the States. To date, States have chosen not to join together to
pursue this. Insurers, reinsurers, and capital markets now
serve to assimilate risk among various risk bearers, public and
private, as an efficient way to achieve a spread of risk and
competitive market pricing. The consortium's underlying
finances and value to consumers should be further analyzed.
The authors of the bill are to be commended for the
principle that the Federal Government will have no liability
under the program, yet it is difficult to understand how a
federally chartered corporation or consortium that does not
bear risk on its own account can issue securities, and not
expose the Federal Government to liability.
It should be expected that the capital and reinsurance
markets will require a risk-based rate for assuming a State
program's--or a consortium State program's catastrophe risk. In
that regard, it's hard to understand how a federally-chartered
enterprise--a conduit, as described in the bill--would seem to
achieve any savings.
The RAA has significant concerns with Title II of this
legislation. We believe that Title II will encourage the
creation of State catastrophe reinsurance funds, and
unnecessarily crowd out the private reinsurance and capital
markets. The principles stated in Title II of H.R. 3355 that
reflects concerns of the liquidity of State reinsurance
programs is valid, but currently of very limited application.
The Florida Hurricane Catastrophe Fund, the only fund that
arguably qualifies under this program, is heavily exposed to
debt financing. No other State has a reinsurance fund. Hawaii
did have an active reinsurance fund after Hurricane Iniki in
1994, but closed it 2 years later, as private market conditions
rebounded.
The bill, in our view, will incent States to create
reinsurance programs like Florida's, based upon public debt.
With a carrot of low-interest loans from the Federal
Government, States will create reinsurance programs which, to
date, they have chosen not to. The risk of loss will no longer
be spread through the private, reinsurance, and capital
markets, but instead will be concentrated within that
particular State and its insurance consumers.
The likely effect of the liquidity provisions is to
transfer risk from consumers who live in catastrophe-prone
areas to Federal taxpayers.
We have offered in our written statement several
suggestions for modifications to the bill. I will not take the
time to go through them, but I encourage the committee and its
staff to look at them. They certainly include encouraging the
Secretary of the Treasury to have a greater role in addressing
the financial underpinning of these State reinsurance and
insurance programs, and certainly questions about the low
trigger that is contained in the legislation of 150 percent of
homeowners' premiums. This is a very small event in most
States, and would result in borrowing for many events that,
historically, have been easily absorbed by the private market,
without any disruption in capacity or pricing.
We look forward to working with the committee, Mr.
Chairman, and the committee staff, in improving this
legislation as it goes forward. Thank you.
[The prepared statement of Mr. Nutter can be found on page
120 of the appendix.]
Mr. Kanjorski. Thank you, Mr. Nutter.
Mr. Vince Malta, on behalf of the National Association of
Realtors.
STATEMENT OF VINCE MALTA, MALTA AND COMPANY, ON BEHALF OF THE
NATIONAL ASSOCIATION OF REALTORS
Mr. Malta. Good afternoon, Chairman Kanjorski, Ranking
Member Biggert, and members on the subcommittees on housing and
capital markets. Thank you for the invitation to present the
views of the National Association of Realtors, NAR, on H.R.
3355, the Homeowners Defense Act of 2007.
My name is Vince Malta, and I am a Realtor from San
Francisco, California, where I am the owner of Malta and
Company. Our firm handles real property sales and manages over
300 residential rental units. I was the 2006 president of the
California Association of Realtors, and currently serve as vice
chair of NAR's public policy coordinating committee.
On behalf of NAR, the leading advocate for homeownership,
affordable housing, and private property rights, I want to
thank Representatives Ron Klein and Tim Mahoney for their
efforts to develop H.R. 3355, the Homeowners Defense Act.
A strong real estate market is central to a healthy economy
by generating jobs, wages, tax revenues, and a demand for goods
and services. In order to maintain a strong economy, the
vitality of residential and commercial real estate must be
safeguarded.
Unfortunately, we have heard Realtors in numerous States,
not just in the Gulf Coast, but also New York, New Jersey,
South Carolina, and North Carolina express concerns about the
availability and affordability of property insurance. Their
insurance concerns extend beyond homeowners insurance, and
include multi-family rental housing, and commercial property
insurance.
Insurance is a key component to financing the purchase of
real estate. Limited availability and high cost of property
insurance threatens the ability of current property owners to
hold on to their properties, and slows the rate of housing and
commercial investment in many communities. Either of these
threats could, in turn, further delay the rebuilding of
communities damaged by recent catastrophic storms.
The Homeowners Defense Act has two components: number one,
a national catastrophe risk consortium; and number two, a
program to make liquidity and catastrophic loans to State or
regional reinsurance programs after a natural catastrophe. Both
of these programs would enhance a State's ability to institute
disaster mitigation activities, support the availability and
affordability of insurance, and help States and property owners
recover faster after disaster strikes.
The bill authorizes the Secretary of the Treasury to make
liquidity and catastrophic loans to States with qualified
reinsurance programs, and in case of catastrophic loans, to
FAIR and windstorm plans. These loan programs would help
provide consumers access to homeowners insurance by stabilizing
insurance markets, particularly after a disaster has struck.
NAR believes that the time has come for Congress to develop
a comprehensive natural disaster policy that will mitigate
exposure to the risks of natural disasters, and foster the
availability and affordability of insurance for residential and
commercial properties.
The private sector, government, and individual property
owners must work together to address the current insurance
situation. A comprehensive natural disaster policy would
acknowledge that there must be a team effort, with shared
responsibilities, to prepare for and recover from catastrophic
events.
Homeowners need to take appropriate mitigation measures,
and purchase adequate insurance. Insurance companies need to
offer adequate and understandable coverage at fair prices, and
pay claims in a timely manner. Governmental responsibilities
include protecting consumers, preventing market failures, and
ensuring the adequacy and soundness of a central
infrastructure, such as levees, damns, and bridges.
A comprehensive policy must address each of these elements.
H.R. 3355 addresses one element, preventing failure of
insurance markets, of what can be a comprehensive national
policy to address future catastrophic events.
NAR also would support legislation such as tax credits to
support mitigation activities, and increased funding for
infrastructure, two areas outside the jurisdiction of the
Committee on Financial Services.
Additional details regarding NAR's position on these and
other provisions can be found in my written statement. Thank
you again for the invitation to present the views of NAR on
H.R. 3355. We stand ready to work with you and the members of
the Committee on Financial Services to enact H.R. 3355.
[The prepared statement of Mr. Malta can be found on page
108 of the appendix.]
Mr. Kanjorski. Thank you, Mr. Malta.
And now we will hear from Mr. Robert Joyce, chairman and
chief executive officer of The Westfield Group, on behalf of
the Property Casualty Insurance Association of America.
STATEMENT OF ROBERT JOYCE, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, THE WESTFIELD GROUP, ON BEHALF OF THE PROPERTY
CASUALTY INSURANCE ASSOCIATION OF AMERICA
Mr. Joyce. Good afternoon. I am Robert Joyce, chairman and
CEO of Westfield Group, and vice chairman of the Property
Casualty Insurance Association of America, a national trade
group representing more than 1,000 insurers. PCI members
provide homeowners insurance to more than 35 million American
households.
Thank you, Chairs Kanjorski and Waters, and Ranking Members
Pryce and Biggert, for inviting me to address you today. We are
pleased to have the opportunity to work with you in this effort
to develop a solution that works for consumers, insurers, and
State and Federal Governments.
