[Senate Hearing 110-911]
[From the U.S. Government Publishing Office]
S. Hrg. 110-911
AN EXAMINATION OF THE AVAILABILITY AND AFFORDABILITY OF PROPERTY AND
CASUALTY INSURANCE IN THE GULF COAST AND OTHER COASTAL REGIONS
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
THE AVAILABILITY AND AFFORDABILITY OF INSURANCE IN COASTAL REGIONS TO
ADEQUATELY PROTECT AMERICANS' HOMES, BUSINESSES, AND THEIR FAMILIES
FROM NATURAL DISASTERS
__________
WEDNESDAY, APRIL 11, 2007
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate /
senate05sh.html
----------
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania ELIZABETH DOLE, North Carolina
JON TESTER, Montana MEL MARTINEZ, Florida
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Alex Sternhell, Professional Staff
Sarah A. Kline, Counsel
Jennifer Fogel-Bublick, Counsel
Andrew Olmem, Republican Counsel
Jim Johnson, Republican Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George Whittle, Editor
C O N T E N T S
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WEDNESDAY, APRIL 11, 2007
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
Senator Menendez............................................. 6
Senator Martinez............................................. 7
Senator Allard............................................... 20
Prepared statement....................................... 63
Senator Reed
Prepared statement....................................... 63
WITNESSES
Bill Nelson, U.S. Senator from the State of Florida.............. 9
Charlie Crist, Governor, State of Florida........................ 11
Prepared Statement........................................... 65
Edward Lazear, Chairman, Council of Economic Advisers............ 22
Prepared Statement........................................... 69
Response to written questions of:
Senator Dodd............................................. 170
Senator Shelby........................................... 170
Walter Bell, Commissioner, Alabama Department of Insurance, on
behalf of the National Association of Insurance Commissioners.. 32
Prepared Statement........................................... 75
Response to written questions of:
Senator Dodd............................................. 173
Marc Racicot, Former Governor of Montana, and President and Chief
Executive Officer, American Insurance Association.............. 34
Prepared Statement........................................... 94
Robert Hartwig, President and Chief Economist, Insurance
Information Institute.......................................... 36
Prepared Statement........................................... 104
Response to written questions of:
Senator Shelby........................................... 176
David Guidry, President and Chief Executive Officer, Guico
Machine Works, Inc............................................. 38
Prepared Statement........................................... 125
Harold Polsky, Homeowner......................................... 40
Prepared Statement........................................... 131
Franklin W. Nutter, President, Reinsurance Association of America 43
Prepared Statement........................................... 135
Admiral James M. Loy (USCG-Ret.), Co-Chair, ProtectingAmerica.org 45
Prepared Statement........................................... 148
Response to written questions of:
Senator Dodd............................................. 178
Senator Shelby........................................... 183
Charles Chamness, President and CEO, National Association of
Mutual Insurance Companies..................................... 48
Prepared Statement........................................... 161
Response to written questions of:
Senator Dodd............................................. 237
Senator Shelby........................................... 239
Additional Material Supplied for the Record
Statement from the Property Casualty Insurers Association of
America........................................................ 242
Statement from the National Multi Housing Council (NMHC) and the
National Apartment Association (NAA)........................... 249
Statement from the National Association of REALTORS............. 253
AN EXAMINATION OF THE AVAILABILITY AND AFFORDABILITY OF PROPERTY AND
CASUALTY INSURANCE IN THE GULF COAST AND OTHER COASTAL REGIONS
----------
WEDNESDAY, APRIL 11, 2007
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:30 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order.
I want to welcome everyone to today's hearing,
``Availability and Affordability of Property and Casualty
Insurance in the Gulf Coast and Other Coastal Regions.'' Let me
first of all thank the witnesses who are appearing before the
Committee today. I want to particularly thank my colleague from
Florida, Senator Nelson, and Governor Crist for appearing at
the hearing today, and also Senator Landrieu, who was planning
to testify this morning but was unexpectedly called back to her
State on an emergency and will be unable to attend the hearing
this morning. But her statements and supporting information she
wants the Committee to be aware of will certainly be included
in the record.
Today's hearing is on an important and timely topic:
insurance in our Nation's coastal regions. Although coastal
areas comprise only 17 percent of the contiguous land area in
the United States, 55 percent of the Nation's population lives
within 50 miles of the coast; and by next year over 160 million
Americans, more than half our population, will live and work
along America's expansive coastlines. It is critical that these
Americans are able to adequately protect their homes, their
businesses, and their families from natural disasters.
We have all witnessed the devastation that nature can wreak
across our country in the form of hurricanes, floods,
tornadoes, and earthquakes. In 2005, Hurricanes Katrina, Wilma,
and Rita destroyed hundreds of thousands of homes and
businesses along the Gulf Coast. In 2004, Hurricanes Frances,
Charley, and Ivan devastated parts of Florida. In the 1990's,
the worst natural disasters were geographically diverse:
Hurricane Andrew in Florida in 1992, and the Northridge
earthquake in California in 1994, and the Red River floods in
North Dakota in 1997. Each of these caused billions of dollars
in destruction.
In order to rebuild homes, businesses, and lives, Americans
looked to, among other things, their insurers as well as their
National Government for disaster assistance. Unfortunately,
insurance coverage is becoming increasingly difficult to secure
and afford. In many coastal areas from Texas, along the Gulf,
and up the East Coast, insurers are pulling out of high-risk
areas. Others are dropping certain coverages, such as wind
storm coverage. Others are drastically raising rates and
deductibles. Let me just read two examples from recent press
articles of how these actions are affecting Americans' lives
and their livelihoods.
A Chicago Tribune article on March 20, 2007, detailed the
situation of Jeffrey O'Keefe, President of the Bradford-O'Keefe
Funeral Homes in Mississippi, on Mississippi's Gulf Coast, who
has scaled back his insurance coverage. Before Katrina, Mr.
O'Keefe paid $61,224 in annual premiums to insure his business,
and now renewing that $7 million in coverage would have cost
about $781,000. So he reduced his coverage from $7 million to
$2 million, but he is still paying $122,000 in premiums--twice
as much as before the storm. So he is paying much more for a
lot less coverage in his business.
A Palm Beach Post article from May 29, 2006, tells of Tracy
Casper, who dropped her homeowners' insurance after her
premiums became unaffordable. The article, entitled ``Insurance
premiums force tough choices,'' says, and I quote, ``Tracy
Casper felt ill Mother's Day weekend. While plenty of people
will remember opening sentimental cards, Casper remembers
opening her wind storm insurance renewal notice. Her premium
had skyrocketed 194 percent to $7,443.
Today, appearing on our second panel, we have with us
homeowner Harold Polsky, who was forced to sell his and his
wife's home in Florida because of rising insurance costs. We
are also joined by a small business owner from the Greater New
Orleans area, David Guidry, who has seen his insurance costs
rise and faces great uncertainty about his ability to shoulder
further increases.
I would like to take a moment to personally thank the
Polskys and Mr. Guidry for taking the time out of their
schedules and time out of their work to come and speak with us
at this public hearing this morning. It is critical that this
Committee understand what this issue means to people around our
country, and their testimony is going to help us do just that
this morning in real terms with real faces.
The lack of affordable insurance is a serious problem for
millions of Americans across our country. Many States have
attempted to address the lack of available and affordable
insurance by taking measures such as setting up State insurance
pools to cover wind and other damages. However, these States
cannot be expected to shoulder the burden alone given the
magnitude of the losses that have occurred over the past few
years and that may occur in the years to come. This is a
national problem--a national problem that demands national
attention. As such, it deserves examination by us as national
leaders, and it is an appropriate area in which to consider
national solutions.
Let me be clear at the outset that any Federal actions must
be carefully crafted to ensure not only that Americans have
access to affordable insurance but also that taxpayers are not
overly burdened by the risk of losses that are properly borne
by insurers and reinsurers. With that in mind, I believe we can
and should consider a number of steps to help Americans find
affordable insurance, because without insurance, their homes,
their businesses, their very futures will be put at
unacceptable risk.
There are four steps that I propose today that Congress and
the administration take to provide relief for homeowners and
businesses in the coastal areas of our Nation.
First, given the acute challenges faced by working families
and working business owners, I believe that we ought to provide
relief in the form of tax deductions for homeowners' insurance
premiums in areas where premiums have been significantly
increasing. Any deduction should be targeted to working and
middle-income families who need it most and should be capped,
both individually and on a national basis, so as not to exceed
$100 million for the year. This homeowner's insurance deduction
can give homeowners some desperately needed short-term relief
from skyrocketing premiums, and it could also help ensure that
families in hard-hit areas are not forced to move while they
seek longer-term solutions. I am not talking about a permanent
program here, but one that could provide some immediate, short-
term relief to get people on their feet and avoid the kind of
problems that I mentioned already in this statement.
Second, I believe that our Nation should increase our
investment in mitigation activities so that communities,
families, and businesses can protect against future losses. The
current FEMA Mitigation Program provides $100 million in fiscal
year 2007. This is, in my view, not enough to assist
communities around the country to truly address the risk of
loss to their residence. Mitigation efforts are critical, and
we should at least double the amount of funding so that
communities can assist individual homeowners to strengthen
their homes, can find larger-scale mitigation projects to
protect whole blocks of communities, and can help people
relocate to safer ground. Additional funds should be used for
revolving loans and grants to directly assist homeowners and
business owners who want to make needed upgrades to help
protect their properties. Increased mitigation efforts can help
to decrease insurance costs, and they can also protect
Americans from future devastation caused by natural disasters.
I talked about a revolving fund here. I think if you have a
vested interest, an equity interest in your home, then you
ought to bear some responsibility for paying back those
resources that helped you strengthen your residence or your
business.
Third, we must strengthen the National Flood Insurance
Program. The National Flood Insurance Program is essentially
the only insurer of flood risks in this country. As a result of
Hurricane Katrina, this program has borrowed funds from the
U.S. Treasury and is now over $20 billion in debt. Most of
that, I would point out to all of you here, occurred as a
result of Katrina. Actually, the Flood Insurance Program is
running fairly well. It ran into some debt problems but nothing
of the magnitude that I have just described until we were hit
by Katrina. These numbers now, the premiums alone on this,
could reach $1 billion a year fairly quickly. And, again, I
will point out here the Committee also dealt with this
legislation in the last Congress under the leadership of
Senator Shelby and Senator Bunning. We need to get back to this
right away, in my view, and deal with the Flood Insurance
Program in the country. The interest alone on this, as I said,
will reach $1 billion annually, close to half of the premium
generated in the program each year. Clearly, this program was
not designed to handle a catastrophe of the magnitude of
Katrina, as I mentioned. In order to ensure the future
availability of flood insurance, we must strengthen this
program and put it on a sound financial footing, as Senator
Shelby, Senator Bunning, and others on this Committee worked so
hard to do last year.
Last, we need to gather additional information as we
consider longer-term solutions here. Today's witnesses offer a
range of views and a number of proposals on what, if anything,
should be done at the Federal level to improve the long-term
availability and affordability of property and casualty
insurance. This diversity of opinion is on one level healthy
and positive, and I welcome it. On another level, however, it
underscores the fact that there is a lack of consensus among
stakeholders and policymakers about what national action, if
any, is appropriate in the long term to help homeowners and
businesses contend with rising property and casualty premiums.
For that reason, I believe we ought to establish a short-term
national commission of insurance experts and other leaders to
make recommendations to the U.S. Congress and to the executive
branch in very short order. I look forward to working with my
colleagues Senators Nelson and Martinez, Senators Landrieu,
Lott, and others on this effort.
The issues before us today are critically important to
millions of Americans. Recent analysis predicts that the 2007
hurricane season will be unusually active, with 17 possible
named storms, 9 possible hurricanes, and much higher than
average likelihood of a major storm hitting U.S. shores.
Today's hearing is the first step toward looking at how we can
assist in protecting Americans from natural disasters and
assuring them that when disaster strikes, they will be able to
rebuild their homes, their businesses, and their lives.
I look forward to hearing from all of our witnesses today
and to working with Ranking Member Shelby and my colleagues on
this very important issue.
With that, let me turn to Senator Shelby for any opening
comments he wants to make. Then I will turn to our two
colleagues from Florida, and to welcome Governor Crist for
being here, and I thank you this morning for joining us as
well.
Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Chairman Dodd.
Hurricanes Katrina, Wilma, and Rita caused more damage than
any other natural catastrophes in U.S. history. The aftermath
of these storms is still being felt even in my State of Alabama
and across the entire Gulf Coast. Both homeowners and
businesses are struggling to rebuild and to get back on their
feet. Available and affordable insurance is a critical part of
that effort.
In the case of the Gulf Coast, insurance has served this
function for many people. It has protected them from financial
ruin and has aided the recovery effort by injecting billions of
dollars into the region from the payment of claims on insurance
policies. Unfortunately, many were under- or uninsured, and the
increasing cost of insurance in the region has slowed the
economic recovery.
As we examine the question of the availability and
affordability of catastrophic insurance, I believe that there
are several considerations that we should keep in mind.
First, private markets are far more innovative than
Government programs. The private sector is rapidly developing
new ways to manage catastrophic risk, including the use of
catastrophe bonds, catastrophe futures products, and
securitization of insurance risk. Already, newly designed
sidecar transactions have allowed the market to significantly
expand its capacity for catastrophic risk over the past 2
years.
Second, the market is a better risk manager than the
Government always. It is worth noting that we have yet to have
a catastrophic situation inflict losses that our insurance
markets were not able to absorb. Certainly there could be a
catastrophe that our markets would not be able to handle, and
we should consider how to address such a catastrophe for the
future. In the overwhelming number of cases, however, our
insurance markets can, and they do, effectively manage the
risk.
While some in the insurance industry may favor the idea of
the Government covering the most expensive risk, I doubt
taxpayers would look favorably on paying for losses that
insurance companies can and should bear. Our experience has
shown that the Government-operated insurance programs have a
record of financial mismanagement. The program most familiar to
the Members of this Committee is the National Flood Insurance
Program. This program is not actuarially sound, was never
actuarially sound, and is currently in debt in excess of $20
billion, as the Chairman noted. Based on this experience, any
consideration of a national catastrophic insurance program
should have to address several key questions.
One, how would it ensure that its pricing is actuarially
sound and not influenced by political considerations?
Two, what types of coverage would it provide?
Three, would it cover $1 million vacation homes?
In a time of fiscal constraint, what impact would it have
on the Federal budget?
And, finally, if it is truly for catastrophic events, is it
likely that it would benefit only citizens living in one State
and a few other select areas at the expense of all Americans?
Recent events have demonstrated once again diversification
is essential in managing catastrophic risk. As devastating as
Katrina was, it would have been far worse had it resulted in a
wave of insurance company insolvencies. One of the primary
reasons insurance companies remained solvent was because they
diversified their risk. Some estimates show that around half of
the insured losses from Katrina, Wilma, and Rita were
ultimately absorbed by insurers outside the United States. This
diversification appears to have enabled U.S. insurers to bear
the financial losses inflicted by the storms. As a result,
policyholders could turn to solvent companies to pay their
claims, and they did. Some policyholders, however, were not
made whole, and we should focus on where the market failed and
examine whether the market or the Federal Government is best
positioned to fill those gaps.
As always, I support a comprehensive examination of every
facet of this very complex set of issues. This Committee has a
rich history of doing just that on a number of very difficult
topics, and I believe, Mr. Chairman, that is where that
examination should take place.
Thank you.
Chairman Dodd. Thank you very much, Senator Shelby.
We have been joined by Senator Martinez--excuse me, Senator
Menendez, although Senator Martinez is here as well.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. You are in good company, Mr. Chair. The
President did that to me, too.
[Laughter.]
Mr. Chairman, let me--and I never mind being confused with
Senator Martinez, by the way. You know, the other day I voted
for him.
[Laughter.]
Let me thank you and Senator Shelby for holding an
important hearing on the availability and affordability of
property and casualty insurance in coastal regions. We all
remember the Gulf Coast and how it was struck by several
hurricanes in 2004 and 2005, and Katrina alone caused more than
$40 billion in insured losses, including approximately $16
billion from homeowners' claims.
However, the availability and affordability of such
insurance is not just a Gulf Coast problem; rather, it is a
national problem. People in States from Massachusetts to my
home State of New Jersey, to Florida and to Texas are facing
similar situations because of hurricanes, and residents of
other States across this country face similar challenges,
whether they come from tornadoes, fires, earthquakes, or
floods.
In my State of New Jersey, we have 127 miles of Atlantic
coastline and more than 80 miles of bay side coastline. More
than 51 percent of New Jerseyans live in counties that the
National Oceanic and Atmospheric Administration lists as
exposed to hurricane risk. And as of 2004, New Jersey ranked
fifth in the Nation with $506 billion worth of insured coastal
property that is vulnerable to hurricanes. While we were not
directly hit by the hurricanes of 2004 and 2005, all we have to
do is look back to 1999 when Hurricane Floyd damaged 76,000
homes, 4,000 businesses, and 9 New Jersey counties were
declared disaster areas.
So as the Committee that is responsible for housing issues,
we all know that the American dream of owning a home has been a
powerful force throughout our history. The average family
invests more in their homes than they invest in the stock
market, the money market, or their retirement savings plans.
Unfortunately, skyrocketing insurance premiums and
insurance availability are posing real threats to the American
dream of homeownership. According to the Department of Banking
and Insurance, last year rates increased 8 to 12 percent in New
Jersey, or up to about 15 percent on average in coastal areas.
And that is for those who can get coverage, Mr. Chairman. The
fact of the matter is that several insurance companies in New
Jersey have made a business decision to stop offering coverage
in our coastal areas, and I am certainly not happy with that.
More and more homeowners in my State have been dropped or
are slated for nonrenewal by their insurance companies. A
recent report in the Asbury Park Press had Richard Ray, a 72-
year-old retiree, who lives six blocks from the ocean in
Bellmawr, receiving a letter from his insurance company in
January informing him that his homeowner's insurance policy
would not be renewed in February. The property insurance crisis
is clearly a major one. It is not isolated just to New Jersey.
Mr. Ray is one of many Americans who are now facing owning a
home without the proper and much needed insurance, and without
that, the single biggest asset that he has is exposed to
enormous risk.
So, Mr. Chairman, I look forward to working with you and
the Ranking Member to make sure that we ensure the dream of
most people, their retirement security, the essence of their
financial security, and that we can do so in a way that is
thorough and efficient and make sure that that dream remains
alive.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Menendez.
We have been joined by our colleague from Florida, Senator
Nelson, as well as a Member of the Committee, Senator Martinez.
I will begin with the Member of the Committee, and then I will
turn to Senator Nelson before we hear from the Governor.
Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Well, thank you, Mr. Chairman. I
appreciate so very much you and Ranking Member Shelby holding
this very, very important hearing. I am a little under the
weather this morning, but I could not pass the opportunity to
be here with our Governor and an opportunity to introduce him
before the Committee as well.
As has been noted, the skyrocketing cost of property
insurance is a problem that has been largely driven by the
devastating hurricanes that we have seen in the last couple of
years. And let's be clear from the outset that the skyrocketing
property insurance rates are a national concern and have the
potential to become a national crisis.
It is a national problem because 90 percent of the people
in our Nation live within 200 miles of a coastline. There is
the risk crisis because insurance companies in my State and
others have already shown that the current marketplace is not
working for them. State Farm has chosen to stop writing
business in Mississippi. This year, Allstate Floridian will
send notices to an additional 100,000 Floridans that their
homeowners' policies will not be renewed. Even in Northeast
States that have not seen recent hurricane activity, we are
witnessing a constricting of the market. We are indeed facing a
crisis in both the availability and affordability of property
insurance, and I believe the Federal Government can play a
reasonable and responsible role in helping the marketplace
better address the needs of our consumers.
We live in a world that will always have risk. In light of
past disasters and in expectation of future ones, we have got
to find a better way to spread and finance the risk. I support
the creation of a national catastrophic fund in order to
stabilize and strengthen the insurance market and encourage
proper disaster mitigation. The economic distress brought by
disasters affects us all. With a national catastrophic fund, we
have an opportunity to minimize risk nationwide and ensure our
economy is able to absorb losses from large and small
disasters.
But the looming insurance crisis will not be fixed with a
national backstop alone. This is a multilayered problem that
requires a multilayered approach. Among other things, I believe
we should provide tax incentives that encourage homeowners and
businesses to prepare for disasters. I also support increased
funding for hurricane research because, in order to better
prepare for disasters, it is imperative that we know more about
them.
I am so glad that we are meeting here today to discuss some
of these initiatives, and I am also so proud to be able to
introduce Florida's Governor, my Governor, to this Committee.
Charlie Crist is a public servant defined by his tireless
devotion to the citizens of Florida. He has been a Florida
State Senator, an Education Commissioner, and our Attorney
General. In 2006, he sought and won the Governor's seat, and on
January 2, 2007, was sworn in as Florida's 44th Governor. In
his public career, Governor Crist has worked to pass laws that
dramatically toughened penalties for the identity theft and
counterfeiting and dealing of prescription drugs. He proposed
and worked to pass Florida's landmark civil rights legislation,
the Marvin Davies Civil Rights Act of 2003, to pursue those who
engage in willful discrimination. He also won approval for
legislation targeting those who distribute illegal spam on the
Internet.
Since his first day in office, my good friend, Charlie
Crist, has tackled the issue of property insurance
affordability. One of the first things he did after becoming
Governor was call our Florida legislature into special session
to deal with the Florida insurance crisis. The State succeeded
in addressing that issue in the best way that it could, and now
Florida is rightly looking to the Federal Government to step in
and play its appropriate role.
The Governor is working tirelessly with the entire Florida
delegation in a bipartisan way to find a resolution, and I know
I speak for all Floridians when I say we are proud to bring him
before this Committee.
