[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

                              ----------                              
                                                                   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

                              ----------                              


                      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.]


















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                           September 6, 2007

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