When it comes to insuring against the financial devastation
caused by natural disasters, all of us share the same goals. We
want to reduce the losses from catastrophes by making homes
stronger and people safer. We want to limit development in
higher risk areas. We want to stabilize markets by combining
private market competition with appropriate government
participation.
While no insurer can predict how or where an individual
loss will occur, the most common and frequent types of losses
covered by homeowners insurance policies are very predictable.
Insurers can reasonably estimate, from past experience, what
percentage of policyholders will file claims, and how much
those claims will cost.
Catastrophes, however, present a unique problem. Either no
one is affected, or millions of people file claims at the same
time. What's more, the financial risk from natural disasters,
such as hurricanes and earthquakes, are highly concentrated.
H.R. 3355 provides a basis to begin the debate over how we can
work to stabilize property insurance markets. Title I of the
bill establishes a Federal consortium that opens the door to
developing effective ways to utilize innovative financial
tools, most notably catastrophe bonds.
While we support this concept, it appears that a
centralized repository may result in the establishment of a tax
advantaged private market competitor. We would like to work
with you on possible modifications to Title I that would
achieve the same results, without creating a new Federal
bureaucracy.
Title II contains a provision that would make credit
financing available to qualified State catastrophe funds,
insuring their ability to meet claim requirements. We believe
that this liquidity loan program should be one of the key
elements of a comprehensive public/private program to address
catastrophic issues.
The industry has proven that it can respond to large
catastrophes, but private markets may not have the financial
capacity to fund mega catastrophes, or to pay claims from a
series of very large events in a single year. In these
instances, the liquidity facility would offer solvency
protection to State catastrophe funds in order to stabilize
markets.
However, any Federal program must be carefully structured
so that it does not mask the true cost of insuring against
catastrophes, encourage reckless development in high-risk
areas, or hinder the flow of private--new private capital to
the markets. We think it is critical to connect such standards
to the creation of a Federal financing facility, in order to
provide incentives for States to do everything they can to
reduce their exposure to future losses, and attract private
capital, before asking for Federal assistance.
PCI believes that the threshold for liquidity loans is too
low, and will allow States to look to the Federal Government to
pay for catastrophe losses that are well within the ability of
the private market and State disaster insurance plans to
handle. We look forward to working with you to develop
threshold levels that are more appropriate to each State with
exposure to catastrophic risk.
H.R. 3355 will also make loans to State or regional
catastrophe funds that are not qualified reinsurance plans, or
to State residual market entities. PCI believes that making
loans to these entities would allow States to benefit from a
Federal loan program without doing everything possible to
reduce or prevent losses, and spur private market participation
before seeking Federal assistance.
Finally, the bill's provisions do not specify how the loans
will be repaid. PCI's concern is that the cost of these loans
could simply be passed on to insurers, which could create
solvency problems for some companies, following a catastrophic
event.
The liquidity facility proposed in this bill has
considerable merit, and could play an instrumental role in a
long-term solution to America's natural disaster problem. There
are other provisions in the bill and other components to a
comprehensive approach to addressing catastrophic risk issues
that are addressed in our written testimony. We look forward to
working with the sponsors and the committee to refine this
proposal, so that it best serves consumers and taxpayers. Thank
you.
[The prepared statement of Mr. Joyce can be found on page
99 of the appendix.]
Mr. Kanjorski. Thank you, Mr. Joyce.
Mr. Spiro, on behalf of the Independent Insurance Agents &
Brokers of America, Inc..
STATEMENT OF STEVEN J. SPIRO, CLU, CHFC, SPIRO RISK MANAGEMENT,
INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS
OF AMERICA, INC.
Mr. Spiro. Good afternoon, Chairman Kanjorski, Ranking
Member Biggert, and members of the committee. My name is Steve
Spiro, and I am pleased to be here today on behalf of the
Independent Insurance Agencts & Brokers of America, Inc., also
known as the ``Big I,'' to provide my association's perspective
on efforts to reform how our Nation insures against natural
disasters.
I am currently serving on the government affairs committee
on the Big I. I am also president of Spiro Risk Management,
Inc., an independent insurance agency based in Valley Stream,
New York, which offers a broad array of insurance products to
consumers and commercial clients in New York, and approximately
30 other States.
Whether it is the possibility of earthquakes or threats
posed by hurricanes, just about every corner of the United
States is subject to the effects of a devastating natural
catastrophe. Even if your constituents aren't hit directly by
natural disasters, when the government provides assistance
after disaster strikes, we all pay, as taxpayers.
This unfortunate and regrettable certainty has created what
amounts to a property insurance crisis in some parts of the
country. I have seen the effects of this crisis firsthand, on
Long Island. Within the last year-and-a-half, a number of major
insurers have decided that they will not write new homeowners
policies. Meanwhile, the commercial marketplace is now seeing
policies with separate wind storm deductibles, as well as new
limitations on business interruption coverage.
While at this time I am able, through much effort, to find
insurance coverage for my consumers, it is often times at
unaffordable rates. I would like to stress that this issue is
not simply a Gulf Coast problem, it is a national problem. The
same marketplace challenges that have affected coastal areas
are now beginning to occur elsewhere.
Along the New Madrid fault line, both a large national and
regional company have recently announced their intentions to
completely withdraw over time from the residential and
commercial earthquake market. The regional company is the
largest regional writer of homeowners insurance coverage for
independent agents in these earthquake areas, and as many as
70,000 customers could be affected by their decision. These
latest developments are further evidence of the increasing
national scope of this problem.
In order to effectively prepare for and insure against
natural disasters, our country needs a natural catastrophe
plan. The Big I is not alone in calling on Congress to act.
Both the bipartisan Southern Governors Association and the U.S.
Conference of Mayors have adopted resolutions urging Congress
to create a reasonably priced national reinsurance program.
Copies of both States are included at the end of my written
testimony.
Some insurance companies are also recognizing that a
congressional solution is needed, and we particularly like to
commend companies like Allstate and Travelers, for engaging in
this policy debate, and proposing innovative ideas. In specific
regard to the Homeowners Defense Act, I would like to thank
Representatives Ron Klein and Tim Mahoney for their efforts to
address this natural disaster crisis.
While the Big I is not yet ready to formally endorse the
Homeowners Defense Act at this time, we do believe it contains
a number of provisions that could have a positive impact on the
availability and affordability of natural disaster insurance.
There are, however, important questions that must be answered.
The legislation contains a number of creative ideas,
including a consortium that could lead to some lower
reinsurance prices, a loan program to stabilize State
reinsurance programs in the event of catastrophe, and the
incentive such a loan program would provide for more States to
create reinsurance programs. As I mentioned, however, there are
also some questions this legislation raises that I feel must be
answered.
For example, how many States would volunteer to participate
in the consortium, and how many investors would be interested
in purchasing these natural disaster bonds?
Can the legislation go further in strengthening building
codes for qualified plans?
Should a qualified plan be required to offer commercial
coverage, in addition to residential?
Would the 5-year transition allowing FAIR and windstorm
plans access to loans crowd out the private market, and should
this transition be shortened or altered?
Finally, and the most important question for any proposed
solution, how will the private market react? And will this
result in increased coverage for consumers?
In short, we believe the Homeowners Defense Act deserves
serious consideration. We are hopeful that some questions--the
questions mentioned earlier are resolved, and this bill could
be part of a broader, more comprehensive solution.