Before closing, I would like to add that in case you have
not seen the hurricane predictions for this season, we could
very well be in for a lot of activity. The forecast is calling
for nine hurricanes, with a prediction that five will be major
ones, Category 3 or higher. We dodged a bullet last year, but
asking for the hurricanes to miss us 2 years in a row is like
betting against the house.
Chairman Dodd, thank you for holding this hearing and
tackling this very important issue this year.
Chairman Dodd. Thank you very much, Senator Martinez. That
is the reason we are holding the hearing now, is to try and get
in front of this as early as we can and come up with some
ideas. And no one has been more insistent upon that than the
two Members from Florida in talking to this Committee, and no
one more insistent within the delegation of Florida than my
friend and colleague, Senator Nelson. I can see him coming
almost on a daily basis to me. In addition to saying hello and
wondering how my daughters are doing, he was also wondering
when we could have a good hearing on the subject matter of the
availability and affordability of property and casualty
insurance. So I am pleased to welcome Senator Nelson here.
I would point out to the Committee, I know you have another
Committee hearing in the Commerce Committee, but I want you to
know if time permits, please come and join us here on the dais
as we hear from other witnesses, and you are welcome to be a
part of this hearing as well.
STATEMENT OF BILL NELSON, U.S. SENATOR FROM THE STATE OF
FLORIDA
Senator Nelson. Thank you, Mr. Chairman, and thank you for
permitting me to be a pest with you ever since our telephone
conversation on November the 8th, the day after the election,
when it became apparent that you were going to be Chairman of
the Committee. I am grateful to you and Senator Shelby for your
kindness in having this hearing, and indeed, Senator Martinez
and I are quite honored to have our Governor here, who has to
deal with this on a daily basis.
Mr. Chairman, the long and short of what is facing us is
that the Big One is coming. In 2005, you may have thought that
that was the Big One, and we in Florida in 2004 may have
thought that four hurricanes within the span of 6 weeks,
hitting virtually every county in Florida, might have been the
Big One. But remember that Katrina was a Category 3, and it did
to the Mississippi coast what you would expect a Category 3 to
do. It just so happened on the back end of that hurricane and
the winds coming counterclockwise from the north to the south
in the city of New Orleans, that for reasons other than wind
damage, the canals filled up, the drainage canals filled, and
then emptied into the big drainage canals. The water rose. The
pressure on the sides of those canals increased, and in two
places they were breached, thus filling up the bowl of New
Orleans with water, with the consequence that we are well in
excess of that 2005 year, in excess of over $200 billion worth
of damage, of which the Federal Government's share at the end
of the day is going to be in excess of half of that. And that
was a Category 3.
The Big One is coming, and it is a Category 4 or 5 hitting
at a high-density, urbanized part of the coast, and it is not
just Florida. It could be anywhere up that Atlantic seaboard.
It could be anywhere on that Gulf Coast. Or it could be an
earthquake in San Francisco. It could be an earthquake in
Memphis. And when the Big One hits, at the end of the day, just
like Katrina, the Federal Government is going to pick up the
tab.
So the question is: How can you rationally devise a system
so that we know ahead of time and it gives certainty to the
marketplaces that Senator Shelby was talking about so that the
marketplaces can provide a commodity which is essential today?
Insurance is not a luxury. If you want to own a home, you have
got to have insurance because you cannot get a mortgage without
insurance. And, oh, by the way, three major industries in this
country--construction, real estate, and banking--all depend on
homeownership and home building. So everything fits together.
So then when you look at it, you find out there is no
consensus. The insurance industry is split nine ways to Sunday.
The insurance industry is in a war with the reinsurance
industry. The reinsurance industry is saying that the private
marketplace can solve the problem, and it cannot on risk of
this magnitude. When the Big One hits, it is a $50 billion
insurance loss storm, minimum. The private marketplace cannot
supply that. There is no one State that can withstand that kind
of economic hit, and there is no one insurance company or
reinsurance company or series of reinsurance companies that can
withstand that kind of hit.
Therefore, that brings us to the table today. What is the
appropriate role? Well, with everybody so split and with the
fact that the Federal level of Government has discharged to the
States ever since the 1930's, through the McCarran-Ferguson
law, the responsibility of the regulation of insurance, then
the question is begged to be answered: How do we build that
consensus? And it is the bill that Senator Martinez and I and
others--most of them the Gulf States, both Senators from
Mississippi, Senator Landrieu are signed on--that takes the
model of what we did in Florida in the mid-1990's, inheriting a
paralyzed marketplace, not just in South Florida where
Hurricane Andrew hit---and it was a Category 4 that hit not the
high-density, urbanized area. It hit South Dade County, a
relatively lessened urbanized area. And yet the paralysis of
that marketplace spread over the entire State.
The model that we used, we brought people together on a
consensus-building--then it was called the Academic Task Force.
It was headed by the presidents of the State universities. They
went out, they hired the best staff. They sought people's
opinions. They came together. They made 16 recommendations to
me and to the Governor. We then went to the legislature, and we
adopted 15 of those 16 recommendations and, indeed, restored
the private marketplace.
What is that role? Senator Martinez and I have filed a six-
pack. There is an additional bill that would be a seventh that
we ought to look at, which is what is the Federal legislation
that would incentivize the States to form a regional compact, a
regional catastrophic fund. We tried that back in the 1990's.
The rest of the States did not want to participate. Florida had
to do it on its own. But Florida saw from the 2004 experience
of four hurricanes that all of that catastrophic fund, which is
a reinsurance fund, was depleted.
And so what we are facing is the question of what is the
appropriate Federal role when, in fact, at the end of the day,
on the experience of Katrina, the Federal Government is going
to pay a lot of the tab. And I am just as pleased more than I
can tell you, Mr. Chairman, that you have said that you support
this consensus-building bill, because you will hear in the
testimony today from all these experts there is no consensus.
And there is no way, no idea of how you would even build a rate
structure on a national catastrophic fund. We have got to
determine that.
Should we change the Tax Code so that insurance companies
can reserve for catastrophe without having to pay taxes on it
and fence it off? But there is no consensus on that within the
industry.
Should we change the Tax Code to reserve an individual
person, a homeowner, to reserve for catastrophe without paying
taxes on it? There is no consensus on that.
And all the other bills that Senator Martinez and I have
filed in this six-pack, there has to be a high-level national
emergency commission on catastrophe. And maybe at the end of
the day you are not just looking at hurricanes, but you are
looking at earthquakes. And who knows? Maybe at the end of the
day, you might even be looking at the question of floods, all
within what is the proper Federal Government role to backstop
these huge natural catastrophes that, in fact, are so
catastrophic economically as well as personally.
So it is my pleasure, Mr. Chairman, to introduce our
Governor, who has taken a very strong leadership role in this,
because people at home are hurting. They cannot afford their
homeowner insurance premiums, and when that is combined with
taxes in Florida, the homeowners' real estate taxes, people are
being eaten out of their house and their home. And I wanted to,
along with Senator Martinez, welcome our Governor, Governor
Charlie Crist.
Chairman Dodd. Well, thank you very much, Senator Nelson,
for that, and Senator Martinez as well, both of you, for
introducing your Governor. We are pleased to have him as our
lead witness this morning.
Charlie Crist was elected in November 2006, served as the
Attorney General of your State prior to that, and we are
pleased that you are here this morning to talk about this issue
as it affects your State and the Gulf States as well. So,
Governor, welcome.
STATEMENT OF CHARLIE CRIST, GOVERNOR, STATE OF FLORIDA
Governor Crist. Thank you very much, Mr. Chairman, and
thank you, Senator Shelby as the Ranking Member, and Members of
the Committee. I thank you for the opportunity to testify here
today regarding the availability and affordability of property
and casualty insurance, and I applaud you, Mr. Chairman, for
your leadership on this critical issue. I want to thank my
friends, Bill Nelson and Mel Martinez, for their leadership on
this issue as well.
A few weeks ago, our Senators introduced an array of
legislative options addressing insurance reforms. As you know,
they call it the ``six-pack,'' and it may have a seventh. I am
so proud to work with Senators Nelson and Martinez, along with
our Florida Members of the House of Representatives, to move
toward the creation of a national catastrophic insurance fund.
The role of the Federal Government in protecting the
American homeowner from skyrocketing homeowner's insurance has
been debated for many years. Conceptually, the idea remains the
same. The debate now focuses on the millions of Americans
impacted by increased property insurance rates. Traditional
insurance market mechanisms are not adequately managing
catastrophic risk, and the financial strain on consumers can be
felt from coast to coast.
Hurricane Katrina reminded us all of what a natural
disaster can do, not only to a specific region but to our
Nation as a whole. No specific area of our country is immune to
natural disasters or exempt from paying the recovery costs
thereof. In the past, congressional action created a bridge to
homeowners in the form of national flood insurance. Congress
has the opportunity once again to provide homeowners relief in
the form of a national catastrophic insurance plan.
During my campaign for Governor last year, I traveled our
great State, and I listened to the concerns of the people of
Florida. Floridians are being forced to choose between paying
skyrocketing insurance premiums or selling their homes. I have
heard from many Floridians who are worried that soaring
premiums are threatening their chance to raise their family in
a Florida home. This is not the American dream.
The hurricane seasons of 2004 and 2005 produced eight named
hurricanes that hit our Florida, costing the State $33 billion
in property loss. As a result, the number of carriers providing
property insurance coverage has been on the decline, and market
concentration has diminished as well. Florida now relies on a
greater number of carriers, often smaller, recently formed
domestic insurers that provide coverage, rather than a handful
of nationally known insurance companies. The dramatic increased
cost of reinsurance, increased projected cost of building
materials and labor, and projection of future catastrophes have
all contributed to significant premium increases paid by
Florida policyholders.
Commensurate with these issues, Florida's Office of
Insurance Regulation, headed by Kevin McCarty, and in
conjunction with our new CFO, Alex Sink, has received a
substantial increase in the number of rate change requests from
insurance providers. Floridians understand the risk of living
in our beautiful State. Our State has made immense progress in
reinforcement efforts and stricter building codes to protect
our citizens when the next storm surely will come. However,
these efforts are not enough to convince the insurance industry
that Floridians are a worthy risk.
As Florida's new Governor, I have heard directly from our
people that immediate insurance relief was needed. The people
of Florida cried out. They needed help, and we answered their
call. Earlier this year, the Florida Legislature did meet in a
special session, seeking solutions to runaway property
insurance rates. We worked together in a bipartisan way. We
focused on results, not on politics or the process. Together,
we achieved a momentous step forward in reducing property
insurance rates for our people.
The legislature passed meaningful property insurance
reform, providing much needed relief to the people of Florida,
and I must at this time thank our Senate President, Ken Pruitt,
and our Speaker, Marco Rubio.
The work of the Florida State Legislature has begun to
address the insurance crisis in our State, but Federal action
is also necessary. I implore Congress to take the next step to
ensure the affordability and availability of property
insurance. I know that each of you has chosen to serve the
people of your State, with the end goal of improving their
lives and their well-being. Like me, you want your citizens to
have the opportunity to own a home without the worry of losing
it to out-of-control property insurance rates.
Mr. Chairman, you have been a leader on consumer issues in
Connecticut and in our country, and I applaud your efforts. Let
me please be clear. This crisis is not an exclusive issue for
Florida. Many other States are also facing insurance crises.
In February, I had the privilege of working with my fellow
Southern Governors, including Governors Barbour, Riley, and
Kaine of Virginia, in drafting a resolution urging our Congress
to create a national catastrophic fund. Governors throughout
our Nation deal firsthand with the impact of natural disasters,
as do you. I am also proactively working with Governor
Schwarzenegger of California, Governor Spitzer of New York, and
Governor Perry of Texas to advance a national fund proposal.
Governors understand, as you do, the need for such a program
and look forward to working with you to formulate this
legislation, much like as Senator Nelson and Senator Martinez
have already done in their forward-thinking approach.
The problem of insurance availability and affordability in
the Gulf Coast area has been widely publicized, but it is a
problem that is now affecting other States as well. Mr.
Chairman, as you probably know, the Connecticut Department of
Insurance recently conducted a study of its homeowners'
insurance market and determined that insurance availability
within 1,000 feet of the shore is difficult to find in the
traditional market today. Coverage that is available typically
is 2 or 3 times more expensive now and often available only
through a specialty market. Similar problems are being felt
from Cape Cod to the Carolinas. The response from insurers is
aimed at coastal exposure, but it ignores the very real
possibility that the next major catastrophe will not even touch
a coastline. Our country has a relatively brief history, but in
that time virtually every region of the country has experienced
some form of catastrophic event. The hurricanes in the Gulf are
only our most recent reminder of the risk from natural
disasters, but we would be naive to think that they are the
last. We are all vulnerable to natural disasters. Most of the
States you all represent have been impacted by hurricanes or
tornadoes or wildfires or blizzards or drought. Whether you
live in Connecticut, Alabama, New York, Hawaii, New Jersey,
Ohio, Kentucky, North Carolina, or any other State, we are all
at risk.
That is why it is time, I believe, for Congress to move
forward and listen to the American people and create a national
fund. A Federal catastrophe fund would provide protection for
American homeowners throughout the country. A national program
would spread the risk across our country, thus strengthening
our insurance markets. Capital for the plan could come from a
portion of the property insurance premiums already collected by
insurance companies. The funds could grow tax free, provide the
financial capability to cope with the catastrophic risk, and
allow affected regions the ability to recover more quickly from
the natural disasters they may suffer. This Federal backstop,
as Senator Nelson refers to it, for insurers is an essential
step to addressing our insurance crisis.
The situation is not just an issue of lowering insurance
rates to our citizens. It is also an issue of using taxpayer
dollars in the most efficient manner. Our current policy for
managing the devastating effects of catastrophic natural
disasters relies heavily on our Federal Government. Consider
the $110 billion allocated so far to facilitate recovery and
rebuilding following Hurricane Katrina. As generous as
compassionate as the American people are, this current system
leaves much to be desired.
The subject we are discussing today is not new. What are
new are the insurance industry's record profits, to the tune of
$68 billion in 2006 alone. That is according to a Wall Street
Journal article from January 23, 2007. The insurance industry
as a whole has enjoyed lavish prosperity in recent years. I
believe it is time for the American people to participate in
that prosperity by way of reasonable insurance costs.
Our Nation's response to natural disasters is one of
defense. Mr. Chairman, the Committee has a unique opportunity
to play offense by changing the mind-set within the Government.
This change can be made by creating a national catastrophe fund
that will ultimately protect our bosses--the American people.
The time is now to bring all the stakeholders to the table
to do what is right. I ask you to refocus our national effort
away from large-scale funded recovery after a disaster to
proactive prevention. A national catastrophe fund will create
this transition. Clearly, this practice makes the issue a
national one, not only a local or a regional problem.
For example, it is estimated that the Great Lakes and
Plains States will contribute approximately $26 billion to
Katrina initiatives. However, these tax dollars are not risk
based, and they will leave little legacy that guarantees relief
for the next natural catastrophe, regardless of where that
natural catastrophe would strike.
A national plan would also raise the bar for disaster
preparedness and recovery. By encouraging States to adopt
stronger building codes and emergency response capabilities, we
would undoubtedly mitigate future economic damage while
developing a cultural preparedness that will create a safer
environment for all of the citizens of the United States.
Today, we must ask ourselves: What will make insurance more
available and more affordable for the people that we all serve?
I believe a national catastrophe fund will achieve that goal.
I thank you again for holding this hearing, Mr. Chairman
and Senator Shelby, for inviting me here today, and for your
continued interest and leadership on this crucial issue. I look
forward to working with Congress to solving the insurance
crisis facing our citizens. I thank you for your time and for
your attention and for your compassion, and I want to again
thank my colleagues and my friends, Senator Bill Nelson and
Senator Mel Martinez, who serve the people of our State so ably
and so well.
Thank you, sir.
Chairman Dodd. Thank you very much, Governor, for your
testimony. We thank our colleagues as well for their
observations.
Let me just ask one question, if I can, of you, Governor,
and that has to do with--and I think you referenced this in
your comments. What has happened to the presence of private
insurers as a result? Some have suggested that as a result of
the Cat fund which was established in the State that the
private industry has felt challenged by that and the result has
been one of the contributing factors for them not staying in
the State? What evidence do you have that that is the case?
Governor Crist. Well, I think the opposite is the case now,
Mr. Chairman. What is happening is we have expanded that
catastrophe fund as it relates to Florida-specific. That is
intended to encourage more insurers to come to the State, and
they are coming.
As I mentioned in my prepared statement, many of them are
domestic, and some of them are smaller companies. But it is
creating greater competition and more choice for the consumers
of the State of Florida.
Recently, one company offered new rates that are 34 percent
lower than they were just a year ago. Two other companies'
rates are more than 20 percent lower than they were just a year
ago. And additional companies, one in particular wants to bring
$100 million of coverage to our State that did not do so before
this special session we had just in January.
Chairman Dodd. So you actually think it is having the
effect of attracting insurance companies.
Governor Crist. I believe that it is, and we also have in
Florida something that may be unique. We have a Citizens
Property Insurance Company that is run by the State. This
company came into being a number of years ago as a result of
the catastrophes that we were facing. It offers greater
competition. It was set up originally to be the insurer of last
resort, required by law to only provide the highest rates. The
special session changed that law. They now can compete. And
what the old threat used to be in Florida by the insurance
industry was, because the old mind-set used to be, the only way
you can improve the insurance market in your State, Florida, is
to allow rates to increase so you will attract more.
Well, that is exactly what was killing our citizens, were
the increased rates. Senator Nelson was right in his comments,
the double whammy of pocketbook issues in our State, our
insurance premiums, as well as property taxes. And we are
working on both.
But this insurance company that is run by the State now can
compete, and what insurance companies used to say to us in the
private market is, If you do not allow us to raise our rates,
we will leave your State. Well, we do not want them to leave,
but if they leave now, we have protection for our people, and
we owe them that.
Chairman Dodd. How much is in your fund in the State? And
can it deal with the kind of situation that Senator Nelson
described?
Governor Crist. Not a $50 billion situation, but it is up
to about $9 billion now, and we intend to increase it. That is
why we feel that, you know, this is sort of a mosaic and there
are lots of pieces to the puzzle across the board on this issue
that will benefit Connecticut, that will benefit Florida, that
will benefit Alabama, and every State in our country.
I had the opportunity--I guess you could put it that way--
to be in California at a World Series game and witnessed the
earthquake that stopped that game. Any State you are in in our
country can suffer from a natural catastrophe. That is why I
think it is so important that you have been kind enough to hold
these hearings today.
Chairman Dodd. Senator Shelby.
Senator Shelby. Senator Nelson, one of the concerns I have
about establishing a national catastrophe fund is that it may
increase the chances of financial crisis following a natural
disaster. Under your legislation, the national catastrophe fund
would provide reinsurance to State insurance funds. Just as the
Flood Insurance Program has failed to charge actuarially sound
rates, the national catastrophe fund is very likely to
underprice the reinsurance it would provide to State insurance
funds. This is a concern of mine. This price break would likely
be passed on by the State funds to their customers in the form
of rates that are not actuarially sound. This could have two
results.
First, because State insurance funds would charge below-
market prices, they would underprice private insurers and
obtain a significant share of the insurance market in their
States. As a consequence, insurance risk could become
concentrated in State insurance funds.
Second, the failure of the State insurance funds to charge
actuarially sound rates, Governor, means that they would
probably not collect enough premiums to cover their
obligations. Accordingly, the net effect of a national
catastrophe fund would be to concentrate insurance risk in
undercapitalized State insurance funds. When a natural disaster
hits a State--Florida, Alabama, or anywhere--risk will not be
spread among numerous well-capitalized firms in the private
market, but concentrated in one financially impaired State
fund.
Senator Nelson, do you have any concerns that your
legislation at this point--and I know it is subject to change--
would concentrate too much risk in State insurance funds? Do
you understand my concern?
Senator Nelson. Yes. Senator Shelby, I see problems with
the national catastrophe fund, but not in the way that you have
stated them, and----
Senator Shelby. Why?
Senator Nelson. And I am going to answer that, but let me
just say that the six-pack of bills that we have filed is
purely to get the ideas on the table. What I have urged you for
the last year, and the Chairman more recently, is to get that
emergency commission going so that consensus can be built,
because nobody has all of the answers and, in fact, if they do,
they do not want to share them or they want to just protect
their turf. And that is what is going on in the industry today.
Now, what I see, the biggest problem with a national
catastrophe fund is not what you have said; it is the fact that
you are going to have a Star Chamber up there setting rates
that will not have the accountability to the people. And
whenever you have that, that is not a good thing.
Senator Shelby. Let me stop you, though. Do you believe
that any fund we set up should be actuarially sound? You know
the Flood Insurance Program is not actuarially sound. It is in
debt of $25 billion now. Do you believe it should be
actuarially sound?
Senator Nelson. In theory, yes.
Senator Shelby. In theory? What about practice?
Senator Nelson. Well, in practice. Take, for example, the
National Flood Insurance Fund. It would be great if you could
have it actuarially sound, but that means you are going to have
to hike all of the premiums, and politically that may not be
available to you and to the rest of the Senate and to the
Congress. Therefore, the Federal Flood Insurance Program has
been subsidized by the Federal Government for the last number
of years since its existence. That is a perfect example of a
response to your question about these other funds.
Now, what these other funds do, if Florida had not had that
catastrophe fund after the four hurricanes in 2004, it would be
``Katy, Bar the Door''; the insurance companies would have fled
the State of Florida. Is Florida's fund actuarially sound, to
take your question back? The answer to that is technically no,
because when the fund is drained, it under Florida law goes out
to assess the people of Florida through the ratepayers of
insurance policies.
Senator Shelby. Well, my concern is that we should not dump
everything, including the risk in my home State on the coast,
on the taxpayers, as you well know.
Governor Crist, you recently enacted----
Senator Nelson. May I respond to that?
Senator Shelby. Yes, go ahead.
Senator Nelson. But the fact is that your taxpayers from
northern Alabama that do not have much of the risk that your
people from the south coast of Alabama do, they are paying it
because, remember, in excess of $100 billion for Katrina has
been paid by the National Government.