As the committee searches for this solution, we urge you to
look first towards the possible addition of Congresswoman
Brown-Waite's provisions from H.R. 330. This bill would allow
private insurers to purchase, at auction, reinsurance contracts
directly from the U.S. Treasury to cover natural disasters. A
package that contains a consortium to offer natural disaster
bonds and reinsurance contracts, a loan program to stabilize
State reinsurance programs, and a Federal reinsurance program
that would directly assist the private market, could be an
interesting and innovative approach to the natural disaster
crisis.
In conclusion, we commend you for convening today's
hearing, and hope the committee will act quickly to pass a
comprehensive solution to resolve the catastrophe insurance
availability crisis. Thank you.
[The prepared statement of Mr. Spiro can be found on page
155 of the appendix.]
Mr. Kanjorski. Thank you, Mr. Spiro.
Mr. Echeverria.
STATEMENT OF JOHN D. ECHEVERRIA, EXECUTIVE DIRECTOR, GEORGETOWN
ENVIRONMENTAL LAW & POLICY INSTITUTE, GEORGETOWN UNIVERSITY LAW
CENTER
Mr. Echeverria. Thank you, Mr. Chairman, and members of the
committee. I will attempt to set a record for brevity in these
proceedings.
The institute which I direct, the Georgetown Environmental
Law and Policy Institute, recently published a report on this
topic with a dramatic bright blue cover. The basic conclusions
of that report are one, that a major Federal Government
intervention in the coastal disaster insurance market such as
that proposed in H.R. 3355 would likely have numerous
unintended adverse consequences. And, two, the case has not
been made that the private insurance industry, working with
reinsurers and private investors, cannot succeed in making
coastal disaster insurance widely available at fair prices
without Federal Government involvement.
Because I think the latter point has been more than
adequately addressed by this panel, I am going to focus, in the
interest of brevity, on the first point.
The nature of our political system, as well as our
experience with the National Flood Insurance Program, suggests
that the Federal Government cannot do a good job of supporting
coastal disaster insurance prices that reflect the true cost of
the covered risks. The financial burdens of disasters and the
premiums necessary to cover those risks create a strong,
concentrated, and highly motivated constituency seeking
financial relief from those burdens.
On the other hand, the costs to the Federal Government--
and, in turn, to Federal taxpayers--of providing this relief
are dispersed, and often deferred into the future. As a result,
there is a substantial risk--indeed, I would say an
inevitability--that Federal Government involvement would lead
to systematic underpricing of coastal disaster insurance,
creating a subsidy for development in hazardous areas, and
greater long-term financial risk.
The dangers associated with this underpricing of disaster
insurance become even more serious when one recognizes the
recent upward revisions in projected hurricane intensity and
resulting property damage.
These risks are compounded by the fact that, under our
Federal system, responsibility for regulating land use is
generally assigned to State and local governments, while under
the proposed legislation, the Federal Government would backstop
insurance.
Under this arrangement, the level of government with the
most to gain from development, from increased tax revenues and
general economic development, would bear relatively little
financial exposure from potentially unwise development, while
the level of government with the greatest financial exposure
would have little direct authority to limit and mitigate risks.
This misalignment of incentives also tends to encourage unwise
coastal development, again creating greater long-term financial
risks.
In sum, taking into account the unfair subsidies, the
irrational incentives for development, and the cost to
taxpayers inherent in a major Federal intervention in the
insurance market, and taking into account the capacity of the
private market to address this issue, our view is that Congress
should avoid making the U.S. Treasury the backstop for coastal
disaster insurance. While there are undoubtedly some risks
associated with relying on the private sector, on balance, the
risks to the taxpayer and to the country's general economic
welfare appear significantly lower if the business of providing
coastal disaster insurance is mainly left to insurance
companies and to private investors.
This is not to say there is no role for the Federal
Government in supporting the availability of fairly priced
coastal disaster insurance, as I have outlined in my written
testimony, but it is a very limited role.
In closing, let me say that I am sympathetic to the
accounts of citizens, particularly those of low and moderate
income, unable to obtain affordable insurance. It seems to me
that the problem is a larger one of the distribution of
resources in our society, one that could be addressed through
revisions to the tax code, or reducing expenditures on a whole
variety of things, depending on your politics, including the
war in Iraq, or agricultural subsidies in Illinois. But the one
solution we should not embrace is that of systematically
underpricing insurance policies for coastal disasters. Thank
you for the opportunity to testify.
[The prepared statement of Mr. Echeverria can be found on
page 88 of the appendix.]
Mr. Kanjorski. Thank you very much. Well, we still have our
two cosponsors here, Mrs. Biggert.
[Laughter]
Mr. Kanjorski. This may be history for this subcommittee.
If I could very quickly, Mr. Seo and Mr. Ozizmir, either
one of you, give me a thumbnail sketch explanation of the
bonds, how it is done, who makes the purchases, why, and what
risk is involved.
Mr. Ozizmir. I will cover that. The basic structure of the
transaction is as I described before. There is a sponsor, which
can be an insurance company, it can be a reinsurance company,
or a corporation, who will look to buy protection. That
protection will be in the form of a reinsurance contract or a
derivative contract, depending upon the trigger for the pay-
out.
An SPV will be created, in which investors will purchase
bonds issued by that special purpose vehicle. The investors of
those bonds will tend to be hedge funds, money managers--
specialized managers, such as Mr. Seo, next to me. Those
investors will purchase those bonds, due to the non-correlation
aspect of them.
If there is an event, there are specific rules about what
the trigger is. Some are based upon the industry losses in
Florida. Others are based upon the actual loss of a specific
insurance company. If those triggers are hit, the investors
lose all their principal, and that money goes to the insurance
company to pay claims. If there are no events, the investor
will get their full principal back, and will receive a coupon
over LIBOR for their risk.
Mr. Kanjorski. What interest rate is the return?
Mr. Ozizmir. The interest rates will vary widely.
Typically, they're between LIBOR plus 300, which is 3 percent
on the low end. There have been some bonds issued up to a 45
percent coupon. Typically, we have seen most U.S. perils pay
somewhere between LIBOR plus 400, and LIBOR plus 1,000. So, 4
to 10 percent.
Mr. Kanjorski. Is there a restriction on high net worth
individuals who can be the purchaser of these bonds, or can
anybody wander off the street or out of a casino?
Mr. Ozizmir. No. Not anyone can buy these bonds. The
purchasers of these bonds are limited to qualified
institutional investors, which is $100 million of net worth or
greater. It is our view that the current state of this market,
that it is an institutional product only. We do not believe
that retail investors should be in this market right now.
Mr. Kanjorski. As I gather, it is not just a little
reinsurance company? Everybody who is making a purchase, are
they not acting as a little reinsurance operation?
Mr. Ozizmir. We would agree with the statement that Mr. Seo
made, as well. The important thing to think about--and, again,
Mr. Seo mentioned this--is that due to the structure of the
transaction that is very programmed, it enables investors
anywhere in the world, investors that are not experts in
insurance, or experts in reinsurance, to actually take on that
risk.
By doing that, you expand the capital base from the
reinsurance and the insurance industry to the entire capital
markets. And, again, it is our view that, as that development
continues, the amount will increase, in terms of availability
of reinsurance, and that the cost will fall, because you have a
far greater base of capital to access.
Mr. Kanjorski. And for what periods of time do these
bonds--
Mr. Ozizmir. Typically, the bonds are done anywhere from 1
to 10 years, but the typical maturities are 2 to 3 years. And,
in fact, I think this is an important point to raise.
In any other capital market, corporations fund themselves
over many years. For example, a corporation will do 10-year
securities, 5-year securities, and 1-year securities. Because
they do that, they have a stable source of capital, in which
they have less price volatility, from year-to-year. The
insurance/reinsurance industry is interesting in the sense that
all contracts are renewed each year. We certainly believe that
the term aspect of the CAT bond market will allow, over time,
the cycle and the volatility of insurance and reinsurance rates
to be minimized.
Mr. Kanjorski. There is a sort of junk bond rate, then?
Mr. Ozizmir. Yes.
Mr. Kanjorski. Okay.
Mr. Ozizmir. Typically, the notes are, you know, single B,
a double B is the most typical rating. You know, some deals are
done with investment grade ratings that are--where very large
events would be required to trigger it. Others are so high in
risk that they have no rating. They're really more like equity
risk.
Mr. Kanjorski. Very interesting. It takes an investment
banker to come up with an idea like that, does it not? Very
good.
Would it be fair for me to say that most of the panel is in
favor of the legislation, with the exception of the gentleman
from Georgetown?
Mr. Nutter. Mr. Kanjorski?
Mr. Kanjorski. Oh, reinsurance.
Mr. Nutter. But even our objections to the legislation are
with the caveat that there are many principles, particularly
the reliance on the private markets, that we endorse. And we
have suggested specific changes to the legislation to try and
improve it.
Mr. Kanjorski. The one thing that disturbs me about the
bond question is what are we going to do to curtail the amount
of development, the location of development, and the
methodology of development, if we just throw it into the
capital account?
You know, is Florida going to end up with 40 million
people? In my prior speech, I discussed that fact that if you
look at the normal principles, you get a control of population
by the cost of living in an area, and eventually it becomes
prohibitive.
But if we put a fast fix in where we can sell junk bond
rated securities, what is going to inhibit Florida from further
densifying, or other States? California is probably another
example.
Mr. Nutter. Mr. Chairman, it does seem to me that all
States should look at consumers who are funding these kinds of
programs, whether they're public or private, with a sound basis
of risk assessment, and the risk that they're exposed to.
Insurance premiums are a great messenger to people about the
cost associated with the decisions they make. And so, risk-
based premiums, or risk-based reinsurance premiums, seem to be
a fundamental feature.
I think we would agree with the various statements that
have been made that there are people with low or fixed incomes
for whom the cost of their insurance has become difficult or
prohibitive, and that the States and the private sector should
be looking at solutions that address that specifically. In
other words, look at the consumers of insurance, to see if we
can find some solutions for those people.
But there obviously are people for whom the cost of their
insurance is a consequence of the decision they made, but they
also may have the resources to pay for the cost of that
decision.
Mr. Kanjorski. So, some subsidy for the snow birds who
moved to Florida 20 or 30 years ago, that their pensions or
individual net worths cannot afford the insurance has now
occurred--that is what you're talking about, as compared to the
independently wealthy people down there, let them handle the
full burden?
Mr. Nutter. Well, it's consistent with the principles of
the legislation being proposed that you're looking for sound
economics, that the capital markets and the reinsurance markets
that are part of the solution being proposed here are likely to
expect a risk-based premium for this. And loans, or some sort
of facility that does indeed make this more affordable for
these funds, need to reflect the quid pro quo.
What does this do to help the consumer at the consumer
level, if in fact you're going into the private markets and
expecting the private markets to price this on a risk-based
basis? Some kind of government role related to consumers that
have affordability problems needs to be incorporated in State
programs or a Federal facility of some kind.
Mr. Mahoney. Mr. Chairman, would you yield?
Mr. Kanjorski. Yes.
Mr. Mahoney. Yes, one of the things I would like to point
out is that--to make sure that there is clarity on this point--
and that is what the program does is it requires that each
State that volunteers to go into the program have an
actuarially sound catastrophe program, so that a State like
Florida would have the responsibility to have their own CAT
program. Today, that number is about $28 billion, and gets us
to probably maybe a 1 in 100 year kind of event.
States like, you know, North Carolina, their actuarially
sound responsibility might be, you know, $1 billion or $6
billion, depending on what it is. So this idea that somebody is
subsidizing the State of Florida is not accurate, because in
each State there would be a responsibility to have a
catastrophe program funded by the State and the citizens of the
State before anything happens with the Federal monies. So, this
concept of subsidization, it just really doesn't occur in this
bill.
Mr. Kanjorski. Okay, well, my time has expired. Mrs.
Biggert.
Mrs. Biggert. Thank you. Just a little bit more on that.
Mr. Seo, it seems like we're at a pivotal point in the CAT bond
history. The point at which these bonds are becoming
mainstream, it's not going to be--institutional investments.
How would the Federal Government involvement or competition
in the CAT bond market affect this emerging market?
Mr. Seo. I'm not sure how to answer that, because I'm still
not clear on what's being proposed. But from what I can
understand, from what I can see, I think that the effects, you
know, could be positive, could be negative, but limited, either
way. I don't really see any--nothing really jumps out at me
that says it can be a complete disaster for the private sector.
Mrs. Biggert. Okay.
Mr. Seo. And nothing really jumps out at me that says, you
know, this is exactly the spark that we need to get it going,
either. Does that answer your question?
Mrs. Biggert. I think so. Maybe if Mr. Ozizmir--could you
comment on that, too?
Mr. Ozizmir. Yes. I think a lot of it will depend upon how
the bill is executed. And, specifically, I am going to talk
about, I think, Title I, which talks about the consortium.
I think the way I try to get the committee to think about
this is that in both cases we're saying there are going to be
capital market investors with risk adjusted--actuarially sound
and risk adjusted returns. So, the question is, if you're an
investor like John Seo, and you're being offered two CAT bonds,
one from a U.S. primary insurer or reinsurer, and the other
from this consortium, you know, what would make you buy one
over the other?
And I think the questions will come down, obviously, to
pricing. But I think a lot of it will also come down to the
controls and disciplines within those programs.
For example, if you are a U.S. primary--pick Travelers, or
any one specifically--when you issue your bond, you will go to
investors with the bankers, and tell them about your program,
how you underwrite risk, how you do claims, your track record.
And you will talk about your incentives, your alignment of
interest, that it needs to be a well-run program, and claims
need to be handled appropriately.
Now, if bonds come out of a consortium, in some sense,
since there are so many different insurers, maybe that's a
positive, it's slightly more diversified. But the investors
will ultimately need to believe that the way that consortium is
run, the way the State fund is run, the way prices are done, is
robust and will stand the test of time.
I think that if, in fact, the investors believe both
stories are equal, then the pricing will be similar. If they
believe one program is run better or worse, then clearly the
investor capital, which is completely free, will ultimately go
to the program that they think is better run.
Mr. Klein. Congresswoman Biggert, would you yield for a
second on that?
Mrs. Biggert. Yes, I yield.
Mr. Klein. Yes, just a--part of the thinking, and part of
the discussion we had in the research in this--and we spoke to
the Chicago Mercantile Exchange, some of the professionals
there, and what they said the standardization is what they're
looking for. They think that helps the market.