Senator Shelby. By the taxpayers.
Senator Nelson. By the taxpayers.
Senator Shelby. I understand that.
Senator Nelson. So at the end of the day, the Federal
taxpayer is paying it now. We ought to devise a system----
Senator Shelby. Just because the taxpayer is paying it now,
if we are looking at a future catastrophe fund, shouldn't we
make that, the best we can, actuarially sound?
Senator Nelson. And that is the reason for the consensus
commission.
Senator Shelby. OK. I hope you are on the right track;
otherwise, this legislation will go nowhere.
Governor Crist, your recently enacted insurance reforms
greatly expanded the financial obligations of Florida's insurer
of last resort and largest property insurer, Citizens Property
Insurance Corporation. Citizens was allowed, as I understand
it, to cover policyholders who could obtain insurance in the
private market and to write additional lines of insurance. I
think you mentioned this earlier.
Governor Crist. Yes, sir.
Senator Shelby. Your reforms also expanded the amount of
reinsurance the State Hurricane Catastrophe Fund could provide
to approximately $32 billion. Is that correct?
Governor Crist. I think so.
Senator Shelby. Yet despite the expansion of the financial
obligations of Citizens and the catastrophe fund, your reforms
did not increase the financial resources available to cover
these obligations. Your reforms reduced the rate Citizens
charges, and the catastrophe fund, as I understand it, has
approximately $1 billion in cash. Critics have said that your
insurance reform plan was not fiscally sound and that Florida
has nowhere near enough money to cover all the promises made to
insurers and taxpayers. The solvency of both Citizens and the
catastrophic fund now depend on the levying of assessments on
all Florida policyholders following a hurricane or an incident.
However, a recent study found that the assessments that would
have to be levied in the event of a real disaster on all
policyholders in Florida to cover claims following a
hurricane--not before, but following--would range from
approximately $1,700 per household for a moderate hurricane to
$14,000 per household for a major hurricane.
Governor, if faced with levying such assessments, is it
possible that you would seek to waive them and look for other
sources of funding, such as us, the Government, to cover the
shortfall?
Governor Crist. Thank you for the question, Senator. Some
of your comment was not accurate. We have more in the fund. It
is about----
Senator Shelby. Correct the record if we were wrong.
Governor Crist. Sir?
Senator Shelby. You said it was not accurate. Correct the
record.
Governor Crist. I was about to.
Senator Shelby. OK.
Governor Crist. Yes, thanks. It is about $9 billion that we
have in reserve.
Senator Shelby. Not $1 billion?
Governor Crist. Right.
Senator Shelby. Not $1 billion in cash but $9 billion in
reserves, that is your----
Governor Crist. It is my understanding we have the ability
to pay $9 billion, yes, sir.
Senator Shelby. OK.
Governor Crist. And it almost sounds like you are making my
case for a national catastrophe fund by way of explanation of
how at-risk many States, including yours, could be.
Senator Shelby. Absolutely.
Governor Crist. And that is why I think it is so important,
Mr. Chairman, that we have this discussion. Florida has been
responsible and we have responded to the needs of our people,
just as you would respond to the needs of the people of
Alabama. And what we have done in a responsible way is provide
for a market and a climate and an opportunity to lower rates so
that people do not have to sell their homes, that they can stay
in the Sunshine State, if they wish, and not risk their homes
as a result. We have done it in a way that is prudent, that is
sound, that is responsible, but as I said earlier, there are
many pieces to the puzzle. And we look to our friends at the
Federal level because we are a union, we are a United States,
and we all have a duty to each other. And that is what I am
imploring you to do today, is give us a hand and help us, too,
as we would help Alabama.
Senator Shelby. Well, I think you are right in that regard.
We are a union. We are in this together. But, on the other
hand, if we have learned one thing from the Flood Insurance
Plan--I think it came into being in 1968, more or less--it is
insolvent today. It was always actuarially unsound. And if we
are ever going to learn a lesson, we ought to learn a lesson
there. And as we move forward in this area, whatever we do, we
ought to make it as actuarially sound as we can, and we should
look, I believe, at insuring million-dollar homes--a lot of
times they are a third home--you know, at a cut rate, at a
subsidized price, flood insurance, for example, and other
things.
Governor Crist. May I respond to that, Mr. Chairman?
Senator Shelby. Yes.
Governor Crist. Thank you. Well, I do not disagree with
some of your comments, but I think it is important not only to
look at the Flood Program but look at the Katrina experience
and let us learn from it. As Senator Nelson ably pointed out,
the Federal Government is giving the money anyway. It is
already happening. And it just strikes me from a common-sense
point of view that if we can do it proactively before the storm
or disaster would hit, we can, you know, have premiums come in,
we can earn interest in this fund, instead of shelling out the
money that the taxpayers end up paying ultimately anyway.
Wouldn't that be smart?
And the final point that I will make--and then I will be
quiet, Mr. Chairman--is that we have a national defense in this
country to protect us from foreign invasion. That makes sense,
and it is right and it is just and it is appropriate. Wouldn't
it make as much sense to have a fund to protect us from natural
disaster as well? Don't we have a duty to protect our people,
whether it is from a foreign invasion or from a natural or
catastrophe? Our duty is to protect and serve, and I think we
share that duty.
Senator Shelby. I would just respond to that. I think we
share a lot of views in this regard. My thought is to make it
as actuarially sound as we can.
Governor Crist. I do not disagree.
Senator Shelby. Not open-ended for the taxpayers to take a
hit.
Thank you, Mr. Chairman.
Senator Nelson. Mr. Chairman, if I could just add one
comment, Senator Shelby, you may want to consider one of the
other ideas that is out here on the table, which is a regional
catastrophe fund, so that those who are most at risk on that
particular natural catastrophe would create a regional
catastrophe fund that would insure--in effect, a reinsurance
fund insuring against that catastrophe. Then you pinpoint more
the risks to the ratepayers and can make it, what you said,
actuarially sound.
Senator Shelby. Well, I think we should leave everything on
the table as we go forward, but we should go forward.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Senator Shelby.
Let me just make one additional comment. I see Senator
Allard is here as well, and he may have some questions for the
Governor and our colleagues.
One of the things that occurs to me, as I am listening to
this idea of the national fund or regional fund, we have to be
careful what we wish for in some cases, because certainly what
will come with--one of the problems with the Flood Insurance
Program was it was open-ended. Basically, it was a check-
writing process, no matter what the circumstances were. And as
I pointed out in the opening comments here, but for Katrina,
actually the Flood Program was working relatively well. Katrina
blew it out of the water, and for those reasons, we are
probably going to have to do what the Committee did last year
under the leadership of Senator Shelby, and that was to have a
forgiveness with FEMA; otherwise, it is just never going to be
paid, not at $20 billion, $25 billion.
But I can see when you come along with either a regional or
national fund, all of a sudden watching a national regulator
start dictating to States and localities where building can
occur, under what circumstances, a variety of other steps that
I suspect may run into a bit of a buzz saw when you get the
National Government mandating now property needs to be managed
and handled in a way that--I can just hear the reaction if that
happens to some extent.
So as I think about this option, also be conscious of the
fact that if you are asking for a national program to provide
financial relief, expect as well that national entity to
probably have some very rigid guidelines and standards that the
States may find a little difficult to accommodate, particularly
when you consider the attractiveness of some of our coastal
States and the appetite to have homes and businesses located in
some of the most beautiful areas but some of the most
vulnerable areas as well to natural disasters.
And so as we look at this, we need to keep conscious of the
possibilities of having some negative reactions to the kind of
restrictions that may be placed on what happens under local
zoning and planning.
Senator Allard, do you have any comments or questions you
want to make?
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Well, Mr. Chairman, I have an opening
statement I would like to make a part of the record, if I
might, and then I do have one brief question.
Chairman Dodd. Yes. Certainly, go ahead.
Senator Allard. You have talked about how property
insurance rates are skyrocketing out of control. I guess you
made that comment. Did we have some sort of artificial
restrictions on how fast insurance rates could increase on
property and flood insurance and whatnot prior to Katrina? Did
we have any cap at all that restricted the increase in property
rates at all?
Governor Crist. Not that I am aware of, no.
Senator Allard. I just wanted to check and make sure of
that because if we had some artificial restriction on how those
rates increased prior to the floods and whatnot, then all of
the--if those were removed for some reason, then you could have
an artificially high increase. That is the point I am trying to
get to.
Governor Crist. That is a great question. No, sir.
Senator Allard. OK. So this is strictly just a market
phenomenon that has occurred in that area down there, and the
rates have increased, according to the insurance companies,
based on the risk.
Governor Crist. Dramatically. One of your colleagues--if I
might, Mr. Chair, one of your colleagues, Senator Menendez,
indicated that they have risen not only in Florida but in his
New Jersey as well.
Senator Allard. And why has the increase--I can understand
the increase in Florida, Louisiana, and whatnot. But why? Is it
that New Jersey is along the coast?
Senator Martinez. The next panel for that one.
Governor Crist. Yes, the next panel will probably tell you,
but my guess would be to make money.
Senator Allard. OK. But how do they justify that increase?
Governor Crist. I have no idea, and I----
Senator Allard. OK. We will ask that of the next panel.
Thank you very much, Mr. Chairman.
Chairman Dodd. Thank you very much. Governor, we thank you
very much for your presence here today. It means a lot to us to
have you here, and you have spoken eloquently on behalf of your
State, and as your colleagues, the two Senators do, with great
frequency, as I mentioned earlier. And the reason we are
holding this hearing is because this is a national problem, and
as you point out accurately here, natural disasters hit all of
us at one point or another. I pointed out earlier that had some
of these storms that you have described and Senator Nelson and
Senator Martinez have described, had they moved a few degrees
west as they went up the coastline, they could have had some
devastating implications on the Northeastern States. I
certainly recall back as a child growing up in Connecticut the
huge storms that we had hit. The 1938 hurricane, I have a
brother that was born in the middle of the 1938--they did not
call it a hurricane in those days. They called it a sandstorm,
I think, as they came through. We did not know how to predict
them. It wiped out huge areas of the Northeast in 1938. In the
1950's as well, we had a number of big ones that came through.
And you pointed out the natural disasters that hit other parts
of the country as well.
So this is an important hearing, and obviously your State
has been on the front lines of this given the devastation that
has occurred in Florida, and, of course, Katrina and the
devastation that occurred in the Gulf States. So we want to
take some responsible actions.
The commission idea is one that I endorse, and I would like
to have it move fairly quickly. As I mentioned to the former
Chairman here, the possibility of combining that with the
reform of the Flood Insurance Program, to mark up those bills
in the next few weeks to be able to move aggressively so that
we could get a commission to come back quickly with some
recommendations as to how we might pursue this, on the
assumption we can come up with some consensus here with
responsible people from the insurance industry as well as
others, to give us some ideas on what could be done.
So I thank you for the suggestions and ideas. I mentioned
several other points that we could possibly move on, the tax
relief as well as the issue of a mitigation program here, a
revolving fund where people would have to pay back but,
nonetheless, provide some low-cost loans to people to be able
to take steps to protect their homes and businesses against the
problems of natural disasters.
So there are a number of things that I think we would like
to get moving on, and your testimony here today helps
crystallize those ideas. So we thank you immensely for coming,
and I thank both of my colleagues for their presence.
Senator Martinez obviously will be here. Senator Nelson,
you are more than welcome to join us on the Committee as well.
Senator Nelson. Thank you, Mr. Chairman. Thank you all,
Senator.
Chairman Dodd. We will move to our next witness, Dr. Edward
Lazear, who was sworn in as the Chairman of the Council of
Economic Advisers in February of 2006. Before coming to the
Council, Dr. Lazear was a member of President Bush's Advisory
Panel on Tax Reform. He is on leave of absence from Stanford
University, where he is the Jack Steele Parker Professor of
Human Resources Management and Economics, and the Morris Arnold
Cox Senior Fellow at the Hoover Institution. We thank Dr.
Lazear for coming to the Committee.
Doctor, thank you, and I say this to all of our witnesses
this morning. Your full statements and supporting documents and
materials will be included as part of the record. If you can
keep a bit of an eye on the clock here so that we try and stay
within time here so we can get to some questions and get to our
next panel. Thank you very much.
STATEMENT OF EDWARD LAZEAR, CHAIRMAN, COUNCIL OF ECONOMIC
ADVISERS
Mr. Lazear. Chairman Dodd, Ranking Member Shelby, and
Members of the Committee, thank you for the opportunity to
allow me to testify today. Your Committee is tackling an
important and difficult set of issues in this hearing. I
believe that we share similar goals. We all want homeowners and
businesses to have insurance against events that are beyond
their control. The question is how to provide it.
When Government gets into the insurance business, it
undermines private insurance supply, and then individuals can
only rely on the Government for insurance. Governments are not
very good at providing insurance and should be wary about
crowding out the private sector, leaving individuals with no
recourse other than to rely on the Government.
The administration opposes legislation to create new
Federal programs to backstop catastrophe insurance. There are a
variety of forms that the backstop could take. We believe that
none of these approaches would be helpful, nor are they
warranted. They would create primarily three kinds of problems
for the economy:
First, the Government insurance would displace insurance
provided by the private market. For the most part, that market
is healthy, and were it not for other forms of interference,
the market could operate effectively to insure risks faced by
homeowners and businesses.
Second, a Federal program would undermine economic
incentives to mitigate risk because the program would likely
distort rates from their actuarial values. Individuals would be
encouraged to take on risks that are inappropriate,
specifically putting themselves in harm's way because they do
not bear the full expected cost of damages incurred.
Third, the Federal backstop would mean that all taxpayers
nationwide would subsidize insurance rates for the benefit of a
relatively small group of people in high-risk areas. The
general taxpayer would pay for actions over which they have no
control. Those who can avoid the risk would be passing the
costs onto others, creating a system of distortion and
inequity.
For the most part, the national insurance industry is
healthy today, despite the record $57 billion estimated in
insured losses incurred as a result of the 2005 hurricane
season. Industry-wide capital available to cover future losses
actually increased during 2005. Although it is true that
Florida, North Carolina, and parts of Mississippi, Louisiana,
and Alabama are experiencing difficulties with insurance
availability, much of this can be traced to certain regulatory
actions at the State level.
First, some States have used regulation to suppress prices,
which has the effect of making insurance unavailable where it
might be most needed. The role of State regulation should be to
protect consumers from fraud and inadequate risk management by
insurance companies, but States sometimes use their regulatory
power to control prices. This discourages insurance companies
from voluntarily providing insurance in those high-risk areas
where unregulated rates would naturally be the highest.
Insurers need to charge rates that are high enough to allow
them to cover expected losses and purchase reinsurance or
maintain surpluses to cover catastrophic losses.
Second, a national catastrophic risk insurance plan would
likely distort rates and undermine economic incentives to
mitigate risk. The experience of the National Flood Insurance
Program and the steps needed to reform it illustrate some of
the challenges that would likely arise in a broader Federal
natural catastrophe insurance program. The National Flood
Insurance Program plays an important role in helping homeowners
insure against flood losses, but it needs to be further
reformed and should not be expanded.
Reforms passed in the 2004 authorized a pilot program to
remove some of the worst repetitive loss properties from the
flood insurance rolls, and the President's fiscal year 2008
budget calls for doubling the funding of this program.
Furthermore, the administration has proposed several principles
for improving the National Flood Insurance Program, including
making premiums more flexible and actuarially sound. We look
forward to working with the Committee on developing these
principles. However, the challenges of this program show it
does not serve as a good model for broader Federal catastrophe
insurance programs.
National catastrophe risk insurance would displace private
insurance and undermine the economic incentives to mitigate
risk. It would force all taxpayers nationwide to subsidize
insurance rates for the benefit of a relative small group of
people in high-risk areas. This would be both costly and unfair
to taxpayers.
Returning to the example of national flood insurance, the
financial consequences of passing claims on to the general
Federal taxpayer is no minor issue. The National Flood
Insurance Program has borrowed $16 billion from Treasury to
cover the 2005 losses. The cost will in large part be borne by
taxpayers nationwide, many of whom are not exposed to flood
risk and do not receive coverage under the program. The
insurance industry is healthy, and the private sector is well
equipped to provide insurance for hurricanes and other natural
catastrophes, but State regulators and the Federal Government
must allow the private market to function. Therefore, the
administration believes that a Federal program to provide
catastrophe risk insurance at the Federal level, although well
intentioned, would have significant adverse consequences to the
economy and would be unfair.
I welcome your questions.
Chairman Dodd. Thank you very much, Doctor, and we
appreciate your being here today. I should point out you have
very strong statements about the opposition to a Federal
program to provide catastrophic risk insurance. Is there
anything you believe the Federal Government should be doing in
this area?
Mr. Lazear. I think that the Federal Government should
encourage the private sector to be active in providing
insurance, and to the extent that the Federal Government is
involved in insurance--for example, through the National Flood
Insurance Program--we have to be careful that we make sure that
we charge the right rates and that we do not drive out other
insurers who could be competitive. And let me be specific
because I know Senator Shelby, who talked about this earlier,
has strong views on this as well.
The last thing I think we want to do is create a structure
where we induce people to locate in harm's way. The best way to
avoid doing that is to make sure that we charge people the
actuarially fair rates for being in those areas. That said, we
have a program in place right now; the National Flood Insurance
Program is in place right now. We certainly do not believe that
we can pull the rug out from under people who have relied on
that program, and as a result, we have thought about ways to
reform this, and I think some of the positions that the Senator
has taken on that are consistent with the way the
administration is thinking about it as well.
Chairman Dodd. Well, we were talking about it, and I hear
what you are saying. Take Louisiana, for instance, New Orleans
here. We are talking about people here, not all of them living
in fancy homes on Bourbon Street here who were hurt. A lot of
very desperate people were adversely affected by that. What is
our answer to be? Is it sort of tough, that is the way things
go? I mean, there is no insurance down there today. You have
300,000 homes in that city that are either uninhabitable or
totally destroyed.
Mr. Lazear. Right.
Chairman Dodd. There is little or no insurance available so
you cannot get mortgages, you cannot get loans to rebuild.
Things are absolutely stalled as they presently stand. Doesn't
the National Government--I mean, if that were my State here in
devastation like that here, or someone else's State, I would
expect my Government to want to stand up and help at a moment
like that.
Mr. Lazear. What I would say is that we want to make sure
that help is available. The question is whether it should be
done by the National Government or whether it should be done by
the private sector.
Now, that is why I distinguish between things that were
done in the past and things going forward. If you have a system
in place and people have relied on that system--you talk about
New Orleans. I think that is a great case in point--you simply
cannot change the rules on those people midstream and say,
well, just tough. I mean, obviously, we have to have compassion
for individuals who have bet on the coverage that was there in
the past. And it is for that reason, I think, that the
President felt strongly about the reauthorization of the
National Flood Insurance Program in 2004. But it was also the
case that he felt that as we look forward, as we go forward, as
we think about new programs, we do not want to get ourselves
into the same situation that we were in then. We want to try to
take actions that will encourage the private market to come in
and to take care of those risks that were previously covered by
the Federal Government.
To the extent that we can do that, I think we move in a
better direction, because I believe--and I think the President
believes--that the private market will do a better job,
actually, at insuring these people, at providing the kind of
coverage--again, going forward, not talking about going
backward--that we need to have. And it is extremely important
that we do that.
I would be careful about getting in the way of the private
sector in terms of providing----
Chairman Dodd. You have made that point. I hear you saying
that. I am curious as to whether or not you believe the
administration takes the view, then, that the Flood Insurance
Program--putting aside its obligations under the existing one,
but do I hear you saying, in effect, that if you had your
druthers, you would eliminate that program as well?
Mr. Lazear. No, that is not the position of the
administration. Again, we did prefer reauthorization of that
program, but, again, with----
Chairman Dodd. Let me make a distinction between the
reauthorization of that program as opposed to doing something
like a national catastrophic risk----
Mr. Lazear. Well, again, I would----
Chairman Dodd. Similar ideas here to deal with natural
disasters.
Mr. Lazear. Similar, but one is new and one is old, and I
would go back to that----
Chairman Dodd. Aside from the newness and the oldness of
it, what about the principle involved here?
Mr. Lazear. I think that is the key principle. The key
principle is that when national flood insurance came in--that
was about 30, 40 years ago.
Chairman Dodd. 1968.
Mr. Lazear. 1968. Insurance markets were different. Capital
markets were different. Now we have much more sophisticated
both insurance markets and capital markets.
For example, we have national catastrophe bonds--
catastrophe bonds which you can purchase on the market, which
is a form of insurance that individuals can take. You can
diversify risk that way. Those are a relatively new
development.
What that means is that we have mechanisms available today,
again, going forward, to deal with other kinds of risks that we
did not have available when that program was first instituted.
Chairman Dodd. I understand that. I am just trying to
understand, putting that aside, then, if I was coming and
proposing to you today a National Flood Insurance Program, the
administration's view would be to oppose that idea.
Mr. Lazear. I do not know that the administration would
necessarily oppose a new program. We would certainly oppose
expansion of the National Flood Insurance Program right now. We
believe that given the program as it stands--and, again, I am
making the same point, so I hate to be----
Chairman Dodd. I am just trying to understand the
distinction here. I understand your point that you have made
here, but the Flood Insurance Program has got some problems. We
all admit that. It needs to be fixed.
Mr. Lazear. Right.
Chairman Dodd. But I am trying to get at a deeper point
here with you, and that is, whether or not the administration
takes the view that even the National Flood Insurance Program
is a program that probably is one that does not really deserve
to be reauthorized, looking forward, again.
Mr. Lazear. That was not the position. Again, the position
was that we favored reauthorization. We did so in 2004. So the
answer to that question would be no.
Chairman Dodd. All right. Senator Shelby.
Senator Shelby. Thank you, Chairman Dodd.