But, ultimately, if there is more competition, I think
that's good. Competition is good in any field, and obviously in
the bond market, there is nothing wrong with it, either.
The other thing that--there is some question of a possible
good thing is this may create more liquidity and more trade
opportunity. They are saying that they haven't had enough there
to make a huge market yet, but they think that if the bonds
really start taking off, you are going to have a very big
market. And the trading opportunity is what really becomes
interesting to the investors, as I understand it--you may want
to comment on that.
But I think that's what we're trying to drive this toward,
is more investor activity and interest, and hopefully more bond
interest.
Mrs. Biggert. Does it make any difference, then, that the
consortium would be, you know, created by statute, and would,
you know, securitize the State catastrophic risk in the form of
bonds? I just don't know how the competition works, when you
have one by statute and one by--
Mr. Klein. Well, we're not trying to influence it, either
way. We are told that, you know, they're going to compete, and
I think that, ultimately, the best way to do this thing would
be to let it evolve, and let the market really sort of run this
thing, and be successful that way.
Mr. Seo. May I comment, please?
Mrs. Biggert. Yes, Mr. Seo.
Mr. Seo. Absolutely competition on the investor side. But
as Dan was saying, there is also competition on the bond side.
And there is a concern that if you're off on the terms that
you're offering, then you could get very little investor
interest for seemingly a very trivial thing.
So, it is a double-edged sword. With all due respect to
Congressman Mahoney, it is true that Florida has always
supported the principle of actuarially sound rates, but I will
give an example of something that I'm talking about that could
be a problem.
Recently the State of Florida has decided to adopt its own
model for calculating what that is. Now, these models--I mean,
no one model necessarily is better than another. So I think
that the Florida model is well within its right to come out and
say, ``I think this is an actuarially sound rate.'' But it just
happens to be their model, and not the market's model, what
we're using. And since one thing is not better than another,
you know, you could argue all day long about it. But in a
market, they're going to go off the market model.
By the way, if that market model was giving a lower risk
than the State of Florida model, they would still go off of
that. But it just so happens that the Florida model estimates
the risk at roughly half of what the market models do. So that
disconnect alone could result in a consortium that collects
risk, comes out to the market, and doesn't place one dollar of
the bonds.
Mr. Mahoney. Can I say just something? Would you mind
yielding? We happen to have the expert from the Florida
insurance commissioner here, and he pointed out that you're
incorrect in that statement, that Florida uses an average of
four private sector models. And so they do not have their own
model, they are using an average of the four private sector
models.
Mr. Seo. Well--
Mr. Kanjorski. Let us try and keep this orderly now. We
have an extension of time here, but Mrs. Biggert's time has
expired. Ms. Waters?
Ms. Waters. Allow me to just yield my time to Mrs. Biggert,
so she can continue that line of questioning. I am interested.
Mrs. Biggert. All right. Mr. Seo, if you would continue,
then?
Mr. Seo. Yes. Well, Congressman Mahoney, it's true. I mean,
Florida--actually, I believe--I thought it consulted even more
models than that. They take any model that's valid out there.
But, in the end, again, right or wrong, the Florida numbers
that are coming out aren't what the market is going off of, and
there the argument lies.
On a fundamental basis, stepping back, I don't have a
problem with anybody in CAT risk disagreeing with each other by
a factor of two. That's easy to do with these models. So I
think reasonable people can disagree with that. But then, it
comes down to a market transaction that has nothing to do with
these types of philosophical judgements.
So, you know, the anxiety that a civic-minded market
professional would have is that we would be in an awkward
situation where, fundamentally, what the State of Florida was
saying is it thought the actuarially sound risk is--is fine. I
don't actually have a problem with that. But on a market
execution basis, I can't execute there.
Effectively, the rest of the market, right or wrong, is
going to be adopting these other market actuarial rates and
paying on them. And I have an obligation to my clients, my
investors, to put capital where it's going to have the highest
return. I'm putting you in competition with other bond
opportunities.
Now, if the State of Florida can actually come around to
that understanding, that to tap these capital markets they're
going to have to go with certain market conventions, even if
they disagree, then I think we can have a really nice situation
down there. But that one single disagreement alone, you know,
where everything else is beautiful, can completely kill the
effectiveness of the program. And nobody wants to see that, of
course.
Mrs. Biggert. Thank you. We will look forward to more
discussion of this. And I yield to Ms. Waters.
Ms. Waters. Thank you very much. There was a question that
has been nagging at me for a long time, and some discussion
occurred today, relative to the subject matter that I am
concerned about.
There was some talk about mitigation, and--mitigation in
the bill, and there was some more discussion about not allowing
people to build in certain areas. I thought about restrictions
on building in certain areas, not simply because of floods, but
because of earthquakes and other kinds of potential hazards.
What is the thought from any of the panel members--and
maybe we will just go to anybody who would like to answer this
question--what is the thinking about public policy that would
go in the direction of prohibiting the building in larger areas
than we ever really thought about doing? Any discussion in any
of the industries about that?
Mr. Malta. Chairwoman Waters, there has been a lot of
discussion locally and at regional levels regarding just that.
And in California, for instance, in dealing with
earthquakes, ``Earthquakes don't kill people, it's buildings
that kill people,'' and it's mitigation measures that, if
you're going to build in a certain area on a certain soil, that
you have to compensate for that. Rather than prohibiting
building in soft soils, you have to put a floating foundation,
or you have to do some measure that will protect the building
and human life, in the event of an event.
So, rather than banning, they look towards technology that
will allow building, but do it in a sensible manner that
protects property and human lives.
Ms. Waters. And there is substantial technology that can
mitigate against disaster?
Mr. Malta. So we are told, but we haven't had a 1906-type
earthquake happen on a 60-story building. But we are told by
the experts that these matters have been taken into
consideration in the construction of these properties.
Ms. Waters. Thank you very much.
Mr. Nutter. Could I?
Ms. Waters. Yes.
Mr. Nutter. If I could also comment, building codes are
implied in all of this. The legislation that has been offered
has, in fact, placed upon the Secretary of the Treasury some
authority to see that States have building codes that are
appropriate for the risk, and enforced building codes as a
critical feature of this.
And as I mentioned, I think before you came back in the
room, the insurance premiums should be risk-based, because they
do send a message to people about the decisions they make,
whether they adopt certain mitigation features, or whether they
place properties in harm's way. That's a message that consumers
should get about the cost of the decisions they make.
The legislation does offer a feature that does focus on
appropriate building codes, so that you can get appropriate
development.
Mr. Seo. May I make a comment on your question? Let's say
that this legislation goes through, and the CAT bond market
comes through. The price signal that we're talking about that
acts as a--that helps actually keep areas safe by sending a
signal that it's dangerous, will go away. The prices will go
down.
And I have thought about this, and I think that is what you
are asking. Let's just say that, for some reason, the insurance
is cheap, even in these really risk areas. And the only thing I
can think of is that there is an old model or situation--for
this situation, and it's just fire insurance. I mean, the
modern insurance industry was created because entire cities
were burning to the ground, but yet the cities kept growing.
And so, what happened is that we decoupled the price signal
for insurance from the danger signal. So we just have fire
codes. So, even to this day, even though fire risk may be low,
we limit the number of people that can occupy a commercial room
or auditorium, etc. And I think that you might end up getting
the cost signal. Again, but it's all poured into safety, not
for the cost of capital.