Mr. Chairman, you are Chairman of the Council of Economic
Advisers with the administration, and you have a deep
background in economics. If a Federal bailout is required, what
impact could it have on the Federal budget? And does your
analysis provide any insight into the impact of a national
catastrophic fund, what it would have on the Federal budget if
it is not put together right?
Mr. Lazear. We do not have specific numbers to answer that
because we would have to be thinking, obviously, about a
specific plan. In order to score that, we would have to be
quite specific about it. But the general impact is clear. If we
were to have a bailout, then we would be passing the costs onto
other taxpayers. And there is simply no doubt that that would
have distortionary effects through the rest of the economy
because you have to raise taxes in order to fund that, and that
is the general principle.
Senator Shelby. We understand that there are a lot of
people in circumstances beyond their control. They live in
certain areas. They are challenged economically. We have them
in my State. We have them in Louisiana. We have them in
Mississippi. We have them in New Jersey. Everywhere. And
something ought to be--if we come with an insurance program or
flood insurance reform, we would have to look into protecting
those people to some degree.
But why do we have to continue to insure million-dollar
homes, whether it is my State of Alabama, Florida, New Jersey,
Louisiana, where people are in a flood-prone area and sometimes
it is their third home, too? You understand what I am getting
at.
Mr. Lazear. I do.
Senator Shelby. Why should the average working person
paying taxes in America have to do that?
Mr. Lazear. We believe that one of the major problems in
terms of fairness associated with a national program is that it
does pass the burden onto the general taxpayer. Sometimes the
expenditures go to good purposes and go for things which we
would all agree are important and fair. Sometimes they do not.
The point is that, no matter where we spend those monies,
the cost will be borne by the general taxpayer, sometimes by
people who are more needy than the individuals who receive
those funds, and that is always a problem in terms of
redistributing from one party to another. Sometimes it helps in
terms of fairness, sometimes not.
Senator Shelby. We have all referenced the Flood Insurance
Program because we know it is not actuarially sound, was never
actuarially sound. It is nearly 40 years old--1968. We tried to
reform it last year. The whole Congress is aware of that. We
had, I thought, a pretty good bill that came out of this
Committee. It did not please everybody, but it came out of this
Committee very strongly.
Doctor, I believe that we could be headed toward
establishing a commission to review these issues. I think that
if that is the direction that we take, we need to make sure
that such a commission is appropriately comprised and put
together--the taxpayer advocates, pro-market advocates, those
familiar with the risks associated with coastal development,
and others that would be able to participate in this
commission. In other words, it would be broad-based and not
slanted toward another so-called Flood Insurance Program that
is actuarially unsound and does not work. Do you agree with
that?
Mr. Lazear. I agree with that, Senator.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Dodd. Could I just ask--I should have asked this
question myself. We have talked about this commission idea.
Does the administration support the idea of having a
commission, sort of a 90- or 120-day brief window here to take
these various ideas? I do not know if you heard Senator
Nelson----
Mr. Lazear. I did, yes.
Chairman Dodd [continuing]. Talk about the fact, and he is
accurate in this. We are going to hear a lot of--in fact, in
the next panel you will hear a lot of different thoughts on
what ought to be done here, that we ought to try and pull some
of this together so we get some clarity on this.
Does the administration support the commission?
Mr. Lazear. I think the administration would look forward
to hearing from a commission that was broad-based, as Senator
Shelby suggested, and that focused on providing new
information. This is an area that is pretty well understood.
The insurance area has been researched and researched for
probably 50 years, so it is not a new problem. It is a problem
that is pretty well understood in the economic literature. But
there are certainly facts that could be uncovered by such a
commission.
For example, some States have done things better than other
States. Some States have run into difficult problems. It would
be useful, I think, for a commission to perhaps unearth some of
those problems and make those public, and we could learn from
that. I think more information is always better. It is pretty
hard to oppose getting more information.
Chairman Dodd. Thank you very much.
Senator Allard.
Senator Allard. Thank you, Mr. Chairman. I would like to
follow up a little bit on a question that I posed to the
Governor. You also referred to it in your remarks, and that is
that some States, their Insurance Commission artificially held
down insurance rates. Could you share with us which States that
might have occurred in? Were they the coastal States that we
are looking at and talking about now?
Mr. Lazear. I probably would defer to your next panel. I
think the panel to which they referred was actually not this
panel, but it was the one where you are actually having the
experts from the industry.
Senator Allard. OK.
Mr. Lazear. I would prefer to have them testify on it in
detail.
Senator Allard. But you do see that as a problem?
Mr. Lazear. It is certainly a problem because if you
constrain the rates, then obviously insurance companies have a
choice: either they produce the insurance, provide the
insurance at rates that are below their actuarial costs, or
they opt out. And most have opted out.
Senator Allard. Yes, and so it is supply and demand. If you
cannot make a profit at a certain rate, you just discontinue
providing the service. You do not have any choice. You cannot
keep a business going and take a loss year after year.
Mr. Lazear. Simple economics.
Senator Allard. But your view is that the insurance
companies have actually been doing relatively well in the last
few years in many cases. Are you looking at it from a national
basis, or are you looking at it on a State-by-State basis?
Mr. Lazear. Looking at it from a national basis, the
insurance companies have been able to increase their solvency,
increase the size of their funds available for paying off
catastrophes.
Senator Allard. And that is probably by design, isn't it?
Because the risks are getting greater, so you have to have
larger pools out here. If you have any more Katrinas, you know,
you are not in business any longer if you are insuring that.
You have got to have a larger pool. So talk about that a little
bit, if you would.
Mr. Lazear. Yes, in fact, the insurance--that is an
excellent point. Insurance companies have redone their models
of the risk, of the expected costs associated with disasters.
In particular, what is important--and I will try to avoid
economic jargon, but what is particularly important is the
correlation among bad events. If lots of bad events happen at
the same time, then that puts insurance companies in a worse
situation than if these events are uncorrelated, if they are
kind of random.
What happens is when you get populations moving to
particular areas, so you have--for example, in Florida, as the
population of Florida grows, you have more and more people who
are at risk in an area that would be hit by one event. It tends
to increase the correlation, and insurance companies have had
to take that into account in adjusting their actuarial
calculations, and that is what they have done.
Senator Allard. The question was posed by the Chairman:
What is it the Government can do to help property and casualty
insurance? In my view, they can get their act together as far
as determining these floodplains. I mean, FEMA is not--they are
not anywhere close to getting all these floodplains designated.
In some areas, we have areas that are not in floodplains, but
the maps show they are in it. We have other areas where they
are shown out of a floodplain but in reality they are in
floodplains that have heavily been built into.
So, you know, I think one of the reasons that the flood
insurance is not working is because we have not done a good job
of defining the floodplain.
Mr. Lazear. Again, that would be consistent with the view
of basing costs on risk. So the floodplain is an extreme
example of a very high-risk area, and the problem is we do not
price it appropriately.
Senator Allard. Yes. Now, it seems to me if the Federal
Government in flood situations, particularly Louisiana and
Mississippi and those States that were impacted by Katrina, we
have not been particularly hesitant about handing money over to
those areas, and that has all gone to low-interest loans and
whatnot, which is a way of providing, I guess, some insurance
on a case-by-case basis to one locale that gets adversely
impacted. So, in a way, the Government is already involved,
would you say?
Mr. Lazear. That is correct. The block grant program that
was associated with some of the recent disasters has put a
significant amount of money into those regions. Mississippi got
$5.4 billion, Louisiana $10 billion. Some of that has been
used, by the way, for insurance, so, for example, in
Mississippi, approximately $80 million went to purchasing
reinsurance for that State.
So there are a variety of mechanisms that can be used, and
I think some of the States have done a good job in using funds
provided by the Federal Government to enhance the quality of
the insurance--and, again, in cooperation with the private
market, which, again, in my view, is probably the best way to
do it.
Senator Allard. And how do you figure that into your rate
setting? Or is that a factor?
Mr. Lazear. Well, it is certainly a factor in terms of the
private companies figuring it in. If they get cheaper
reinsurance, of course, that lowers the rate, and I suspect
that some of that is going on in Florida as well, as the State
provides cheaper reinsurance rates. So that does do that.
Now, again, one has to be very careful about doing that
because to the extent that we subsidize reinsurance, either at
the State level or the Federal level, again, what you are doing
is you are saying you are essentially changing the true cost
that the individuals see when they locate in an area. And so,
again, you are giving an additional incentive by making that
insurance cheaper than it otherwise would be to locate in
harm's way.
I think we have to think carefully about any kind of
reinsurance program as well.
Senator Allard. So your view is that the market is pretty
well working, the free market is pretty well working at this
particular point, with----
Mr. Lazear. My view--sorry.
Senator Allard. I mean, the insurance industry has
traditionally relied on State regulation as avoiding
Federalizing these programs, and I guess the market approach,
feeling that States are in a competitive environment with each
other--I mean, if you get insurance too high, an insurance
company will not do business in your State. And it could have
an impact on ownership and population in that State.
Could you talk about that some?
Mr. Lazear. Yes. The insurance industry is quite a
sophisticated industry, obviously. It is sophisticated in many
respects, but it is also a reasonably competitive industry.
There are a number of large companies out there, some smaller
ones, that can compete and do compete on the basis of rates and
other kinds of services. As long as we have a well-functioning,
competitive system--and what I mean by well-functioning,
competitive system is that insurance companies can compete with
one another and that they are not undermined by competition
from the State or the Federal Government--then those companies
can provide effective insurance and, I would argue, better
insurance and better coverage to the average citizen of the
State.
Again, I go back to my earlier statement. I am very
uncomfortable when the State or the Federal Government comes in
and provides cheaper insurance that, in the short run, looks
like a better deal to the citizens, but then drives out the
private market. And then what you find is that everybody has to
rely on the Government and only on the Government. And then
something happens and the Government is not there to pick up
the slack.
So that is my big concern about having programs that are
well intentioned but have the side effect of driving the
private market out.
Senator Allard. And more Government control.
Mr. Lazear. More Government control.
Senator Allard. Yes. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much.
We have been joined by Senator Carper. Tom, do you want to
submit some written questions here, or do you want to go to the
next panel?
Senator Carper. Let's go to the next panel. Thank you.
Chairman Dodd. Well, thank you.
Senator Shelby. Doctor, could you compare in any way or
contrast, compare and contrast the national catastrophe
proposal as we understand it at this point with TREA and its
future?
Mr. Lazear. Yes. TREA, as you know, when the President
authorized or suggested TREA, it was viewed to be a temporary
program.
Senator Shelby. Absolutely.
Mr. Lazear. And it came in as a temporary program and as a
program to deal with a very new situation where the risks were
not well----
Senator Shelby. And it is working, is it not?
Mr. Lazear. I believe that it has worked because we have
seen the private market actually increase in parallel to TREA.
Senator Shelby. Absolutely.
Mr. Lazear. And it looks like now we----
Senator Shelby. And we scaled it back some, did we not?
Mr. Lazear. We have scaled it back, and, in fact, private
insurance is functioning and well developed. So we would expect
that the temporary nature of TREA would be something that would
give way in the future to the private market, and, you know,
obviously you are thinking about those issues right now, and I
think you will be exploring that with the administration.
That is a slightly different kind of issue than thinking
about risks that are well known, that we have seen in the past,
where there is the ability to diversify these risks and we can
deal with that at the private level and can already deal with
that at the private level. So I guess that would be the
distinction that I would make.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Doctor. We appreciate
your testimony, and we will leave the record open. Colleagues,
I am sure, will have some additional questions for you. We
would ask you to respond to them as quickly as you can.
Thank you very much.
Let me introduce our next and last panel here. We have a
very distinguished group of panelists. I appreciate their
patience this morning in listening to the earlier testimony.
Let me begin with Commissioner Walter Bell, who was named
Alabama's chief insurance regulator in January of 2003, also
President of the National Association of Insurance
Commissioners, a position he was elected to in December of
2006. Commissioner, we welcome you. Thank you for being with
us.
Governor Marc Racicot is with us this morning. He began his
tenure as President of the American Insurance Association in
August of 2005, joined AIA from the law firm of Bracewell &
Giuliani, and he was a two-term Governor of Montana and someone
whom I have come to know and respect immensely. Marc, we thank
you for being with us here this morning.
Our third witness is Dr. Robert Hartwig, the President and
Chief Economist of the Insurance Information Institute. He
previously served as Director of Economic Research and Senior
Economist with the National Council on Compensation Insurance
in Boca Raton, Florida.
Mr. David Guidry is President and Chief Executive Officer
of Guico Machine Works, located just outside New Orleans in
Louisiana, and, Mr. Guidry, we thank you for being here with us
this morning as well. Mr. Harold Polsky is with us, a homeowner
who recently moved from Port Richey, Florida. I mentioned both
of these individuals in my opening comments. We thank them for
being with us.
Frank Nutter has been President of the Reinsurance
Association of America since May 1991. He held the same
position with the RAA from 1981 to 1984. Prior to becoming
President in 1991, Mr. Nutter served as the association's
general counsel.
Admiral James Loy is National Co-Chairman of
ProtectingAmerica.org. Admiral Loy is the former Deputy
Secretary of the Department of Homeland Security, former
Administrator of the Transportation Security Administration,
retired from the Coast Guard as its Commandant in 2002, and we
are pleased to have you with us. And as someone who has
represented that academy for a long time, I am delighted to
have you be a part of the panel here this morning.
And, last, Mr. Chuck Chamness was appointed President of
the National Association of Mutual Insurance Companies in
September 2003. Prior to his appointment, he was Executive Vice
President and served as Vice President of Public Affairs from
1995 to 2003.
We have a lot of you jammed in here. I apologize for that,
but we wanted you all to get to know each other well here. So
we have a little intimacy up here, elbow to elbow packed in.
You look like you are passengers on one of our new airliners
today here, jammed in here.
[Laughter.]
At any rate, let me begin with you, Commissioner Bell, and
thank you for coming this morning. Then we will move right down
the line in the order that I have introduced all of you here--
at least the order I have introduced you rather than the order
you are sitting here. And I will call on each one of you in
case you fail to remember which number you were in the list.
Commissioner, we thank you. Keep your eye on the clock, by
the way, so try and live within that timeframe for me here.
STATEMENT OF WALTER BELL, COMMISSIONER, ALABAMA DEPARTMENT OF
INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS
Mr. Bell. Thank you, Mr. Chairman, Ranking Member Shelby,
and Members of the Committee. Thank you for the opportunity to
testify here today on behalf of the National Association of
Insurance Commissioners. My name is Walter Bell. I am the
Insurance Commissioner, as you stated, for the State of
Alabama, and I also serve as President of the NAIC. As a
commissioner and citizen from the Gulf Coast, I commend you for
holding this hearing today on this crucial national issue.
State insurance officials from coastal States are seeing
significant problems near the water with the insurance
availability and affordability. Rising rates near the coast are
challenging many current homeowners. Retirees and those living
on fixed incomes who have lived in their homes for years are
now finding their insurance costs doubling, or worse. Likewise,
rising rates are also challenging real estate development as
more properties are going unsold because buyers cannot find
affordable coverage. Some insurers are even reducing the number
of policies they are willing to write at the coast, regardless
of price, due to the exposure of Katrina-like events.
The uncertainty of anticipating future losses is the main
factor that adds volatility and subjectivity to the insurance
pricing. Insurers and reinsurers are becoming more conservative
with where they place their business, and rating agencies are
requiring these companies to retain more capital to maintain
their ratings. Carriers are responding to changes in perceived
risk by scaling back where they are willing to offer coverage,
by reducing the number of policies they rate, and by raising
prices.
A recent report by Guy Carpenter indicates that in 2006,
reinsurance rates across the U.S. rose 76 percent on average,
and that number is far higher near the water. This increased
cost is passed on to consumers, and it is contributing to the
growing gap between what they can afford and what insurers are
willing to charge.
Property insurers are often licensed in 50 States, but the
policies they sell, how they are underwritten, and how they are
priced makes them an acutely local product. As part of my
written testimony, we provided brief snapshots illustrating the
challenges of insurability in a number of coastal States. The
common theme in these snapshots is that most coastal states
have a relatively healthy market, except for areas within a few
miles of the water. In those areas, much of the coverage is
provided by State-run insurers or surplus line carriers. What
little coverage is provided by the market is typically
expensive and often carries high-deductible and other coverage
limitations.
The risk associated with large natural disasters is managed
through a variety of means. Much has been talked about about
the flood insurance. Floods are covered by the Federal
programs. Earthquakes are largely uninsured or covered by a
State entity. And wind is covered, but often augmented by a
State wind pool. Very few areas of this country are not
threatened by some form of devastating event, yet few people
have comprehensive insurance coverage that fully reflects that
risk.
There is no single solution to this problem. State
governments and insurance officials are taking a variety of
steps to manage the risk exposure in their State, but as
Congress considers its own involvement in this challenge, there
are a number of ideas that merit attention. Perhaps the biggest
idea is a concept of an all-perils policy, a single policy for
a single risk-based premium. A lesson learned from Hurricane
Katrina is that consumers clearly expect all-perils coverage,
and the current system of two or three separate policies just
to cover one piece of property is ineffective and leads to gaps
in coverage. All-perils coverage should be a private market
solution, and any national insurance program should serve as a
backstop to augment the private market, not supplant it.
We must also consider adopting mitigation efforts such as
responsible land use policies, better building codes, and
retrofitting programs to strengthen existing homes. Tax-
deferred reserves for individuals and insurance companies
should also be considered to increase market capacity and give
consumers another option to manage the property risk.
The NAIC strongly endorses the concept of a national
commission to analyze the problem and develop the best mix of
solutions. State insurance commissioners look forward to
working with this Committee to find the right answers to the
problem.
Again, thank you for holding this hearing this morning and
for inviting me to participate, and I will be pleased to answer
any questions.
Chairman Dodd. Thank you very, very much. That was very
helpful testimony. We thank you for coming this morning.
Governor Racicot, thank you very much.
STATEMENT OF MARC RACICOT, FORMER GOVERNOR OF MONTANA, AND
PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN INSURANCE
ASSOCIATION
Mr. Racicot. Good morning, Mr. Chairman and Ranking Member
Shelby. Thank you for the opportunity to appear in front of the
Committee. Good morning as well to Senators Allard and Carper.
My name is Marc Racicot, and obviously it is an
understatement to take note of the fact that Hurricane Katrina
has focused renewed attention on the role of the private sector
insurance industry in managing natural catastrophe risk.
Fortunately, we believe very strongly that the insurance
industry is well positioned to do that. However, insurers must
have the tools available to them to measure, reduce, and fund
those exposures. By contrast, in our judgment, quasi-
governmental Cat Funds, draconian regulatory restrictions, and
new legal liabilities not only fail to address the true
problems but also threaten the viability of our Nation's
private insurance mechanism.
In responding to Hurricane Katrina, just to put this in
perspective, I believe that the insurance industry performed
extremely well under very difficult circumstances. To date,
claims payments have totaled about $40 billion. More than 95
percent of the claims have been successfully resolved. Less
than 2 percent have been disputed, and less than 1 percent
across the Gulf have ended in litigation. Those, however, even
though they comprise a minority of the number of instances of
dispute, nonetheless have received most of the attention.
As a Nation, we know that we have to make certain that we
are prepared for and can respond quickly to future
catastrophes, and insurers are fully committed to working with
local, State, and Federal policymakers to make this happen.
I have had the chance to testify before Congress on this
subject several times before, and I have shared our perspective
with Southern Governors at their recent meeting in Washington
in February. Each time that I have had the chance to talk with
policymakers, I have strongly urged them to act carefully.
Thankfully, last year's hurricane season was remarkably mild,
but hurricane experts, as we all know, are calling for another
active season in 2007, and each year more and more people
populate our Nation's most vulnerable coastal communities,
sometimes estimated those emigrating into Florida to be in the
neighborhood of 1,000 to 1,400 people a day. And how are we
advising them of the risks that are associated with the
decisions they make?
At the same time, I am here today to urge appropriate
scrutiny and care as this Committee sorts through the various
Federal legislative proposals that have been introduced into
this Congress. The reality is that there are no quick fixes or
easy answers. However, I can assure the Committee that punitive
measures directed at insurers, including recently introduced
bills to repeal the McCarran-Ferguson Act, are wholly
unrelated. They will do literally nothing to improve the
availability or affordability of coastal insurance. In fact,
the cruel irony is that they will have a serious and
detrimental effect on the very markets that they purport to
assist.
We have proposed a reform agenda that we believe in
principled. It discards the path of least resistance and
instead focuses upon sound financial, capital market, and
environmental principles. It consists of four major principles:
mitigation and land use planning, regulatory and legal reforms,
tax incentives, and National Flood Insurance Program reforms.
We are also working to identify other measures that can be put
in place to address concerns expressed about the availability
and affordability of natural catastrophe insurance. These
measures would be designed to preserve the essential role that
the private insurance sector plays in recovery and response,
while at the same time recognizing the post-Katrina challenges
that are still facing coastal communities.
As this Committee is well aware, several bills have been
introduced this year to address different aspects of the
natural catastrophe issue, but I would like to offer just a
couple of thoughts about two of them.
The Homeowners Insurance Protection Act would create a
Federal reinsurance mechanism to encourage States to establish
Cat Funds based on the premise that large-scale natural
catastrophes are uninsurable by the private sector. We
respectfully but strongly disagree with the premise. Even after
Hurricane Katrina, private sector capacity for natural
disasters has increased. Ironically, the single greatest threat
to private sector risk transfer mechanisms is not the force of
hurricane winds, but legislation and regulations that displace
available private capital or make it economically unfeasible
for private companies to operate in coastal markets.
Despite their seeming promise of short-term relief, Cat
Funds are no panacea for natural catastrophe risk, and they can
lead to generational inequities among policyholders, unfair
geographic and cross-sectional subsidization, and increased
building in catastrophe-prone regions.
Another bill, the Homeowners Insurance Non-Coverage
Disclosure Act, would require insurers to restate the terms of
their private property insurance policies in plain language
that may well be at odds with the actual contract language. It
would increase complexity and the likelihood of litigation
rather than address the issue at hand.
Unquestionably, these are tough and complex issues. The
property/casualty insurance system, like any human enterprise,
is not perfect, but it has been in place since the beginning of
our Nation, and it takes good care of millions of Americans. It
pays about $250 billion a year in damages that they sustain to
their property, and I would suggest that is the threshold and
most significant decision that will be made by policymakers. Do
we want to preserve the private property protection system
that, with its imperfections, has operated extremely well? Or
do we want to move more and more toward the socialization of
this protection system as we address these issues on an
episodic basis? The last thing we want to do, it seems to me,
that any Government can afford to do in the name of reform is
to irreparably compromise the capacity of the private insurance
industry to continue doing what it has done well over these
last 150 years.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you, Governor, very much.
Dr. Hartwig. And I understand you have some video.
STATEMENT OF ROBERT HARTWIG, PRESIDENT AND CHIEF ECONOMIST,
INSURANCE INFORMATION INSTITUTE
Mr. Hartwig. Yes, a bit of video here. Good morning,
Chairman Dodd, Ranking Member Shelby, and members of the
Committee. I would like to thank you for the opportunity to
discuss the financial vulnerability of the United States to the
real and growing threat posed by catastrophic hurricanes and
the corresponding impacts on the availability and cost of
insurance. My testimony today will address three major issues:
the recent history of catastrophic hurricane losses in the
United States; drivers of the increase in insured losses in
coastal regions, including population growth, rising property
values, and unsound land use decisions; and implications of
increased hurricane risk on the price and availability of
insurance.
Measured in dollar terms, the United States is arguably the
most vulnerable country in the world to natural disaster risk.
Catastrophic hurricanes, earthquakes, tornadoes, wildfires, and
severe winter storms cost insurers $20 billion on an average
annual basis. The record hurricane seasons of 2004 and 2005,
however, spawned seven of the ten most expensive storms in U.S.
history, as you see in the chart before you, resulting in
payments to 5.5 million policyholders totaling $80 billion.
Tropical events now account for nearly half of all
catastrophe losses over the past 20 years. Looking ahead,
meteorologists are predicting that the 2007 hurricane season,
which begins just 50 days from today, will be 85 percent more
severe than average. Not only will more storms occur, but the
likelihood of a powerful Category 3, 4, or 5 storm making
landfall is estimated at 74 percent this year, well above the
long-run average of 52 percent. More ominous is the fact that
we may only be on the leading edge of a prolonged period of
elevated hurricane activity, lasting perhaps another 15 to 20
years. Insurers today are actively planning for a $100 billion
storm.
For the 53 percent of Americans today who live within 50
miles of the coastline, hurricanes represent a potentially
life-altering economic threat. Yet despite increased awareness
of the risk in the wake of Hurricane Katrina's destruction,
people continue to be drawn to the coasts in records numbers.
The U.S. Census Bureau predicts that the number of people
living in hurricane-exposed States will increase by nearly 44
million, or 36 percent, between the years 2000 and 2030. Eight-
hurricane exposed States will experience population gains equal
to or exceeding the projected gain of 29.2 percent for the
country overall. Florida, already the most exposed hurricane
State in the country, will lead the way, with an expected
population increase of 12.7 million people, or about 80
percent, by the year 2030.
Yet these trends are merely a continuation of growth trends
that have been under way for some time, mostly in the years
since the last period of intense hurricane activity ended about
1960. The following sequence of charts depicts population
increases in a sampling of coastal counties from New England to
the Gulf Coast. In each case, sharp population increases are
noted in areas that are historically vulnerable to hurricane,
although perhaps not recently.
Rising coastal populations drive increases in coastal
development. In 2004, the insured value of all coastal property
exposed to the threat of hurricanes totaled some $7.2 trillion,
equivalent to 62 percent of GDP. It is expected that the value
of insured coastal property will double within the next decade,
as coastal populations and property values continue to soar.
Again, Florida is the most exposed State in the country by far,
with about $2 trillion in coastal exposure, about 27 percent of
the total. The figure also shows how small States, like
Mississippi, can sustain enormous losses and why the Northeast,
with $3.7 trillion in insured coastal exposure, is so
financially vulnerable. Indeed, a major landfalling hurricane
in the Northeast could produce insured losses exceeding $100
billion.
Now, with respect to the issue of land use decisions, which
has not been discussed too much, despite the fact of its well-
known vulnerability to hurricanes and rapidly escalating
property values, coastal development continues at a furious
pace. The example of South Miami Beach is illustrative. In that
narrow strip of land alone, 15 new condominium complexes will
be completed by year-end 2009, offering a total of 2,111
individual units at prices ranging up to $16 million, with an
average price of $3.7 million. Total insured exposure is likely
to top $6 billion, much of it insured by the State at rates
that are not actuarially sound, further burdening the State's
already precarious property insurance markets. Rapid buildups
are observed in many other coastal areas, from Galveston Island
to Cape Cod.
The fact that so much coastal development continues to
occur despite the lessons offered by the hurricane seasons of
2004 and 2005 suggests that builders, realtors, and buyers are
entering into real estate transactions in these areas with
their eyes wide open, fully cognizant of the risk. The bottom
line is that coastal development is economically rational from
the perspective of coastal stakeholders only because most of
the benefits are retained locally while a high proportion of
the hurricane-related losses are redistributed to others.
The price of insurance is determined primarily by the
degree of risk assumed by the insurer. In the wake of the
record hurricane seasons of 2004 and 2005, insurance prices
have climbed sharply for many owners of coastal property as a
direct result of this increasing risk. Deviations from risk-
based pricing do lead to distortions or dilutions in the
message that risk-based premiums do bring and do then encourage
additional development in vulnerable areas. This is exactly
what is happening in Florida today. The good news is that
strengthening of building codes, encouraging mitigation, better
land use policies can all help to reduce risk and lower
insurance costs.
To conclude, I would like to say that the insurance
industry is committed to working in partnership with public
policymakers, consumers, and businesses in developing fact-
based solutions to the formidable challenge posed by hurricanes
and continuing our tradition of helping families, businesses,
and communities wherever and whenever disaster strikes.
Thank you, Mr. Chairman.
Chairman Dodd. Very good. Thank you very much. By the way,
I do not know if we got copies of that.
Mr. Hartwig. In my written testimony, there are these
slides, and many others.
Chairman Dodd. Oh, good.
Mr. Hartwig. And a lot more detail.
Chairman Dodd. They are very, very helpful. Thank you very
much for that. It was very interesting and very helpful.
David Guidry, we thank you for coming this morning. We
appreciate your being here.
STATEMENT OF DAVID GUIDRY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GUICO MACHINE WORKS, INC.
Mr. Guidry. Thank you, sir. Mr. Chairman, Members of the
Committee, I am David Guidry, President and Chief Executive
Officer of Guico Machine Works. I appreciate the opportunity to
appear before your Committee today on behalf of Greater New
Orleans, Inc., a 10-parish regional economic development
organization in southeast Louisiana, representing over 100
businesses in all major sectors of the local economy.
Mr. Chairman, as a small business man in the New Orleans
area, I am truly grateful that you have called this hearing
today to shine a national spotlight on one of the cruel
realities of the post-Katrina Gulf South. Businesses both large
and small simply cannot find affordable insurance. More than a
year and a half after Hurricanes Katrina and Rita, with all the
Federal dollars and tax incentives provided to our region of
the country, many of you would expect to see the skyline of New
Orleans crowded with cranes and bustling with construction
activity. I am sad to report that, instead, very little of that
activity is actually under way.
While many experts may have a number of explanations for
the slow pace of the recovery in New Orleans, I can assure you
that primary and significant factor is the unavailability of
affordable insurance for business. I am told that in the
Greater New Orleans area, not a single commercial property
insurance policy has been renewed on an as-is basis and that
most are simply not being renewed at all.
How can we possibly rebuild our great city under these
circumstances? How can we expect capital to flow into our area
when affordable insurance cannot be found? We must find a
solution to this problem, and in the very near future. Indeed,
if the insurance climate of the Gulf South does not materially
improve in the next 12 to 18 months, many small business men
and women will be forced to consider relocating to other
regions of the country in order to obtain affordable insurance
and maintain viable businesses.
Mr. Chairman, let me tell you a little bit about my
business and what we have experienced during and after Katrina.
My company, Guico Machine Works, is an oil and gas equipment
manufacturer, a company that I founded over 25 years ago in the
New Orleans area. Before the hurricane, my company had 55
employees, turning our wellheads and related products in our
plant located on the Harvey Canal in Jefferson Parish. My
business had accounts receivable of nearly $1 million from
sales of $400,000 per month. However, after Katrina struck in
August of 2006, our manufacturing output immediately dropped to
zero. For nearly 6 weeks after the hurricane, we received no
mail, no checks, no sources of income, yet customers continued
submitting orders. We had a shop full of materials and
machinery, but no workers, causing the shop to sit idle.
During Hurricane Katrina, the building next to my warehouse
literally exploded, and parts of that building rained down upon
my warehouse, causing extensive damage. Like most businesses in
New Orleans, I had insurance coverage against storm and fire
damage. I also had wind and hail protection on our warehouse,
but not on its contents. My insurance company denied coverage
for the damages to my building and its equipment. I have
unfortunately been forced to litigate this claim and in the
meantime have not received one dime from my insurer.
Without any insurance recovery, I have been unable to
repair the damage, and, Mr. Chairman, on top of that, I have
been notified that because the damage has not been repaired, my
wind and hail policy will not be renewed. Moreover, the premium
on the balance of my insurance policies has increased a
whopping 55 percent for far less coverage than under my pre-
Katrina policies, and my deductible has skyrocketed from $2,500
to $20,000. Furthermore, had I opted for the same coverage as
my pre-Katrina policy, my deductible would have increased to
$175,000 per occurrence. These are not costs and risks that my
business can readily absorb.
To put it all in perspective for you, let me give the
Committee just a few real-world examples of the experience that
similarly situated businesses are facing in our area.
A local restaurant located in the French Quarter paid
$27,000 for its property insurance in 2005, which included a 2-
percent wind and hail deductible, with a minimum of $25,000.
The 2006 renewal for the property with the same limits had been
increased, believe it or not, to $242,000 and now includes a 5-
percent wind and hail deductible.
A local shopping center experienced an increase in property
insurance premium from $70,000 to $250,000 and an increase in
its wind deductible from $350,000 to $1.7 million. Furthermore,
when I visit with my colleagues in the business community in
the New Orleans area, among other things, I am told almost all
personal and commercial property policies are not being renewed
or are renewed with severe restrictions regarding wind damage.
Owners of vacant buildings are unable to obtain wind coverage
of any sort. The wind provision in the typical policy will
almost always have a 2- to 5-percent deductible. Business
interruption coverage may not be provided if the wind coverage
is placed with a different insurer.
Mr. Chairman, on behalf of the small business community in
and around New Orleans, I urge you to address this crisis
before it is too late. GNO Inc. is pleased to have joined the
Natural Catastrophe Policyholders Coalition to address this
very issue we are discussing here today. As taxpayers who have
worked hard and played by the rules, we are counting on your
and your colleagues in Congress to rescue us from this
nightmare. We stand ready to work with you in any way we can. I
am pleased to answer any questions that you may have or submit
any additional information that you may require.
Thank you.
Chairman Dodd. Mr. Guidry, thank you very much, and as I
pointed out earlier, we appreciate your coming before us and
telling us your story of what happened. Having been down there
a few weeks ago, I know it is not an isolated case. As you
point out, there are other businesses as well that are paying--
if they can find any insurance at all, it is at prices they
cannot afford. I suspect you are not going to--how long are you
going to be able to hold on with your business? What is your
sense?
Mr. Guidry. What was the last question?
Chairman Dodd. How long can you hold out?
Mr. Guidry. Senator, the truth, I would like to say it is
almost like I am playing this giant game of solitaire. Every
day I pull a card, and I have to figure out where to put that
card. You know, you guys have taught me a new word:
``actuarially sound.'' With this new deductible, I have
discovered my company is not actuarially sound today. So
stability is what we need. As an entrepreneur and small
business owner, managing risk is what I do for a living. But
managing in an arena, in an environment where it is not
stable--my insurance card comes due on September the 9th. That
is my renewal policy. What that is going to look like, I have
no idea yet, but we will figure out a place to put that card.
Chairman Dodd. We will get back to you in a few minutes
here.
Mr. Polsky, thank you for being here.
STATEMENT OF HAROLD POLSKY, HOMEOWNER
Mr. Polsky. Thank you, Chairman Dodd, Ranking Member
Shelby, and Members of the Committee. I want to thank you,
first of all, on behalf of both myself and my wife, Barbara,
for the opportunity to speak before you today. We appreciate
this opportunity to add our voices to this very difficult but
very important issue.
There are two issues here. We have only heard one side of
it, and that is a very important side: the cost and
availability of insurance. But there is another side, and Mr.
Guidry talked to it briefly. Insurance companies are not paying
the claims. They like to tell you, ``We have paid 98 percent of
all claims.'' They have not. They put money in a fund to pay
off a future claim. They call that ``claim paid'' whether it
has been paid or not.
Now, until November 2002, my wife and I rented a house in
the city of Philadelphia, Pennsylvania. Around the middle of
2002, we discovered that we had the wherewithal to purchase a
house. We did not want to live in Philadelphia, and on the
advice of a relative, we looked into Florida. We found a
perfect house for us: 1,500 square feet, concrete block, small
lot. It was not a perfect house, but it was our house and that
made it perfect for us. We moved in in December 2002. We had to
carry three different kinds of insurance. We had to carry
homeowner's insurance, wind insurance, and flood insurance. But
the total of those three premiums was well within our budget.
The year we moved in and bought our first policies, all
three policies had the same value for the property: $90,000.
They were all identical. The homeowner's premium was $464, the
wind premium was $443, and the flood premium was $851, and that
is a total of $1,758. This was in November 2003. Remember that
date, please--or November 2002.
In November 2003, when our first renewal came in, it was
still a manageable cost. Our homeowner's premium was now $482 a
month. The value of the house had changed. It was now $95,200.
Our wind premium was $475 a month, and suddenly the wind policy
value was $99,000, which was the same value that the National
Flood Insurance Program put on the house with a premium of
$935, for a total of $1,892. We could not understand why all of
a sudden these three policies, two of them from the same
insurance company, had different values for the house if it had
to be replaced.
Then 2004 came. Hurricane Frances hit the East Coast of
Florida and, like a slingshot, whipped across the peninsula.
When it got to Port Richey, Tampa Bay area, on September 6th,
it was a very strong tropical storm.
We suffered damage in our house. We do not know how it got
in, but water somehow got into the house. We knew it was not
flooding because there was no rising water. But all of a sudden
all the carpeting in our house was soaking wet.
We were concerned about damage to our possessions. We moved
everything into the middle of the rooms, and we are afraid the
water was going to lead to mold issues. So we tried to contact
our insurance company. We could not get a hold of them until
September 10th, and that is understandable. A major storm had
just come through.
We explained our damage. They gave us a claim number and
told us that an adjuster would contact us within the next few
days. They also gave us a telephone number to contact this
adjusting company if we had not heard. Well, they did not
contact us, and we tried to call every day, and they never
answered their phone.
And then 20 days later, Hurricane Jeanne did her little
whiplash out of the Atlantic Ocean, came right across, and
again we had water on our carpeting. The day after that
happened, we got two letters from our insurance company denying
our claim. One of them said we did not have wind coverage, and
the other one said our deductible did not cover the damage.
Well, nobody had been to our house. How did they know what our
damage cost was? They had no way of knowing it.
We also started to smell an odor in the house that we were
convinced had to be mold because it was not there before. We
contacted the insurance company on the 28th of September to
file a claim for the damage from Jeanne. We were given a claim
number and told that someone would contact us, told us, ``Pull
up all your carpeting, save a piece. Take pictures of your
damage. Give it to your adjuster.''
Then our telephone stopped working. We called the local
phone company. They came out. The technician found that the
main jack in the wall was soaking wet. He said, ``There are
only two ways that could have happened. Either water came down
the walls and soaked the jack, or you had 18 inches of flooding
in your house.'' And we had no flooding.
We pulled up the carpet. There was mold underneath it. We
were worried we had not heard from anybody. We finally got a
call from an adjuster. He inspected everything and said, ``The
wind blew the shingles up on your roof. The water got under the
shingles, came down the walls. That is why you have wet
carpeting.'' He agreed that there was mold and said we should
have a payment within 2 weeks from our insurance company. We
did not hear anything.
Then in November of that year, for 2004, our policy was
renewed again, this time with a $100,700 value of the property
for homeowner's insurance with a $504 premium. Wind had a
$97,000 value with a $538 premium, and $99,000 value for flood
with $992, which was still manageable, $2,034.
Then on December 21st of that year, we called our insurance
company, and they said, ``There is no insurance claim for
you.''
Senators, to put it bluntly, my wife and I went absolutely
ballistic. This went on for all of 2005 and all of 2006, over
and over and over. We had cleaned up all of our wet carpeting
and the mold, which we were later told, ``You should not have
gotten that close to that much mold.'' But we did because
somebody had to do it.
We got sent to mediation to try to settle this, and the
only thing that happened there was the representative for our
insurance company said, ``You had a flood, and you have to file
a flood claim.'' And we said, ``We cannot file the flood claim.
There was no flooding. If we file a flood claim, that is
insurance fraud.'' He said, ``I do not care. You have to file a
flood claim. You had a flood.''
The policies kept going up and up and up. I mean, you have
my written testimony with all of it. I am just going to skip to
a few facts because I have gone over, and I am sorry.
We were living in a house with bare concrete floors, boxes
everywhere. We felt like we were living in a warehouse. The
stress of having to live in these conditions was affecting us
both physically and emotionally. The financial burden from the
increased premiums plus the increased electrical costs--have
you tried to heat or cool a house with wet insulation in the
walls? It cannot be done. Our electric bills doubled.
Between losing our claim, misfiling it, jumping us from one
adjusting company to another, and then putting us in a class
action lawsuit of a wind versus flood claim without our
knowledge and without our consent, we felt like we were living
on a roller coaster. It put such a strain on our marriage that
my wife and I almost split up over this. There is no way to
understand what happened without seeing a timeline, and I have
one of those here that I will give to you. We had to hire a
lawyer to get the claim settled. Eventually, we could not
afford to live in Florida. We settled our claim for half of
what we should have received, sold the house at a loss--and by
a loss, I mean we got $35,000 under market value. And then we
left in September 2006 and moved to Virginia.
Now, in 2006, the original value of our house and premium
for homeowner's insurance, the premium was $1,092 on a value of
$108,000. In October of 2006, we got a revised statement, 1
month before that policy expired, and that revised statement
said your home value is now $215,475 and your premium is
$2,063. That is a 100-percent increase. Our mortgage jumped up
by almost $200 all through insurance. We had already moved to
Virginia when we got that. Heaven only knows what would have
happened to our mortgage costs if we had not already moved.
Right now, in the Pasco County record, the house that we
were living in has been assessed by the county as a value of
$124,856. The insurance company for 2006-2007 valued it at
$231,000. Our renewal that we would have had to pay if we
stayed in Florida--we had a $2,700 premium. Right now the
premium in that zip code is $3,491. That is just homeowner's
insurance.
Senators, our case may be extreme. It is not uncommon.
Thousands of people in Florida and throughout the Gulf States
can tell you similar stories. The outrage here is not just the
cost. It is what everybody who has a claim goes through, and
they are intertwined. How many more people have to go through
what Barbara and I went through or, even worse, lose their home
to foreclosure, because they are. Thousands of people every day
are losing their homes to foreclosure. The insurance industry
along the Florida and Gulf Coast is out of control. It is a
pattern that is repeating itself. If you do not believe that,
ask people who live on Long Island, New York, why they cannot
get insurance. Ask people on the Jersey shore why they cannot
get insurance. It is happening, and it is going to hit every
single State in this union if we do not do something about it.
How long can we wait?
I am sorry I took more time. Thank you for the opportunity,
and I would be happy to answer any questions you may have.
Chairman Dodd. Thank you very much, Mr. Polsky. We are
deeply sorry about what you have gone through and your family
has gone through. But we appreciate your testimony here this
morning.
Let me turn to Mr. Nutter, if I can, Frank Nutter. Thank
you for being here.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA
Mr. Nutter. Chairman Dodd, Ranking Member Shelby, and
Members of the Committee, my name is Frank Nutter. I am
President of the Reinsurance Association, which is the national
association representing property and casualty organizations
that specialize in assuming reinsurance. Reinsurance is
commonly referred to as the insurance of insurance companies,
and one of its most common purposes is for the transfer of risk
associated with catastrophic events, such as hurricanes,
earthquakes, and in the case of September 11th, acts of
terrorism. Any debate about the role, if any, that the Federal
Government should have with respect to financing recovery from
natural disasters should include an analysis of what the
reinsurance capacity is, as well as what the insurance
companies' capacity is to write.
Global reinsurers view U.S. catastrophe risk as an
essential component of their diversified assumed risk
portfolios. Evidence of this is that in 2004 the four major
hurricanes that hit Florida resulted in a little over $30
billion of insured damage. The global reinsurance industry
ultimately paid approximately one-third of those losses.
The hurricane season of 2005 produced losses estimated to
be as high as $60 billion to $65 billion. The reinsurance
industry will ultimately pay approximately one-half of all of
those losses.
The industry finances natural catastrophe risk by spreading
the losses among market segments. For 2005 hurricane losses,
insurers retained 39 percent of the loss, Bermuda reinsurers 29
percent of the loss, U.S. reinsurers 10 percent of the loss,
European reinsurers 13 percent of the loss, and Lloyds of
London 9 percent.