But I think that we are about to enter a phase of
development when we can't depend on the cost of capital, the
high cost of capital, to signal danger. We just have to have a
separate public policy that is completely analogous to what we
use for fire codes.
Mr. Echeverria. The Sigma Xi organization, which has been
looking at the global warming issue, issued a recommendation
that governments consider establishing a prohibition on
development within a meter of elevation of the sea, on the
theory that global warming is on the rise, and we need to
effect some kind of gradual retreat from the shore.
And it seems to me that as a matter of wise public policy,
in addition to hardening structures, and securing them as much
as possible against damage, it's appropriate to think about
moving development out of harm's way. That inevitably raises
the issue of property rights.
The U.S. Supreme Court, about a decade ago, famously in a
South Carolina case, struck down as unconstitutional South
Carolina's effort to draw a line along the shore, which they
intended to revive as the shore retreated. The court was
narrowly divided on that subject. They were not, I think it's
fair to say, fully aware of the risks of global warming, and
the rationale for South Carolina's policies.
But I think one of the interesting questions that will have
to be confronted, if we think about a policy of requiring
retreat from the shore, is how to deal with property concerns.
Ms. Waters. Thank you very much.
Mr. Kanjorski. Thank you, Ms. Waters. Mr. Campbell?
Mr. Campbell. Thank you, Mr. Chairman. And I have been kind
of listening in and out all afternoon, so I apologize in
advance if this has been asked and answered.
But being from California, in California we have a thing
called the California Earthquake Authority, which a number of
you have addressed in your statements. And that is a
government-sponsored risk-sharing pool, as you all know. But in
California today, only 15 percent of all homes carry earthquake
insurance through the California Earthquake Authority or
through private entities, and there are a number of private
entities that do offer earthquake insurance. My personal
residence is insured--I have earthquake insurance through a
private entity.
What is this bill going to do, or what's going to be
different, to change that kind of dynamic? Because if an
earthquake--when an earthquake hits California, 85 percent of
the homes that go down or are damaged are not going to be
insured today, in spite of the availability of both the
government-sponsored program and a number of private insurance
efforts.
They are going to come here, and they are going to say,
``Help us,'' and we helped a lot of people in a lot of other
States, and even a fiscal conservative like me is likely to
say, ``Well, we ought to,'' because we helped a lot of other
States, and not California, so--
Mr. Kanjorski. Maybe I can just ask a question here. Why is
it not mandatory by the mortgagors, that earthquake insurance
be had?
Mr. Campbell. It is not. I can't--
Mr. Kanjorski. In Congress, here, we mandated on flood
insurance. If you have a mortgage of a federally-insured
institution, you have to have flood insurance.
Mr. Campbell. Yes, it's not. I can't answer as to why, but
it's not. Anybody have any comments? Because I will tell you, I
believe we need--we ought to have something in natural
disaster.
I mean, we also have issues--we have mud slides in
California. Those are completely uninsurable. You cannot get
insurance for them anywhere. But they happen, they happen every
few years. People lose their homes, and there is absolutely
nothing they can do, because insurance is absolutely
unavailable on that particular--I am told, from the insurance
industry, because of adverse selection, which I am sure is
probably the case.
But--so, we have situations--particularly the earthquake,
which is obviously a much bigger thing--where, how do we know
we don't do this, and we have the same sort of situation?
Mr. Ozizmir. I would like to take a couple of comments on
that, for just a part of the question you have.
The CEA program is actually substantially supported by the
CAT bond market right now. I think the implications of that
were that when the post-Katrina crisis happened in the
insurance/reinsurance area, that the CEA did have some term
capacity locked up, the had some multi-year transactions, so
that they did not see an immediate move in those rates.
Additionally, the capacity in the CAT bond market did help
mitigate the increased costs that did, you know, occur in that
program, but were much less than they would have been.
So, I think that it's a good example of some of the
benefits that the CAT bond market can provide. But that, in
itself is not, you know, necessarily fundamentally going to
immediately change the situation.
Mr. Campbell. Whoemver else wants to answer--
Mr. Spiro. If I could make a comment?
Mr. Campbell. Yes.
Mr. Spiro. My response would be if California has a
qualified program, I think the loan provisions of this bill
would help.
Mr. Campbell. Because?
Mr. Spiro. The liquidity in the catastrophe loan provisions
would be available to help in that situation.
Mr. Campbell. Okay.
Mr. Malta. But one would wonder why you would do that, the
government would do that, when, in fact, you have a program in
California that, unfortunately, is not meeting all the consumer
needs that should be there, but is, in fact, as Mr. Ozizmir was
saying, is a prototype that works.
They do aggregate risk, earthquake risk. It is laid off
into the reinsurance and the capital markets, just as this
bill, the principle of this bill, provides. It is a workable
prototype that's, unfortunately, not being used by all the
people that--but it's an interesting public/private approach
that does, in fact, achieve a goal that is a fundamental
principle in this legislation.
Mr. Campbell. Okay. Let me get to one more question before
my time runs out. I do think it's just an interesting thing to
look at, and figure out, because it has definitely not solved
the problem in California. And the only reason you haven't
heard about it is because we haven't had a major earthquake in
a while. But when we do, then, you know, again, it will happen.
But the second question I wanted to ask was about--and for
Mr. Spiro, particularly, but anybody else who might want to
comment, it's about the Liability of Risk Retention Act, which
enables people to do self-insurance pools for liability
insurance. And GAO has said it has been effective in reducing
rates, and that sort of thing.
Should we extend that sort of--have a Liability Risk
Retention Act to property insurance, and to allow groups and
different people to pool together for self-insurance on that,
and would that be something that could help in this situation?
Mr. Spiro. That's a good question. The Big I has not
formally taken a position on risk retention groups yet. But we
do have some serious concerns that I would like to share with
you.
Risk retention groups are not subject to State guarantee
funds, State guarantee fund protection, like traditional
insurers. Additionally, there have been some insolvency issues
with risk retention groups. Due to these consumer protection
concerns, we would caution against their use for natural
disaster risk.
Mr. Campbell. Isn't it better than nothing, which is what
85 percent of Californians have right now?
Mr. Spiro. Sometimes something is better than nothing. I
would have to see the specific provisions before I brought it
back to our government affairs committee.
Mr. Campbell. Okay. Anybody else want to comment before my
time expires? Mr. Seo?
Mr. Seo. Yes. Until last year, a California earthquake was
the largest exposure in the CAT bond market, so we have a good
$5 billion of it right now. We don't have a problem with it,
it's just that there is not so much supply because of the
penetration problem you're talking about.
And I believe it's because it's not the dollar amount of
the policy that's in question--it's around $600, on average,
per household--it's just the coverage.
Mr. Campbell. The coverage, yes.
Mr. Seo. So, the coverage is being rationed. So, if this
were to help, what would happen is that you would have a lot of
Florida hurricane risk, or U.S. hurricane risk coming out to
the market. The market would want to complement that with more
California earthquake risk. It would need that.
So, it would actually provide the opportunity for the CEA
to change the terms of its mini-policy, and turn it into a more
full-blown policy.
Mr. Campbell. In your estimation, that would either help
the coverage or the rates?
Mr. Seo. I think it would. I think that your penetration
rates would go up, you know. Right or wrong, you know, I'm sure
you know people that went through the Northridge earthquake.
And so, they just apply the terms of the mini-policy to the
claim that they had made.