Notwithstanding this loss experience, the reinsurance
market has adapted to increase natural catastrophe risk. The
capital markets have greatly enhanced reinsurance capacity
following Hurricane Andrew, as they did following Hurricane--
following Hurricane Katrina, as they did in 1983 after
Hurricane Andrew, and in 2001 after the terrorism losses of 9/
11.
Since the fall of 2005, approximately $32 billion of new
capital has been raised and committed to the reinsurance
market. $10.4 billion was invested in new startup companies,
$10.3 billion in replenishing the capital positions of existing
reinsurers, an additional $5.6 billion was invested in special
purposes vehicles. In addition, $5.3 billion was raised in the
capital markets for catastrophe bonds for U.S. catastrophe
risk. And in the last 6 months both the Chicago Mercantile
Exchange and the New York Mercantile Exchange have launched
catastrophe trading platforms.
Private reinsurance capacity increased in 2006 by
approximately 30 percent, and reports of the January 2007
renewals indicate reinsurance capacity has grown an additional
14 percent in a moderating price environment. Broker reports
reflect that flat to declining reinsurance rates for 2007
renewals. In our view, the free market works.
The RAA believes that the natural disaster risk are
insurance in the private insurance and reinsurance market and
that State Cat funds significantly displace the private market.
The RAA believes there are many flaws with the concept of State
catastrophe reinsurance fund, and only Florida has such a fund
in place.
The first is that politically charged rate-setting does not
affect the underlying risk of loss or cost of recovery. If
premiums are set below actual risk either losses are not
funded, someone else is subsidizing the losses, or insureds are
led to expect a Government bailout.
Second, there is no evidence that State reinsurance
catastrophe funds result in greater availability or
affordability of homeowner's insurance.
Third, State catastrophe funds also violate one of the
fundamental tenets of insurance, and that is spreading the risk
among various risk bearers. State funds concentrate the risk.
State reinsurance funds, particularly as it exists in
Florida, are merely a cost-shifting mechanism financed by debt.
They rely on cross-subsidies to pay for hurricane risk rather
than relying on current affected property policyholders paying
those costs. In Florida, car owners, small businesses, school
districts, daycare centers, churches, hospitals, renters,
professionals, and business owners, anyone with a property and
casualty insurance policy, is required by law to pay the
billions in dollars in bonds authorized by the Florida
Hurricane Cat Fund due to its shortfalls.
When hurricane occurs it requires the Florida Catastrophe
Reinsurance Fund to pay losses in excess of its cash balance,
as in the case in 2004 and 2005, the Cat fund issues bonds. The
bond debt is not paid by insurance companies who receive the
cheap reinsurance. It is paid by assessing or taxing Florida
policyholders.
The irony of Florida is that the people who vilified
insurers are, together with other policyholders, now their
reinsurers.
We believe that preferred solutions include removing
regulatory constraints from the private insurance market's
ability to willingly insure risk, encourage private insurers to
enter the market, and enforce building codes.
If policymakers follow competitive free market principles,
a Federal natural disaster or reinsurance fund is unnecessary.
Some have suggested that a Federal program is appropriate
because we all pay for disaster recovery now, implying that
Federal taxpayers are on the hook for disaster losses. While
natural disasters may occur in all States, most are modest
insurance costs compared with a few regions.
For instance, since 1950, with the exception of Louisiana
in 2005, all other States combined had less insured hurricane
losses than Florida. The potential natural disaster related
losses in other States are notably less than potential costs,
particularly in light of very low probability for the most
severe events, and are paid for by insureds based upon their
own risk premiums. Even with a Federal Cat fund, the reality is
that only a few states would draw on its resources.
Mr. Chairman, we look forward to working with the Committee
with respect to ideas to address this problem and to addressing
any issues that we might help and of focusing on Federal
catastrophe funds.
Thank you very much.
Chairman Dodd. Thank you very much. Thanks very much and we
appreciate it very much.
Admiral Loy, thank you for being here.
STATEMENT OF ADMIRAL JAMES M. LOY (USCG-RET.), CO-CHAIR,
PROTECTINGAMERICA.ORG
Admiral Loy. Good morning, Mr. Chairman. Good morning, Mr.
Shelby, members of the Committee.
I appreciate the opportunity to testify today in my
capacity as Co-Chairman of ProtectingAmerica.org, an
organization committed to finding better ways to prepare and
protect American families from the devastation caused by
natural catastrophes.
My fellow Co-Chairman is James Lee Witt, the former
Director of the Federal Emergency Management Agency. Our
coalition of over 200 members include first responders like the
American Red Cross emergency management officials, insurers
including State Farm and Allstate, municipalities, small
businesses, Fortune 100 companies, and thousands of private
citizens. We like to think we are becoming a bit of a voice of
the people to help the Committee figure out which way forward
is the right way to go.
ProtectingAmerica.org was formed in the summer of 2005 to
raise the national awareness about the important responsibility
we all have to prepare and protect our homes, families,
businesses, and communities. And we are building a campaign to
create a comprehensive national catastrophe management solution
that protects homes and property at a lower cost, improves
preparedness, and reduces the financial burden on consumers and
taxpayers.
Mr. Chairman, in the 5 minutes available, let me make three
critical points, I believe, from my full testimony, which I
offer for the record.
The first is that the comprehensive nature of the solution
I just mentioned really has four pieces. We have talked a lot
this morning about a reformed insurance construct, which is
certainly one of those pieces.
But the second is a serious public education effort with
respect to preparedness that goes to the citizen level, it goes
to the business owner level, and helps all of them understand
how critical their personal role is to prepare.
The third is a serious commitment nationally to mitigation.
We have heard good comments this morning, which is the
beginning of I think the common ground even for the agenda for
the commission that you have suggested. But efforts like land
use policies and building codes and the enforcement of both of
those are extraordinarily important to hopefully minimize the
challenge on the front end that we have to deal with after the
storm goes by.
And last, wherever it is appropriate for adequate support
and resources to the first responders that we all count on,
those four dimensions have to be woven together to design this
comprehensive national solution. And all must be incorporated
or we will fall short of the goal that we have.
The second point I would make is to recognize this current
cycle that we are in of destroy, rebuild, destroy, rebuild,
with hope in there somewhere, as hardly a very decent way of
going forward. I believe that cycle to be fatally flawed and we
have to find a way to interrupt it before the next major storm
comes by.
I think the points at issue here are that complacency tends
to reign. And the further away we get from Katrina, the less
focused we will be on finding a solution to this problem.
Denial of it happening to me is pretty pervasive. But
invariably, as we have heard from testimony at the table
already this morning, sooner or later it happens to us.
The current system is a Government system of bailout.
Random, unplanned use of appropriated tax dollars as a bailout
after the fact is a use of the Federal dollars at this point
which is not what we should be doing. We should be planning in
the front end for better utilization of those dollars.
Fifty-seven percent of our citizens live in catastrophe
prone areas. More go there every day, as we have heard from
other witnesses this morning. Climatologists predict several
decades worth of big storms. Seismologists suggest that we are
way overdue for a major earthquake.
The third point I would offer, sir, is the costs associated
with these megacatastrophes are almost beyond imagination and
certainly are not inside the envelope of what even actuarially
sound policies can deal with.
For Katrina, for example, with a piece that was on the
front page of the USA Today just on Monday, they are talking
about $277 billion worth of claims, and I am mixing both flood
and wind here. But at the other end of the day, this storm has
the potential to get to the point of $500 billion by the time
we are all done bailing this out.
If the 1906 earthquake in San Francisco happened exactly
the way it did in 1906 again today, it would be a $400 billion
event. If that 1938 storm, sir, that you cited in your
commentary happened again today, it would be between $150
billion and $200 billion event.
And last, Mr. Chairman, more directly to the point of this
hearing, ProtectingAmerica.org does advocate the establishment
of a privately funded catastrophe funds in catastrophe prone
States. Such funds will provide more protection at lower cost
to consumers. Much like the 401(k)s retirement savings
programs, these Cat funds would grow tax-free, able to generate
higher levels of reserves to provide greater levels of coverage
in a shorter timeframe.
These Cat funds would serve as a backstop to the private
insurance market that we absolutely must continue to depend on
as we have for the last 150 years. They would also generate
investment earnings that, in addition to helping to pay claims
in the aftermath of a catastrophe, would be used for those
mitigation, prevention, education, preparation and first
responder programs up front.
We also advocate the creation of a national catastrophe
fund that would serve as a backstop to participating State
funds in the event of a megacatastrophe. Those State funds
would be financed through mandatory contributions by insurance
companies in those States in an amount that reflects the
exposure risk of the policies that they write in those States,
to go back to Mr. Shelby's point about actuarially sound
numbers.
Qualified State funds would be able to purchase reinsurance
from the national program. Rates for this coverage would be
actuarially based and would only be available to State programs
that have established the prevention and mitigation funding as
I have described above. In the event a catastrophe strikes,
private insurers would be required to meet all of their
obligations to their policyholders. Should catastrophe losses
exceed those obligations, then at a threshold level first the
State fund could kick in, and then the national fund, if it was
appropriate.
Because this program relies on the traditional private
market for paying claims, the inherent inefficiencies and
bureaucracy in a Government-run program are virtually
eliminated. Because this program requires States to fund
meaningful prevention and mitigation programs, planning,
protection, preparation will take place before the onslaught of
a catastrophe and will be in a state of continuous and rigorous
improvement over time.
ProtectingAmerica.org is cognizant of readiness and
preparedness efforts underway by the Department of Homeland
Security, by the Red Cross, by the Council of Excellence in
Government, and we are working very hard to work with them,
partner with them in that work.
All of these elements are contained in legislation
currently pending in both the House and the Senate.
Mr. Chairman, I want to thank you again for taking the time
to consider and discuss this important subject.
Before I close, reforming the insurance construct is a very
important dimension of this work that we have in front of us.
But Mr. Chairman, my final thought for your Committee is this:
please recognize the opportunity we have to act before the next
nightmare and provide the leadership to produce for America
that comprehensive national catastrophe management solution
with all the salient pieces.
Thank you, sir.
Chairman Dodd. Admiral, it is great testimony and I suspect
Senator Shelby might be asking a guy like you to serve on this
commission when we get it going, and people with. You have got
a good comprehensive view and you make some excellent points.
Admiral Loy. Thank you, sir.
Chairman Dodd. We thank you very, very much.
Our last witness, and thank you for your patience in being
the last witness to appear here.
Mr. Chamness. Pleasure.
Chairman Dodd. But thank you, Mr. Chamness.
STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF MUTUAL INSURANCE COMPANIES
Mr. Chamness. Good morning, Chairman Dodd, ranking member
Shelby, and members of the Committee.
My name is Chuck Chamness, and I am President and CEO of
the National Association of Mutual Insurance Companies. I am
grateful for the opportunity to testify before you this morning
on a subject that poses an enormous challenge to the insurance
industry and our Nation as a whole.
It is widely acknowledged that property insurance has
become more expensive and less available in coastal regions of
the U.S. While Government and the private sector can and should
work together to address this problem, we believe that any
actions taken must recognize the basic economic principles of
supply, demand, and price.
A serious discussion of the issue at hand should begin by
acknowledging three facts. One, the increased exposure of
densely concentrated, high value property in certain geographic
regions that are prone to elevated levels of a catastrophe risk
means that property insurance in these regions will be
relatively more expensive than regions that lack these
attributes.
Two, as population growth and commercial development
increases in these regions, high insurance costs are likely to
continue to increase, as well. And three, the increased
population growth and commercial development in the coastal
regions is occurring at a time when the frequency and severity
of catastrophe storms in these regions is increasing.
Simply put, the availability and affordability of property
insurance in coastal regions is mainly a function of risk. But
other variables, including actions taken by Government, can
also reflect the supply and cost of risk.
I would like to comment on a few of the disaster-related
proposals that have emerged this year. In Florida, the State
recently removed restrictions on the ability of Citizens
Property Insurance Corporation, the insurer of last resort, to
compete with private insurers while canceling rate increases
previously approved for Citizens to reduce the disparity
between its level of risk and the relatively low premiums it
charges.
Lawmakers also doubled the risk-bearing capacity of the
Florida Hurricane Catastrophe Fund from $16 billion to $32
billion. As a result, the Fund has been given a legislative
mandate to assume a level of catastrophe risk exposure more
than 30 times its capital. Thus, if only one major storm hits
the State this year, all Florida insurance consumers will face
huge assessments and significant tax increases.
At the Federal level, NAMIC strongly opposes S. 618, which
would almost certainly increase costs and decrease the
availability of coastal property insurance. By repealing the
limited insurance exemption from Federal antitrust laws created
by the McCarran-Ferguson Act, S. 618 would prevent small
insurers from sharing industry-wide historical loss data and
using catastrophe models to predict loss costs. Without this
data, small insurers will be driven from the marketplace. Their
demise will decrease the supply and raise the cost of property
insurance, particularly in catastrophe-prone regions.
With regard to a Federal catastrophe fund, NAMIC recognizes
that a true megacatastrophe could exceed the capacity of the
private insurance market. That is why it is appropriate for
policymakers to consider solutions that could augment the
capacity for the private market. However, any Federal
catastrophe fund should have a high attachment point and only
be triggered in the event of a megacatastrophe that the private
market does not have the capacity to handle.
While we have reservations with some of the proposals that
have either been introduced or enacted, we are encouraged by
several bills that were recently introduced. NAMIC believes one
of the best proposals to emerge so far is S. 930, which Senator
Martinez recently introduced. It would lower costs by creating
tax incentives to encourage property owners to mitigate wind-
related risk.
NAMIC also supports two bills introduced by Senators Nelson
and Martinez. S. 927 allows homeowners to create tax-free
catastrophe savings accounts similar to health savings
accounts, which could be used to pay hurricane deductibles and
the costs of retrofitting properties. S. 926 would amend the
Federal tax code to allow insurers to set aside a portion of
premium income on tax-exempt policyholder disaster protection
funds.
NAMIC also would support Federal legislation that would
create financial incentives to encourage States to adopt and
enforce strong state-wide building codes. Strong building
codes, as well as responsible land use planning, have been
shown to greatly reduce the level of property damage and human
suffering caused by natural disasters.
Finally, NAMIC believes the National Flood Insurance
Program should be substantially reformed. We supported the
Senate bill passed by this Committee last year and we are
hopeful that similar legislation is considered this year.
In conclusion, NAMIC recognizes that people who live and
conduct business in coastal areas will face serious challenges
in the years ahead. We believe the most effective mechanism for
addressing these challenges is through the private insurance
market. We also believe Congress can play a constructive role
by enacting some of the positive reforms mentioned above.
Thank you.
Chairman Dodd. Very good and I thank all of you for being
brief in your statements. It has been very helpful to have us
hear from all of you.
I am going to apologize to our witnesses in stepping out of
the room and ask Senator Carper to take the gavel.
I have a series of questions I would like to ask all of you
that I will submit in writing to you and then ask you if you
could, in a prompt fashion, respond to the Committee. I would
be interested in your reactions to a commission. I would be
interested in your reactions to the tax proposal, the temporary
one we have talked about to give some relief on premiums, as
well as the flood insurance reform program. Many of you may
have already commented on this in the previous Congress, when
Senator Shelby struggled to get that adopted. We got it out of
Committee but it did not go any further than that.
As well as the mitigation. I am particularly pleased that
all of you have had positive comments about the mitigation
ideas. That is $100 million we are talking about there.
I want to include a revolving idea there. I think the
notion of homeowner responsibility, business responsibility of
paying something back on this increases the likelihood you will
get more responsiveness from the program than if it is just a
fund you can draw down on without some commensurate
responsibility.
So I would be interested in those and comments on those
ideas for the Committee, and any other suggestions you might
have in response to these questions.
And I apologize to the witnesses here for stepping out
before I have a chance to ask the questions directly. But let
me turn to my colleague, Senator Shelby, and turn the gavel
over to Senator Carper. And I thank Senator Carper immensely
for taking responsibility.
Senator Shelby. Thank you, Chairman Dodd.
Mr. Polsky, I know you are frustrated with what you went
through that you related. Who was your insurer that you had so
much trouble with?
Mr. Polsky. OK. My insurer was the only insurer in the
State of Florida that would insure in my ZIP code, and that is
Citizens Property Insurance Corporation, an arm of the
government of the State of Florida.
But Citizens was the only option we had because nobody else
would sell. Because they were told you do not have to sell.
Because the regulators in the State of Florida caved on their
demands to let them do it their way. That is why it was
Citizens.
But Mr. Shelby, let me tell you, I spoke to many hundreds
of people just in my area, and there were thousands across the
State, who had the exact same problem with State Farm, with
Allstate, and with Nationwide. So it was not a Citizens
Insurance issue----
Senator Shelby. Pretty uniform, was it not?
Mr. Polsky. It was very uniform. There were more issues
with Citizens because the regulations did not apply equally to
them because they were a Government-funded agency. But the
problems were the same, regardless of who the insurance company
was.
Senator Shelby. OK.
Admiral Loy, you propose a private--a public/private
partnership to address the rising cost of catastrophe
insurance. I worry myself when I hear the word public/private
partnership because such partnerships usually involve a lot of
public money, a lot of private profit, and not much
partnership. That has been my concern for many years here.
Admiral Loy, in theory, a national catastrophe fund
should--I say should--should be actuarially sound----
Admiral Loy. Yes, sir.
Senator Shelby [continuing]. And thereby self-financing. Is
that correct? Do you agree with that?
Admiral Loy. That is correct.
Senator Shelby. However, our experience with the Federal
Flood Insurance Program's inability to adequately price flood
insurance leads me and others to doubt whether any Federal
insurance program would be able, would be able to charge
actuarially sound rates over the long term. That is what we
would hope to do.
Would you discuss the scenarios under which you
realistically foresee taxpayers having to pay to cover the
obligations of a national catastrophe program?
Admiral Loy. A national catastrophe fund at the national
level.
Senator Shelby. Right.
Admiral Loy. Sir, first of all, let me establish my
credentials as not an actuary.
Senator Shelby. We know that.
Admiral Loy. There are folks on this panel that are
dramatically better equipped to----
Senator Shelby. But we know you know a lot about water,
though.
Admiral Loy. Yes, sir, I do know a bit about water.
First, I would offer that we should learn lessons from the
National Flood Insurance Program that has gone by. We have
actually, in the ProtectingAmerica.org agenda, attempted to
leave that over here, learn lessons from it, make those lessons
become realistic for us as we think our way through what might
be the proper construct of a national catastrophe fund keyed to
those participating States that would meet the obligations----
Senator Shelby. Should the No. 1 thing be actuarially
sound?
Admiral Loy. Yes, sir, I do believe that to be the case.
Senator Shelby. It has got to be, does it not?
How likely is it that actuarially sound prices will ever be
achieved under the Flood Insurance Program, the proposed
natural catastrophe program, or any other insurance program
absent, Admiral, the use of neutral mechanisms to assign rates
to risk?
In other words, you are managing risk. That is about
insurance, is it not?
Admiral Loy. Exactly.
Senator Shelby. And if you do not, if you do not assign a
rate to a risk, somebody is getting a free lunch, are they not?
Admiral Loy. Well again, sir, I am not a student of the
insurance business as it relates to the----
Senator Shelby. But just use your own common sense.
Admiral Loy. Precisely. My common sense suggests that with
thresholds established, as has been commented on by a couple of
other witnesses, where a State fund--first of all, the first
and primary provider of the insurance capability must remain
the private insurer. And to the degree they find themselves
overwhelmed in the aftermath of a storm, to have in advance the
designed intent of allowing a State fund to kick in, so to
speak, and address the shortfalls, as Mr. Polsky and others
have described, that seems to be an appropriate thing to do.
And in my mind, the last court of resort can be that
national fund where those very few, once in 100 years, maybe
even once in 200 years, catastrophes come by that the national
fund can, in all intents and purposes, be that reinsurer for
the State fund to allow people and businesses not to have to
suffer through what we have heard in testimony this morning.
Senator Shelby. Mr. Nutter, what is your estimate of the
maximum losses that the insurance industry could, could suffer
in a year from a natural disaster before it would face
widespread insolvencies? We know you have a tier of insurance
and you sell off a piece of the risk here and there. That is
managing risk.
But what are the probabilities of an event occurring that
would inflict such losses?
Mr. Nutter. It is a challenging question. Let me give you
my best answer.
Our estimate of the reinsurance contacts in place in 2006,
in other words not necessarily the total capacity available but
the capacity in place, is probably $70 billion to $75 billion
of reinsurance capacity.
You could add to that the capacity that the Florida
Hurricane Cat Fund added, which is probably another $15
billion, looking at 2006, of $90 billion. And that sits on top
of whatever the insurance companies retain by way of risk. So
if you use some percentage of capital and surplus, you would
add multiple billions of dollars of that.
So our estimate is that, indeed, there is satisfactory
capacity for the catastrophe risk based on the probabilities of
losses.
Senator Dodd mentioned the--and Admiral Loy mentioned the
1938 storm and the numbers were $100 billion or something. The
insured exposure, even adjusted to today's cost, is about $38
billion. If that same storm happened today and today's
exposures, that is considerably lower than what the industry
paid by way of Katrina, Rita and Wilma.
The Miami hurricane of 1926 is often cited as perhaps the
worst case scenario. And while it is no longer insured mostly
in the private market because of the State of Florida's
actions, that storm would be estimated at $80 billion.
To us those are numbers that suggest the industry is fully
capable, in terms of capacity and handing a major natural
catastrophe in this country. Admiral Loy mentioned, validly,
numbers considerably in excess of that. But I am sure that
includes infrastructure, disaster assistance, probably includes
the Flood Insurance Program, none of which would be replaced by
any Federal cat fund as currently proposed.
Senator Shelby. Dr. Hartwig, would a natural catastrophe
fund have any impact on the long-term availability and
affordability of insurance?
Mr. Hartwig. In terms of the long term availability and
affordability, potentially for the highest level events that we
can talk about, the sorts of events that Mr. Nutter has
outlined, events that go beyond that, events that exceed that,
events that would have required some Government involvement on
the back end anyway.
To the extent that various funds are being discussed today
or the legislation in Florida which was sold as a savings to
individuals, most of those savings are illusory and they are
illusory because while you can promise to cut rates today, the
reality of it is the deficits that will be incurred both by the
State-run insurer and the State-run reinsurer, have to be
recovered on the back end.
Senator Shelby. So there is no realistic price mechanism
here?
Mr. Hartwig. Right. Definitely with respect to Florida,
there is no realistic pricing mechanism at all. And in fact, I
would go so far as to say that the vast majority of State-run
markets of last resort tend to operate in a deficit position or
at very thin margins and are on the razor's edge of going
bankrupt at any given point in time.
Senator Shelby. Doctor, regarding Florida's catastrophe
fund, regarding their--it replaces pre-event premiums with
post-event assessments. That is an unusual kind of way to
finance insurance, is it not?
Mr. Hartwig. Well, there are some financing mechanisms that
are post-event and some bonds can be triggered post-event. But
what is unusual in Florida is to basically displace the private
sector, promise a big, big savings for everybody in the State,
and then to replace them with what many people do not
understand is a huge tax increase on the back end. Just many
people are unaware of it.
We are talking about literally, in some of the scenarios
Mr. Nutter mentioned, a repeat of the Great Miami Hurricane of
1926. We do not need to go to fiction. We can just look at old
events occurring today. We are talking about assessments in the
vicinity of $40 billion that threatened the State's credit
rating, that will cause all sorts of assessments on policies on
people who do not even live near the coast.
Senator Shelby. Mr. Nutter, I am sure you have reviewed
Senator Nelson's legislation to establish a national
catastrophe fund. What is your opinion on the likely impact of
the affordability of insurance, if that were to become law in
its present form?
Mr. Nutter. It is hard to see how it would help. If, as has
been suggested by proponents of a Federal cat fund, that it is
to be actuarially sound at the Federal level, requiring the
State fund to be actuarially sound, then ultimately you still
have to have the consumer pay an actuarially sound rate in
order to fund the mechanism. If you do not do that, there has
to be a subsidy or some sort of taxpayer assistance, as Florida
is doing now.
It is hard to see how that trickle-down effect of that fund
is actually going to affect the affordability or availability
of insurance.
Senator Shelby. Dr. Hartwig, you just said that there are
billions of dollars available for reinsurance in the
marketplace, as I understand it. Would we chase that money away
if we got the Federal Government in as the backstop business
here?
And if it would be driven away, would it go away perhaps
permanently?
Mr. Hartwig. Well again, I think that everything needs to
be done to encourage capital to flow into insurance in
reinsurance markets. And if there is a need that is beyond what
can be satisfied by any elements in the private market,
including the capital markets, there you might see that there
is some role of Government.
But to use Florida as a bit of a microcosm of this, it is
true that reinsurers were chased out of Florida. And if you
have the belief that each time you make a little money or each
time you get to a year that there are no cat losses that the
Government is going to step in and displace you, you are not
going to come back in. So they are looking for somewhere else
to go.
Senator Shelby. Mr. Chamness, Chamness?
Mr. Chamness. Chamness.
Senator Shelby. One of the biggest problems we had
following Katrina that we have heard a lot, over and over----
Senator Carper. Senator Shelby, I am going to just wrap it
with this one, if you would, please.
Senator Shelby. I am getting toward the end, if you will
let me.
Senator Carper. OK, good. So am I.
Senator Shelby. I always let you, remember?
One of the biggest problems we have had following Katrina
was the failure of some companies to pay claims in an equitable
manner. We have heard some of that today.
There are many reports of companies failing to adequately
assess claims and being willing to litigate claims rather than
to pay them. Do you think that the insurance industry could
have done a better job settling claims in the aftermath of
Katrina? And what are your members doing to make sure that they
will do a better job in the future? You know, they have had a
lot of bad publicity, not just in Louisiana, Mississippi, but
everywhere.
Mr. Chamness. Well, thanks for the question, sir.
The fact is, Katrina was unprecedented in the number of
claims paid, the cost, the number of lives lost. And I think
the insurance industry has learned lessons from the
unprecedented claims handling that was required after that
storm.
We certainly have looked at a lot of issues that Congress
can do today that will help improve the next storm and the
insurance industry's reaction to it.
I would respond, and I am sorry about the experience of Mr.
Polsky in Florida. He was a panelist here and so to address--
well, I cannot address his specific----
Senator Shelby. He is probably speaking for a lot of
people, though.
Mr. Chamness. Well, I would just say that the experience
with Citizens and his claims handling particularly, I think was
well documented in that various period where Citizens had, I
think, twice as many complaints in Florida as any other private
insurer. So unfortunately, his experience perhaps was not an
exception.
Senator Shelby. I have one last question.
Governor, over the past few years, there has been
tremendous growth in the use of alternative insurance
mechanisms, including catastrophe bonds and sidecar
transactions. Could you offer any insight as to why there has
been so much innovation and what impact a national catastrophe
fund would have on these incentives in the private market now
for future innovation?
You might want, just for the audience, explain what you
mean by catastrophe bonds and sidecar transactions. These are
new developments.
Mr. Racicot. They are, Senator Shelby. And frankly, they
are a revelation of a notion that I believe you subscribe to.
And that is the incredible imagination and creativity of
capital markets when they are allowed the opportunity to
function and operate because they are built upon the ingenuity
and the competitiveness of the American people driving toward
the best bargain they can drive to a consumer, thereby
rendering a profit.
And clearly, there have been----
Senator Shelby. But in doing that, they are assessing real
risk, are they not?
Mr. Racicot. They are. And frankly, at its core what this
argument to me about is this, that there are some forms of
insurance whereby a partnership with a governmental entity is
unavoidable, for instance with terrorism. And that is for a
very logical reason, because you cannot be advised--you have no
history, first of all, to set a premium, to do it actuarially.
You have no presently existing information to make an
assessment on a daily basis. So how, in the name of God, can
you go about setting a premium when you cannot assess the risk?
That is unavoidable.
Our belief is that this system has operated exceptionally
well for 150 years. Not perfectly, but exceptionally well. And
when you talk about the number of failures with processing
cases, really you are talking about in the neighborhood of
17,000 out of 1.75 million cases across the Gulf. I would say
that is a pretty good record in any venue.
Those are the ones, of course, that receive the attention
because they are so tragic and they are so difficult and they
are so challenging personally to people, and our empathy goes
out to them. But at the same time, we have got to keep an eye
on principle.
If you establish a cat fund, I think you are tearing at the
fabric of this infrastructure. And you can compromise it
irreparably and you cannot restore it. And that is why our
caution is to be very, very careful here. Because if we get to
the point of socializing property casualty insurance in this
country any more vastly than what is absolutely necessary, for
instance with terrorism, we I think augment substantially the
risk of decimating the system, which then means the Federal
Government to this day has to be prepared to pay out about $250
billion more in damages to the American people.
Senator Shelby. Thank you, Governor.
Thank you, Mr. Chairman.
Senator Carper. Senator Shelby, I remember all those years
when you were our chairman and you were patient with me and let
me go on and on. And I thought how will I ever repay him?
[Laughter.]
I think I owe you one less, my friend.
To our panel, sometimes I say when we have folks before us,
we just have a couple of witnesses on that particular day would
be quality, not quantity. Today we have quantity. But I would
also observe we have quality. This is a good panel and good
perspectives, a lot of different perspectives. They are of real
value.
Governor Racicot and I served as Governors together for 8
years. I believe he once had an idea of--I want to call it a
consensus commission or compromise commission. In a day and age
when we do not get a lot done here in our Nation's Capitol and
maybe we disagree more than we should. It was a different
approach and, I thought, an intriguing approach.
As we listened to this back and forth here today, I think
we may want to dust that off, that idea off, and see if we
cannot apply it here in this regard as well.
I think it was a Republican, a great Republican, Abraham
Lincoln, who used to talk about the role of Government. Do you
remember what he used to say? To paraphrase him, the role of
Government is to do for the people what they cannot do for
themselves.
We have responsibility, really shared responsibility that
involves States, involves Governors, insurance commissioners,
legislators, that involve the private sector insurance
companies, reinsurers, that involve the Federal Government as
well, not only through outfits like the Coast Guard that
respond to these emergencies and FEMA and others, but also, to
those of us who keep looking at this flood insurance program,
the Federal Flood Insurance Program, to decide is it
appropriate or not.
Mr. Chairman, Chairman Shelby and I used to serve together
on the House Banking Committee. And one of the things I worked
on, actually I think we were on that committee together, was
the National Flood Insurance Program. It seemed to me we almost
incentivized people to move into harm's way.
I think it was Dr. Hartwig who said over half the people in
our country live within 50 miles of one of our coastlines. We
do not have 1,400 people a day coming to Delaware, but we
probably have 1,400 people maybe every other month, that are
moving, especially to Sussex County, which is where we have
some terrific, terrific beaches.
What I want to do today is ask two different questions. I
will tell you what both of them are. One of them deals with sea
level rise, something that we are concerned about in my little
State. The highest point of land in Delaware is a bridge and it
is not very high.
We have a lot of folks who come to places like Rehoboth
Beach and Dewey Beach and Fenwick Island and Lewes and Cape
Henlopen and all kinds of places up and down our little shore.
But I kid people and say, Senator Shelby, we are going to
have people buying beachfront property not in those places in
Delaware, but if we are not careful in like Dover, Wilmington,
or places far inland. Hopefully, that will never happen.
But last week the U.N.'s Intergovernmental Panel on Climate
Change released a report. You probably heard about it. They
concluded that climate change--yet another report concluding
that climate change is going to have a significant impact on
the environment. They talked about winners and losers in
different parts of the world and how climate change was going
to affect them.
One of the specific impacts they cited though in the
report, and it states, and I quote ``Sea level rise and human
development are together contributing to losses of coastal
wetlands, and mangroves and increasing damage from coastal
flooding in many areas.'' That is their quote.
We know that climate change is presenting an increasing
amount of risk to our lives and to our property around the
globe, especially in coastal regions.
I would just ask, particularly for the insurance companies
that are here or their spokesmen, if you would, how are the
insurance companies calculating the risk of climate change
impact when issuing policies? That is my first question.
And sort of as a follow-in, are insurance companies taking
any specific risks or steps to incentivize actions that would
reduce greenhouse gas emissions that cause global warming and
contribute to sea level rise and just exacerbate the situation
we are talking about here today?
Mr. Nutter. Senator Carper, I will take a shot at that.
Senator Carper. Mr. Nutter, you are on. Thanks.
Mr. Nutter. The scientists who look at the evidence of
climate change have concluded that the likely effect on
hurricanes, which is how the industry would tend to translate
climate change into its business, is that it will increase the
intensity of storms, that there is no conclusive evidence that
the number of storms will be increased by the intensity of
storms. It does not take much to increase the intensity of the
storms that have hit the Gulf Coast or Florida to understand
that it will exacerbate the damage greatly.
The insurance mechanism that attempts to translate this
scientific information is largely through catastrophe modeling
companies. These companies try to assimilate scientific
information together with the actuarial information. And the
modeling companies then submit information to insurance
companies and, in some cases, to insurance regulators.
Regulators have had difficulty, as you might expect, in
accepting what maybe some consider subjective assessment of the
likely impact of climate change. But it is an effort on the
part of the industry to try and assimilate its actuarial
expertise with the scientific expertise. But some conclusive
information would suggest that not only are we going to see
more activity, as Dr. Hartwig suggested, but the intensity of
these storms are likely to be far more severe.
Senator Carper. It would seem to me, before I yield to
others to respond to the question, it seems to me that the
intensity of the storms is sort of the near term threat. The
longer term threat is sea level rise. That is just an
observation.
Others, please?
Mr. Racicot. Well, Senator Carper, I think it is important
to note and for everyone to clearly understand that it is not
insurance companies that do this actuarial analysis
independently on their own, in private, with visors on. These
analyses are conducted by independent entities that receive
data from virtually every insurance company in the United
States of America.
It actually, parenthetically, is a good reason why the bill
that sets about to diminish or derail the application of
McCarran would be a disaster for people because you would steal
away the opportunity to get as much information as possible
into these distilleries of knowledge and analysis allowing for
an actuarially sound premium ultimately to be suggested.
At the end of the day, I think for our members, when it
comes to climate change, it is not an issue that they denounce
nor dismiss. It also, at the same point in time, is an issue, I
think, that the jury still retains some doubt about. And as a
consequence they are planning, looking to the modeling
agencies, contemplating and trying to analyze virtually all of
the new data that comes in on a daily basis. But frankly, it
has not risen to the level that would allow for them to be able
to draw a conclusive presumption about proceeding in the
future.
Senator Carper. All right. Others?
Mr. Nutter. Senator Carper, can I just supplement it, since
you----
Senator Carper. Mr. Nutter, sure.
Mr. Nutter [continuing]. Made the point about sea level
rise.
As you would expect, gradually rising sea level is not
going to be an insured event. On the other hand, increased
storm activity or increased intensity is clearly going to drive
a wave wash onto shore and affect property.
So it clearly is a problem, both with respect to what I
mentioned earlier, the increased intensity of the storms, but
also the likelihood that properties are now going to be
subjected to a greater extent of the wave wash that comes with
the storms when they come onshore.
Senator Carper. All right, thank you.
Mr. Chamness.
Mr. Chamness. Mr. Carper, I agree with the comments of the
other insurance company participants.
I would add that it is something that our industry is
beginning to pay quite a bit of attention to. Indeed, our own
trade association has rolled out a website called
InsuranceandClimate.org that is starting to track some of the
information, some of the studies that have been published, most
of them from Europe, mostly be reinsurers that are examining
the issue. I might hold it out as a resource for you as you
look into it and the insurance industry.
Senator Carper. Anyone else? Please.
Mr. Hartwig. Yes, Senator Carper.
I would like to get back to one point in my testimony also
about land use.
Senator Carper. By the way, I really enjoyed the visuals
that you had there. You do not see that every day. That was
good, good tool.
Mr. Hartwig. Thank you for putting up the videos for me.
But the issue about land use, while there is a tendency to
often think about these issues as forming part of elements of
an insurance crisis, per se, as my example with South Miami
Beach, every bit of which would disappear were sea levels to
rise just a bit, we can see that clearly. While insurers may be
looking at modelers and a variety of other researchers to help
discern the risk, somebody in South Miami Beach is not looking
at this. And so those structures are no doubt intended to stand
a long time.
So we are seeing different things going on here. We see
insurers taking this very seriously. But because land use
decisions are local, but they do not appear to be thinking big
picture.
Senator Carper. Thanks.
Dr. Loy--not Dr. Loy, Admiral Loy. You may be a doctor,
too, I do not know.
Admiral Loy. I guess I would just like to offer that your
question allows us to sort of step back a bit from the
conversation that we have had for the most part this morning.
For this Committee, as you represent the people of this
country, this has to be about saving lives and protecting
people at the other end of the day.
And to the degree we are able to do that, we can recognize
that insurance and the construct associated with it is not
``the'' solution. It is a part. It is a dimension, a serious,
an important dimension of the solution.
But we need systemic changes, I believe, in the way our
country is prepared and protected against these kind of things.
And so the multiple dimensions associated with truly a
comprehensive national solution to this challenge is,
unfortunately, what the Committee has to try to get its arms
around while concentrating in each of those dimensions,
including the insurance construct.
Senator Carper. Second area I want to explore, I want to go
back to Senator Shelby's questions with respect to the National
Flood Insurance Program. Mr. Chamness, I think you were the one
who said what we tried to do here in this Committee and in the
Senate last year was worthy or was meritorious.
As I recall our efforts sort of foundered. I do not believe
the House ever acted and I do not believe we ever ended up with
final legislation.
But for about 20 years, when Senator Shelby and I were
together in House Banking, we started working on national flood
insurance, looking at the National Flood Insurance Program, and
trying to make sure we were not somehow inadvertently
incentivizing people to move into harm's way. Spend a lot of
money, invest a lot of money, and ended up putting themselves
and their families, and frankly insurance companies and
taxpayers, at risk.
I do not care who starts off. Mr. Chamness, you mentioned
the issue so you may want to start. If you want to give me just
one thing we should do with respect to national flood
insurance. Use last year's legislation. Just one important
principle that we should adhere to in that legislation. I would
welcome any advice you all have for us, because I think we are
going to take it up again. I believe the Chairman mentioned
that before I got here today.
Mr. Chamness. Thank you, Mr. Carper.
You are right. I think the Congressional Budget Office
called the current program unsustainable. Basically, as it was
pointed out earlier, it takes in approximately $2 billion in
premium each year and pays out, in a regular year, about that
amount. Of course, when we reach the events of 2005, it pays
out many times that amount.
So if there is one thing, I think it would be to make it
more, and it is a Government program, more actuarially sound,
allow it to build up a reserve, a reserve that can be called
upon in those times of great need. And we just experienced one
and the Committee is well aware of the challenges that that
posed.
Senator Carper. Thank you.
Any other counsel? Yes, Governor.
Mr. Racicot. Senator Carper, would you permit me to add one
footnote to your previous discussion?
Senator Carper. Add that footnote.
Mr. Racicot. That is that if we set about to--when you talk
about climate change and sea levels--to create a natural
catastrophe fund, perversely it seems to me we are contributing
significantly to your rising concern.
What do I mean by that? You are still providing the same
incentives for people to migrate wherever they choose and make
whatever decisions they wish because at the end of the day they
know that they will be taken care of. The value proposition
that our forebears built into this system is somehow, I think,
eviscerated.
I just thought it might be worthy of your consideration.
Senator Carper. Thank you. Sure.
How about that second question?
Mr. Racicot. In reference to the second question, frankly,
if you really think about it, the National Flood Program was an
effort to optionally federally charter a risk and allow it to
be managed by the Federal Government. And frankly, had it been
required to charge actuarially sound premiums and had it had
accurate maps to be able to determine where the flood zones
were, and had it the ability to react like a private company,
it could very well have done exceptionally well.
And at the end of the day, when you think about it, if you
are going to require something to be actuarially sound, there
is already the private capacity to do that. So why are you
creating that redundancy to create a Government program that
already allows for that function to be performed by the private
sector?
And so I think there are things that ought to be done with
the National Flood Program. I would not agree with Dr. Lazear
that somehow the difference is one is old and one is new. That
has to do with justice. It does not have to do with economics.
And from an economic point of view, it seems to me, what we
ought to be considering is how to make it work. And I think you
can make it work and bridge to the future to an actuarially
sound national pool by charging adequate premiums, having
accurate maps, and having expanded coverage.
Senator Carper. Good. Commissioner Bell.
Commissioner Bell, sitting back here, you are about a head
taller than everybody else on this panel. When you stand up,
how tall are you anyway?
Mr. Bell. I have been that way most of my life, Senator.
Senator Carper. Do you just have really short legs?
Mr. Bell. I am 6,6".
Senator Carper. I could tell. We should sign you up for the
University of Delaware. We could use another Fighting Blue Hen
like you.
Senator Shelby. We are going to keep him in Alabama.
[Laughter.]
Senator Carper. I was afraid of that.
Mr. Bell. Thanks, Senator. That is my State of choice and
birth.
When we look at the flood insurance program, it goes beyond
what is sound in terms of actuarially. The big question from
Katrina was was it wind or was it flood? And that is what has
caused all of the issues in the State of Mississippi, in
Louisiana, and in the entire program.
So until we come up with some way that is going to say and
determine what happened first, unless we get rid of the anti-
concurrent clauses. What happened first? To be able to
determine that with an adjuster going out after the fact is
going to be very difficult and it is still going to give room
for much litigation going forward in another Katrina-type of
event.
So I caution you going forward to make sure that that is a
huge issue that you look forward to going forward because from
day one that was going to be the big issue with the Katrina
situation.
Senator Shelby. Mr. Chairman, I think Mr. Guidry----
Senator Carper. Mr. Guidry, I am going to ask you to really
have the last word here and we will wrap this up. But I am
going to ask the other witnesses to respond for the record,
because I am very much interested in your thoughts.
If you were in our shoes, if you were in our shoes, not
running a small business in Louisiana, and not being
commissioner of insurance, not running a major trade
association. If you were in our shoes, what would you do about
the National Flood Insurance. I would welcome that. Thank you.
Mr. Guidry, the last word.
Mr. Guidry. I just wanted to comment on the notion of
incentivizing people to move in harm's way with flood
insurance.
I service the offshore oil and gas industry. I am not down
there for the view. We are there because that is where the
pipelines are. We are down there because that is where the oil
ports are, the heliports are. And then obviously, to service
that industry I have to be in proximity to that industry.
In turn, the people I employ comes down to that area and
survive. So we are not exactly on the same par with Florida
where we are there to build million dollar houses, third and
second houses.
And finally, the comments that the Admiral said. I am a
firm believer that the profit motive is the most efficient way
to be able to deliver a service. So the private sector thing, I
am in total agreement with that.
When I look at our particular case, the education piece, we
do accept our responsibility in our insurance coverage and
looking at it. Obviously, the term ``in good hands'' does not
mean what I thought it meant. That is a part of it.
And then second, the mitigation piece. I mean, there is a
lot of it that we just feel that we are just being held hostage
because these guys got the lawyers and we do not. And the deal
is just to hold us out, hold us out as long as possible for us
to just come in and finally settle. Because we think the
insurance companies are actually going to do that.
But what I do caution you with is you can come in here and
you can spout all these wonderful statistics. But we, as small
business people, what we are thinking today are going to be the
statistics that you are going to be debating, you know, in the
next year and the next year. When you take it and you make my
company have a $200,000 deductible, what you have done is you
have taken the risk from the insurance company and you have put
it on me.
In turn, I will put it on my banker. And if something were
to happen to just me, I will just have to deal with it. But if
it happens as large as it has happened in my community, then my
banker is going to have to deal with it. And on the back end,
you are going to come right back from the insurance side of
your committee to the banking side of your committee and you
are still going to have to deal with the issue.