And so, like I know a person that had a claim that was
around $80,000. She applied it to the mini-policy, it's $7,000.
So, even like I said, even if it's not quite right, the mini-
policy is worth 1/10th of what the normal policies were. So,
even though the actual dollar cost of the policy is reasonable,
which it is, the coverage, at least by perception, isn't
adequate. So, nobody knows, but I think that the solution lies
along those lines.
Mr. Campbell. Thank you. Thank you, Mr. Chairman.
Mr. Kanjorski. Okay. Mr. Klein is next.
Mr. Klein. Thank you, Mr. Chairman. First of all, thank you
all for being here today. Again, the second panel has provided
a lot of good insight.
Congressman Campbell, I will spend some time with you to go
over--you know, we believe that part of the innovation here is
to try to spread the risk. And there are different types of
risks around the country. And I think what was just explained a
few minutes ago is if you take hurricane risk--which is not
just limited to Florida, it goes all the way up the East Coast
and the Gulf Coast--you have earthquakes, and mudslides, and
lots of different things, the scale is different, the damage is
different, the probability may be different.
But if you put them all in, it may do what insurance is
supposed to do, and that is create a better model, which, in
turn, over time, may--we are focusing on accessibility of
product and price. So that's what the goal is trying to
accomplish.
Mr. Campbell. And if the gentleman will yield for just a
second--and I am very interested in that, and I get that. I
think the fundamental question for me is does this really get
to that.
Mr. Klein. Sure.
Mr. Campbell. And, in the end, how are we going to get
people to buy it and/or hold them accountable if they don't? I
mean, in the end--and it always sounds harsh to say this--but
if you provide a government insurance or reinsure, whatever,
sponsored insurance program, and people choose--people who
choose not to pay the premiums still get benefits from the
government, then you have a disincentive to buy the premium.
Mr. Klein. And this is not a government insurance program.
Mr. Campbell. And I don't want to take up all your time,
but thank you.
Mr. Klein. The other thing I want to mention--because there
is a lot of discussion about where you build properties and
improvements, and all the rest of that, I think everybody
understands that these are local government issues. The Federal
Government is not going to start creating planning and zoning
commissions in here in Washington, to decide what gets built.
However, where we can use our influence a little bit is we
can say, ``If you want to participate in this model, and you
want to be eligible, you may have to do certain things.''
Because, otherwise, we have no ability to say to the local
government, ``You can't build here.'' I mean, we have coastal
construction line issues on the coast, and other things, but
there are limitations of what we can do.
But I think we can certainly have a draw-in by, ``Say,
listen, if you want to participate''--and that's where, in the
first panel discussion, we talked about, you know, there needs
to be discussions with codes. Different in California than in
Louisiana, you know, different risks to protect against. So I
think we will certainly talk about that, and get everybody's
input on making sure that that mitigation factor is brought
into this, and is a condition.
You know, I think the rest of this is I think we have to
read this carefully. We obviously want Wall Street, and the
people that sell the bonds--we're not forcing this on anybody.
I mean, if this works, it's going to work because there is a
market for it, and because it has the consequences we are
trying to create.
But, you know, part of the assessment up to this point is,
``Is there capacity?'' I am hearing from--and we've heard from
others, as well--there is a national--there is risk catastrophe
bond capacity. It is growing, and that may be something that
can build capacity that shifts the risk from policies over to a
private source, and that's a good thing, instead of having, you
know, more public--we don't want the government to be involved,
we would rather have the private sector involved. And if there
is more capacity there, that's a positive thing.
But I am just going to end there, by saying--by thanking
everybody, and thanking the Chairs for holding this today. This
is a work in process, as we have suggested. It is complicated.
But we have to move forward and come up with something that
will work, will help the homeowners, you know, work with the
industries, and make sure that we solve this problem. So, thank
you again for your courtesies.
Mr. Kanjorski. Mr. Mahoney?
Mr. Mahoney. Thank you, Chairmen, very much. A couple of
things. A real quick question for Mr. Seo.
In terms of the CAT bond market, on those interest rates
that you were talking about, does that presume that the holder
of the bond gets repaid in all instances, or do they take the
risk of losing their capital, should the bond be--the CAT
bond--
Mr. Seo. Oh, yes. All the capital is at risk, all the
principal is--
Mr. Mahoney. So you can--so, over a 10-year period of time,
you can actually get people to take these bonds at a 10 percent
over LIBOR rate? Is that what you're telling me?
Mr. Seo. Oh, for a 1 in 100 year risk, I think you could do
less than that.
Mr. Mahoney. Yes, because, you know, it gets to the real
issue here, you know. What no one has talked about here is what
is wrong with the market. We have people who are on my right
side of the table who are very concerned about independent
agents, and things like that.
I think we all agree, as a panel, that everybody that owns
a home should be able to have affordable homeowners insurance.
Is that correct? Okay. Does everybody understand that the
average family of four in the State of Florida makes $42,500 a
year? Does that sound reasonable?
So, the question becomes one of what's the problem, right?
What's the problem with the market? And the State of Florida
has come in, and they say that a 1 in 100 year event, we're
looking at potentially $70 billion worth of liability. And
right now, with their own efforts on the State CAT fund, $6
billion in company retention, working with reinsurers today,
we're getting to about $38 billion of coverage. That leaves, by
my math, $35 billion that we have open-ended liability.
And what we found out, after they did all these heroic
things in the State of Florida, that a lot of these companies
were taking advantage of the lower reinsurance rates, and they
were using it to buy higher cost reinsurance.
But at the end of the day, whether they be your CAT bonds--
which only is $15 billion of a $35 billion problem in the State
of Florida this month--and the reinsurance business, where,
depending upon where the risk that you're buying, whether it be
a 1 in 2 year risk at 80 percent, or a 1 in 100 year event,
which could be a 10 percent premium, $100 million on $1
billion, gentlemen, it's broken.
Because when you add up all these things--I'm an old
manufacturing guy, we call this cost of goods, right? These are
costs, and then you have to earn a return on top of that. When
you take all these costs to try to cover a $70 billion event
using your products, and you divide by the number of homeowners
insurance premiums out there, guess what? You can't afford it.
So, my question to you is, what can you guys do, instead of
costing me a 1 in 75 year event in the reinsurance business
$200 million per $1 billion covered, what can we do to lower
that to something that is affordable? Because that's the
problem. Nobody wants to be in the business today, but until
you cover that liability, then the market is going to be
broken. And it is broken. People can't get insurance in
Florida. If it wasn't for Citizens coming in, there would be no
private market. There would be no market for any kind of
insurance.
So, I hear what you're saying. But the question, again, is
that it's too expensive. So what are you guys going to do in
your industries--CAT bonds and reinsurance--to make your
product affordable, so that people can afford the insurance?
Mr. Kanjorski. You could do what the Congress always has
done, we could pass a law outlawing hurricanes.
Mr. Mahoney. That would be good. All right, why don't we
start out--I would like to hear from Mr. Ozizmir first, if he
could be brief.
Mr. Ozizmir. I will take a first crack at that. I think one
of the things that I would like to discuss is the actual
composition of the CAT bond market, and I think--
Mr. Mahoney. I don't--we don't have time to go into that. I
mean, what can you do to lower the rates?
Mr. Ozizmir. Well, I think--and the point would be this. In
the CAT bond market, there is a big difference between the rate
for non-peak risk and peak risk. For example, if you have a
Mexican quake with a 1 percent expected loss, you will pay 2 to
3 percent. If you have U.S. hurricane risk at a 1 percent
expected loss, you will pay 6 to 8 percent.
The reason that's important is that one of the reasons why
there is a much higher rate for peak risk is that the insurance
and reinsurance industry has a certain amount of capital. And
if they are going to risk a significant amount of that capital
in one location, they will charge a higher rate.
My point would be a lot of people talked about the global
capital markets being $50 trillion. If, in fact, the risk, over
time, is spread throughout the entire global capital market,
the $50 trillion, instead of just the insurance/reinsurance
industry, we would have very good reason to expect that that
extra premium that the people in California and Florida are
paying, versus someone in a non-peak risk zone, will compress
significantly. That is ultimately--
Mr. Mahoney. Yes, you know, but the problem is that--I'm an
old venture capitalist, right? When people put up money and
they risk everything, you know, you're not going to do it for 8
percent or 10 percent. I mean, in the reinsurance industry,
that's what you guys are basically doing. You're basically
getting contracts with people and institutions and saying, ``We
need to pull down on these lines. You give up everything, but
you get a high return.''
Mr. Ozizmir. I understand your comment, but--
Mr. Mahoney. I am asking--now I am talking to Mr. Nutter.
Mr. Ozizmir. If you don't mind, one comment is that the
situation I described, where investors today are earning 2 to 3
percent and risking everything in the CAT bond market--
Mr. Mahoney. I would argue--I hear what you're saying, but
I would argue that's the reason you're at $15 billion of
something that may be a $1 trillion liability. It's--we have a
$35 billion liability today, which swamps the CAT bond market
as it is structured today.
But, getting to Mr. Nutter, I mean, what can we do to get
the cost of reinsurance down, so that people can afford the
product? I mean, what we do in this bill is we try to set a cap
on the insurance company, what the liability of the insurance
industry is, so that we can make prices affordable. But--and
we're trying to do it at a level that encourages, to a certain
extent, the insurance companies continue to buy your industry's
products, because we think that we need to support the
industry.
But, you know, the fact of the matter is that everything to
date hasn't worked, because we have unfunded liability. And the
reason why we have unfunded liability is because it's too
expensive. So, what can we do to encourage, you know, you to--
you know, how do we get the rates lower, so that we can afford
it?
Mr. Nutter. Well, if I could comment that the experiment
that Florida has engaged in, where it not only created a
hurricane catastrophe reinsurance fund in 1993, 1994, expanded
it, as you know, this year at rates charged to insurance
companies at 1/6 of what the private market thought
appropriate. So, the experiment that you hope to achieve is
what Florida is engaged in.
Mr. Mahoney. Yes, I didn't hope to do anything, that's
not--you know, I represent a district in Florida, I don't
represent the system.
Mr. Nutter. I understand. My point was going to be that it
doesn't seem to be working. I mean, that's what you are trying
to help solve. Providing insurance companies with cheaper
reinsurance at the State level, admittedly backed by
assessments on consumers if there is a shortfall, hasn't really
worked to lower rates.
Mr. Mahoney. But why hasn't it?
Mr. Nutter. Our argument would be that, in fact, if you--
why hasn't it worked?
Mr. Mahoney. Yes.
Mr. Nutter. Risk assessment in the State of Florida, in
terms of the exposure of the properties, is so great, and the
probability of loss is so great, that the rates needed to
adjust.
Maybe there is a sticker shock problem here with people in
Florida. But at some point, the ultimate cost of repairing and
replacing people's homes and businesses has to be borne by
someone, either those at risk or a subsidy by others, or
government financial assistance.
Mr. Mahoney. So you are basically agreeing that the size of
the loss is so great, that current commercial market products
are so costly that it makes it unaffordable is what you're
saying? You're agreeing with that statement.
Mr. Nutter. I am not saying it's unaffordable for everyone.
What I am saying--
Mr. Mahoney. For a $42,500 a year family of four in a
$125,000 home who are paying $8,000 a year in homeowners
insurance is--somebody like that?
Mr. Nutter. As I said earlier, there is no question that
those at low incomes or fixed incomes, for whom there is an
affordability problem at the consumer level, need to be
addressed.
Mr. Mahoney. Well, at the high end, Mr. Nutter, you know,
all of my friends that don't have mortgages, you know what
they're doing? They're just not buying insurance. So the
wealthy have solved the problem by saying, ``The cost is so
high, that it's just cheaper for me to pay off my mortgage, and
not to have insurance,'' right?
Now, the other problem a person with $42,500 has is that
they have a fixed income, being a schoolteacher. But yet, when
the rate goes up by the insurance company, guess what happens
on their mortgage on a monthly basis?
So, again, the question I get back to is the fact that
let's talk about the real problem. The real problem is that we
can't get enough affordable insurance. And the CAT bond thing,
I think, is interesting. I am hoping you're right, that people
will be willing to lose their principal and get an 8 percent
return. I'm skeptical. I think that's maybe one of the reasons
why the market is so small.
But, certainly on the reinsurance side, the rates are so
great, and the return is so great, it's great for the investor,
but it does nothing for the person making $42,500 a year, and
his $8,000 premium.
Mr. Nutter. I don't think there is any question, Mr.
Mahoney, that in looking at this legislation that you and Mr.
Klein have proposed, that--it is not clear what the residual
effect is going to be at the consumer level for what you have
proposed. That's why more thought needs to be given to whether
this proposal is sufficient to have value at that consumer
level. There is no quid pro quo built in to the legislation
about what States or insurance companies can or will do to help
the consumer at the consumer level.
The State of South Carolina did something creative, by
creating catastrophe reserve funds for consumers, so that they
can build up--not unlike 401(k) or a medical savings account--
funds for that. That's the kind of thing at the consumer level
that perhaps would help.
Mr. Mahoney. Yes, and I just hope you realize that I--
everything we did with this bill was to try to make the private
markets work. At the end of the day, we know one thing, that
over 250 years, there is nothing wrong with the homeowners
insurance marketplace. And what we have to do is we have to
solve this timing event, and we have to solve the problem of
unfunded liability. That's what is creating the instability.
And the problem is that the cost of your products are so
great, and the liability is so great, that the average
homeowner can't afford it. This bill solves that problem. Thank
you.
Mr. Kanjorski. Thank you. I ask unanimous consent that the
New York Times magazine article, ``In Nature's Casino,'' dated
August 26, 2007, highlighting some of the work Dr. John Seo,
one of the witnesses here today, and a report published by the
Georgetown University, titled, ``Coastal Disaster Insurance in
the Era of Global Warming: the Case for Relying on the Private
Market,'' which Mr. Echeverria helped write, be submitted as
part of the record. If there is no objection, so ordered.
Gentlemen, I want to thank you for participating in the
second panel. I apologize that we held you over this late. As
you picked up, our two erstwhile freshmen here did a yeoman's
job in putting a bill together with a great attempt to solve a
problem not only in Florida, but for most of the coastal United
States.
And I daresay I think, as a result of this hearing, we have
moved considerably further along that line to accomplish that
end, with your assistance and aid. And thank you very much for
your testimony.
With that, 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 hearing is adjourned.
[Whereupon, at 6:21 p.m., the hearing was adjourned.]
A P P E N D I X
September 6, 2007
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