And if Katrina has taught us one thing, being proactive on
a situation is always less costly than being reactive on a
situation.
Senator Carper. That is a good note to end on.
Mr. Guidry, the committees here are always jealous of their
jurisdiction. When you say whether it is banking or whether it
is insurance, we are your committee, that is something that is
probably music to the ears of most members of this Committee.
I am sort of speaking on behalf of Chairman Dodd, and I
will not pretend to speak for Senator Shelby. But we are
grateful that you stuck around with us today and testified and
provided some real good thought.
I think the hearing record will be open for a week or two
after this and you will get a couple of questions, further
questions in writing. If you all could respond to them, we
would be deeply grateful.
Again, it is good to see all of you. Especially good to see
my friend and colleague, Governor Racicot.
And Admiral Loy, we are always grateful to you for your
service to our country.
With that, this hearing is adjourned.
[Whereupon, at 12:45 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follows:]
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Chairman Dodd and Ranking Member Shelby for
holding this important hearing to examine the availability and
affordability of property and casualty insurance in the Gulf Coast and
other regions.
I want to say from the outset that I remain highly skeptical of the
necessity of federal catastrophe insurance. Although the property/
casualty insurance industry paid $57.7 billion in catastrophe losses in
2005, the last three years have been their most profitable ever, rising
to unprecedented levels.
If there is a problem, it is that the companies no longer want to
take on any risk. After one claim, many homeowners are dropped by their
insurance companies. After dropping anyone they perceive as risky, the
insurance companies now want the taxpayers to shoulder the remaining
risk? That doesn't make much sense to me.
While it may be necessary to make some adjustment in the insurance
markets, I am unconvinced that the necessary ``adjustment'' is federal
insurance. After all, the flood insurance program provides a fairly
shameful record of federal involvement in insurance. While proponents
would disagree, pointing out that this program will be actuarially
sound. I would remind them that federal flood insurance started with
the same promise.
Terrorism risk insurance provides another instructive example.
Although we were repeatedly promised that the markets only needed time
to adjust. GAO and others found that the federal presence has served to
stifle private sector innovation and involvement.
So, despite the many promises we might hear surrounding current
proposals, I am reminded of the saying that those who don't know
history are doomed to repeat it.
While I don't think it is a good idea for the federal government to
get in the insurance business, I do recognize that some changes may be
necessary to help foster a healthy private market. I will be interested
in any suggestions our witnesses today may have along those lines, so I
will be listening carefully to their testimony.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF SENATOR JACK REED
Thank you Chairman Dodd and Senator Shelby for holding this hearing
on the availability and affordability of property and casualty
insurance.
In many catastrophe-prone coastal areas, some insurance companies
have stopped writing new homeowner policies and have dropped existing
customers or decreased coverage. Homeowner premiums for customers in
several coastal states have increased sharply despite several years of
rising industry profits and a less costly 2006 hurricane season in the
East. In my state of Rhode Island, property owners have been greatly
impacted and are frustrated by fewer options and significant increases
in insurance premiums; reportedly, some homeowners are paying over
twice their premium. Even though they have been loyal customers for
years and have never filed a claim, some Rhode Islanders have received
non-renewal notices from their insurance company. According to the
Newport County Board of Realtors, 4,500 homeowners' policies have been
cancelled in the Newport area. Other Rhode Islanders have been forced
to accept higher deductibles in order to receive coverage.
Rhode Islanders are experiencing these difficulties in obtaining
insurance and are paying higher premiums even though insurance
companies are reporting rising profits. According to a Wall Street
Journal article, the insurance industry has had three straight years of
rising profits, which factors in the cost of 2005's Hurricane Katrina.
Profits from the property and casualty industry rose to $68.1 billion
in 2006 compared to $49 billion in 2005. However, home insurance rates
along the Gulf and Atlantic coasts rose between 20 and 100 percent
during 2006; outside coastal areas, rates rose 2 to 4 percent over the
same period.
At the national, state, and local levels we must evaluate how we
plan, mitigate, and respond to natural hazards. Hurricanes and floods
have occurred throughout history and will continue to occur. We have to
engage in an honest discussion about how to rebuild in a way that
protects people, property, and the environment.
I believe the federal government needs to provide Americans with
the most accurate data that reflects flooding hazards from hurricanes
and other natural events. Currently, FEMA's flood maps do not reflect
the real flood hazard risks. Over 70 percent of FEMA's maps are over
ten years old. In the case of Rhode Island, the maps are over 20 years
old. New development, community growth, erosion, and a variety of other
factors altered watersheds and floodplains. This new development and
its affects on floodplains are not accurately reflected in FEMA flood
maps. As a result, I plan on reintroducing my flood mapping bill, the
National Flood Mapping Act.
I am interested to find out from today's witnesses the reasons why
insurers are exiting the property and casualty insurance market and why
homeowners are being cancelled or having to pay substantially higher
insurance premiums to protect their homes. Furthermore, I am interested
in what states are doing to address the impact exiting insurance
companies and rising insurance premiums will have on homeowners and
competition. Lastly, I would like the witnesses to address what role
the federal government might be able to play in providing homeowners
with needed relief.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM EDWARD P.
LAZEAR
Q.1. All of the witnesses appear to support the proposition
that mitigation efforts are an important part of preparing
Americans to withstand and hopefully minimize damage from a
large-scale natural disaster. I agree, which is why I have
called for at least doubling the federal investment in
mitigation efforts. What do you see as the current barriers to
mitigation efforts and what can be done to remove those
barriers?
A.1. First and foremost, the government should not take actions
that discourage loss mitigation such as providing subsidized
insurance against catastrophe risk at below actuarial rates or
preventing private insurers from charging premiums commensurate
with risk. In a well functioning insurance market, those
businesses and homeowners who chose to locate in dangerous
areas or fail to adopt measures to reduce losses may be charged
higher insurance premiums, which gives them a financial
incentive to change their behavior.
The Administration strongly supports disaster risk
mitigation. The FY 2008 Budget proposes $100 million for FEMA's
Pre-Disaster Mitigation Program which provides funds to states
and communities for hazard mitigation planning and the
implementation of mitigation projects prior to a disaster
event, and $34 million for FEMA's Flood Mitigation Assistance
Program which provides funding for measures that reduce the
long-term risk of flood damage to buildings. The FY08 Budget
also proposes to double the funding for the Severe Repetitive
Loss Pilot Program, from $40 million to $80 million. Funding is
provided for the acquisition of the structure and underlying
real property for the purpose of creating open space uses in
perpetuity; relocation of flood prone residential structures to
areas outside the hazard area; elevation of existing
residential structures; demolition and rebuilding of
structures; construction of minor localized flood control
projects that provide protection to severe repetitive loss
properties; and certain flood-proofing techniques for historic
structures. Although federal programs such as these can help to
encourage community mitigation efforts, responsibility for
establishing and enforcing prudent building codes, zoning, and
land use planning rests mainly with the states and local
communities.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM EDWARD P.
LAZEAR
Q.1. Are you familiar with the experiences other countries have
had with establishing national catastrophe funds? If so, are
there any lessons that we should learn from their experiences?
A.1. In February 2005 the Government Accountability Office
submitted U.S. and European Approaches to Insure Natural
Catastrophe and Terrorism Risks, to the House Financial
Services Committee. This report, which reflects information
gathered from a diverse array of stakeholders, looked at
practices in six European countries and found a mix of
government and private-sector approaches to dealing with
natural catastrophe risk. The governments of France and Spain
mandate natural catastrophe coverage and backstop private
insurers with state-backed entities or government guarantees.
Conversely, the national governments of Germany, Italy, and the
United Kingdom do not provide natural catastrophe insurance.
All six countries, however, allow insurers to establish tax-
deductible ``reserves'' for future catastrophe events.
Q.2. If a mega-catastrophe did occur that threatened the
solvency of the entire insurance industry, what actions could
the federal government presently take to stabilize insurance
markets and ensure that policy holders' claims were paid, and
would the existence of a national catastrophe fund improve the
federal government's ability to respond to a crisis in U.S.
insurance markets caused by a mega-catastrophe?
A.2. Currently, the Stafford Act provides for post-event
federal disaster assistance and state guarantee funds protect
policyholders when individual insurers are unable to pay
claims. A mega-catastrophe large enough to threaten the
solvency of the entire insurance industry would require an
aggressive federal response, regardless of whether or not a
federal natural catastrophe backstop program were in place. An
insurance industry crippling event would necessarily be much
larger than 9/11 or Katrina, but, if those events are any
guide, only a fraction of the overall economic costs of the
mega-catastrophe would actually be covered by insurance. After
the event, Congress would need to make difficult choices about
how to allocate scarce federal aid dollars and federal
budgetary resources. One problem with a natural catastrophe
backstop program is that it would effectively pre-commit a
share of those scarce aid dollars to pay loss claims. A post-
event insurance bailout could be beneficial, but after a true
mega-catastrophe, other needs might be more pressing.
Q.3. Do you have any concerns that Florida's recently enacted
insurance reforms have undermined its insurance market and make
it likely that a federal bailout will be needed in the near
future?
A.3. As discussed in my prepared remarks, I believe that
Florida's recent insurance legislation is, in important ways, a
step in the wrong direction. States need to allow markets to
function. When insurance premiums reflect underlying risk, they
provide valuable signals to those seeking insurance about the
costs of their decisions, so people have incentives to take
actions to mitigate risk. Moreover, basic economic theory and
evidence shows that if premiums are suppressed through
regulation, less insurance will be available. Unfortunately,
rather than allowing market forces to operate, key provisions
of Florida's recent insurance legislation tighten constraints
on insurer's ability to adjust the premiums they charge.
Furthermore, the state has substantially increased coverage of
its property insurer of last resort while lowering its rate of
coverage threshold, and has nearly doubled the size of its
reinsurance facility, the Florida Hurricane Catastrophe Fund.
When a state provides insurance and reinsurance at below market
rates, it crowds out private insurance and reinsurance. By
expanding coverage provided by the Florida's reinsurance
backstop, the Florida Hurricane Catastrophe Fund, without
appropriating sufficient capital to cover potential near-term
losses, the new law increases the odds that the Fund or the
state will need to borrow heavily to cover claims if a severe
catastrophe strikes.
Every state need to take responsibility for keeping its own
financial house in order, so I would not want to speculate on
the possibility of a federal bailout for Florida. I would note,
however, that it is reasonable to have concerns about the
financial risks posed by expanding state insurance obligations.
Florida's legislative changes to its property insurer of last
resort had made the carrier actuarially unsound, according to
the state's chief financial officer. It is telling that shortly
after Florida's insurance legislation was passed, major rating
agencies lowered credit ratings for bonds issues by the Florida
Hurricane Catastrophe Fund. The insurance strength rating
agency A.M. Best Company also cautioned that insurers with
large exposures in hurricane-prone areas of Florida could have
their ratings downgraded because of concerns over the financial
strength of the Florida Hurricane Catastrophe Fund.
Q.4. If a national catastrophe fund was established and it
increased the supply of reinsurance, would it result in lower
insurance prices for consumers?
A.4. A national catastrophe fund would likely result in
taxpayer-subsidized government reinsurance crowding out some
private reinsurance. We have already seen an example of this in
Florida. Guy Carpenter and Company has reported that expansion
of the state-sponsored Florida Hurricane Catastrophe Fund could
cause Florida insurers to purchase $1.5 to $2.0 billion less
private reinsurance than they otherwise would.
To the extent insurance prices would decline under a
national scheme, it would likely be due to taxpayers taking on
some of the risk instead of insurance companies and policy
holders.
Replacing private reinsurance with government reinsurance
is both unfair and inefficient. It is unfair because it forces
taxpayers nationwide to bear the costs of subsidizing insurance
in high risk areas. Why should the residents if Iowa or
Nebraska, who don't enjoy the amenities of living on a coast,
have to pay higher taxes so that the insurance rates of those
living in high-risk coastal areas can be lower? It is
inefficient because it means that the costs of covering
catastrophic losses will be contained within the United States
instead of diversified internationally. Insurance exists to
spread risk. When a primary insurer buys reinsurance cover, it
is effectively spreading the risk of covering catastrophic
losses to investors around the world. One of the reasons the
U.S. property/casualty insurance industry emerged from the
devastating 2005 hurricane season in sound financial condition
is that a significant fraction of insured hurricane losses were
borne by reinsurance companies backed by capital from investors
in Europe and Asia as well as North America. In contrast, when
insurance or reinsurance is provided by the U.S. government,
all of the costs will ultimately be borne by U.S. taxpayers, so
risk is not spread as widely as it could be.
Q.5. In your testimony, you stated that a national catastrophe
program would ``undermine economic incentives to mitigate risk
because the program would likely distort rates from their
actuarial value.'' Could you elaborate on this statement and
discuss further whether a national catastrophe program could
increase the financial losses incurred by natural disasters by
reducing incentives for risk mitigation?
A.5. In insurance markets, as in other markets, prices affect
the way people weigh costs and benefits. Insurance prices that
are artificially low can discourage people from adequately
protecting against future losses. If we introduce a taxpayer-
backed backstop program designed to keep insurance premiums in
high-risk coastal areas artificially low, we effectively make
it cheaper for people to locate in those high-risk areas. Since
people consider insurance costs when deciding where to live and
do business, such a policy risks encouraging excessive
development in places where catastrophes are most likely to
strike. Similarly, a subsidized catastrophe insurance program
would mean that owners of properties already in place would not
bear the full cost of their risk exposure, so they would have
less incentive to take actions such as installing storm
shutters that might reduce future losses.
Q.6. What impact could alternative insurance mechanisms, such
as catastrophe bonds, insurance derivatives, and the
securitization of insurance risks, have on the availability and
affordability of insurance in the future? Also, what impact
would a national catastrophe fund have on the development of
these new products?
A.6. Through catastrophe bonds, sidecar deals, and other
innovative financing mechanisms, insurers and private investors
are finding new ways to spread the risks posed by large-scale
catastrophes. These financing mechanisms currently contribute
only a relatively small share of the total capital available to
cover catastrophe losses, but the volume of capital they have
raised has grown rapidly in recent years. It is likely that as
these markets mature, the base of investors willing to bear
some catastrophe risk will continue to expand, ultimately
lowering the costs of insuring catastrophe risk. However, a
government-sponsored national catastrophe backstop program
would likely undermine market innovation in catastrophe risk
finance because government-subsidized reinsurance provided at
less than actuarial prices would crowd out private sector
alternatives. It is reasonable to assume that the greater the
government's involvement in the catastrophe risk reinsurance
market, the less time and money will be spent looking for
innovative alternatives.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM WALTER BELL
Q.1. Mr. Nutter says in his testimony, ``The insurance industry
surplus grew from $356 billion at December 31, 2003 to $439
billion at December 31, 2005. As of December 31, 2006, the
industry's claims paying ability and capital base have never
been better.'' This statement suggests that despite Katrina,
the largest natural disaster in American history, insurance
companies have had no problems paying claims, and in fact, have
a better ability to pay claims now than before that disaster.
In addition, Mr. Nutter says that ``reinsurance capacity is
adequate even for peak catastrophe markets.''
At the same time, Americans around the country are finding
it increasingly difficult to secure sufficient and affordable
insurance. We hear reports that people from Texas through the
Gulf and up the Eastern seaboard are seeing their insurance
dropped and their rates and deductibles increased.
How can this disconnect be explained? There appears to be
sufficient insurance capacity, yet working families and
business owners are unable to afford sufficient coverage. What
do we do for these people, so that they can afford needed
insurance coverage?
A.1. The capacity of the insurance industry is an important
indicator of the collective industry's ability to withstand a
catastrophic event, but capacity alone does not dictate
affordability and availability. All the capacity in the world
becomes meaningless to the public if an insurer is not willing
to make that capacity available at an affordable price to cover
their home or business. Insurers are reluctant to expose their
capital to catastrophic risk--risk that if not carefully
managed could result in insolvency--particularly when there are
other lines of business that are potentially more profitable
and less catastrophe prone. While this makes good economic
business sense from their perspective, it does not solve the
regulators' and legislators' public policy concern of making
coverage available to those deemed in a high-risk area. The
perception of catastrophic risk exposure, particularly to an
event that would result in the risk of certain insolvency, is
what has led to the coastal market problems.
Insurance companies, risk modelers, meteorologists and
regulators agree that there are naturally occurring
catastrophic events that could produce insured losses of $100-
200 billion, or perhaps more. A massive earthquake in the new
Madrid fault area or in downtown San Francisco, or a category 5
hurricane hitting Miami, veering out to sea, and then traveling
up the eastern seaboard, are such events. While the statistical
likelihood is relatively low, insurers are factoring such
potential into their risk management and decision making.
Therefore, despite a large amount of aggregate financial
capacity, only a fraction of that capacity is available to any
one company. Further, they are unwilling to put much of that
capacity at risk to catastrophic exposure when there are other
more profitable and less risky lines of business that they
could write. When they do expose their capital to the risk of
catastrophic loss, the cost to policyholders can be rather
expensive.
There are no easy solutions or overnight fixes, but there
are a series of steps that collectively would address this
issue:
In the long term we can limit catastrophic risk
by strengthening building codes and making informed land use
plans. A first step in achieving this would be a commission,
like the one you have proposed, to partner states, localities,
the federal government, and the private sector. Lowered risks
stemming from these improved codes and land use plans should be
reflected in the pricing by insurers.
The tax code could be modified to support
mitigation and loss prevention. For example, deductions or
credits for risk reduction measures would encourage mitigation.
Allowing for tax-free IRA-like vehicles to save for deductibles
would incentivize families to save up funds to have higher
deductibles and lower rates.
Another concept is to amend the IRS tax code to
provide incentives for individual insurance companies to set
aside reserves for catastrophic losses on a tax-deferred basis.
Current tax laws discourage property and casualty insurers from
accumulating assets to pay for future catastrophe losses.
Payments for catastrophe losses are made from unrestricted
policyholder surplus after losses have incurred. Current tax
law and accompanying accounting standards require insurers to
limit the recording of loss reserves to events which already
have occurred, and require the recognition of catastrophe
premiums during the periods in which they are written.
Currently, if a company obtains higher than average profits and
creates an excess reserve, these reserves would be taxed at an
ordinary tax rate, as well as negatively affect future rate
requests. The inability to build catastrophe reserves forces
insurers to prepare financially as if they were going to have a
major storm in multiple locations every year. This necessitates
annual reinsurance purchases with no credit or residual benefit
toward next year if no losses occur. Allowing U.S. companies to
join those in most other industrialized nations by setting
aside tax-deferred reserves specifically for catastrophes, when
structured appropriately as not shelter income, could provide
additional capacity for the market. Tax-free catastrophe
reserves also could help mitigate some of the ``boom or bust''
cycle in the property insurance market to everyone's benefit.
A better system of integrating the federal flood
insurance program with the state regulated property insurance
and wind pools could reduce the litigation risk that is causing
insurance companies to view coastal insurance as riskier than
other lines of business. for example, Congress could partner
with the states to move to a mandatory offer of an all-perils
policy.
A dedicated reinsurance fund, whether single
state, multi-state or national in scope, could help manage the
timing risk associated with catastrophic losses.
A ``line of credit'' or some other access to a
short term funding mechanism could limit the timing risk
associated with large scale catastrophes that would otherwise
overwhelm the immediate capital capacity of a company. In other
words, the risk of total ruin would be reduced because the
insurance company would be able to handle larger than expected
losses by tapping additional funds and being able to pay back
these funds over time.
Q.2. All of the witnesses appear to support the proposition
that mitigation efforts are an important part of preparing
Americans to withstand and hopefully minimize damage from a
large-scale natural disaster. I agree, which is why I have
called for at least doubling the federal investment in
mitigation efforts. What do you see as the current barriers to
mitigation efforts and what can be done to remove those
barriers?
A.2. You are right to focus on the important role of increased
mitigation. The primary barrier to mitigation is the upfront
cost and the fact that the benefits may not come during a
homeowner's time in the house. Although there are some
inexpensive things that a homeowner can do to harden a
dwelling, to completely retrofit a home to a stronger building
code can be expensive. For example, elevating a home to reflect
changes in the flood plain can be extremely expensive, but it
is estimated that $1 of mitigation can result in $4-5 of
savings from reduced loss. Similar mitigation efforts like more
securely attaching walls to roof and walls to foundations pay
off for both hurricane risk and earthquakes. Mitigation takes
foresight but it is good public policy that not only saves
money, but saves lives.
If there is little perception of risk then there is little
incentive for mitigation. As Congress considers its role in
managing natural catastrophes, any federal involvement should
find ways to provide information and incentives to homeowners,
state governments, insurers, builders and other stakeholders to
include mitigation efforts in their decision making process.
Flood plain maps that accurately reflect the risk of flood
would help the public have a true understanding of the risk
empower them to make informed decision about where to build and
how to build. The tax code could be used to provide tax credits
to homeowners that take specific steps to improve the
likelihood that their home could withstand a catastrophic event
to which they are exposed. Congress could authorize funds to
provide grants or low-interest loans to encourage people to
take steps to harden their homes. State legislatures could
encourage mitigation by requiring insurers to offer discounts
or credits that recognize efforts of the homeowner to
strengthen the house against the risk of catastrophic loss.
Also, efforts to educate the public about the positive benefits
of mitigation could be undertaken. Efforts to either encourage
or mandate the adoption and enforcement of strong building and
land use codes could be considered.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ROBERT
HARTWIG
Q.1. During the hearing, testimony was given on how the high
cost of insurance in the Gulf Coast is hindering the region's
recovery from Katrina. What measures would you recommend to
help reduce the cost of insurance in the region?
A.1. There are a variety of recommendations that will reduce
the cost or limit the magnitude of future increases. All are
related to risk reduction.
Further strengthen building codes throughout
vulnerable states.
Allow insurance prices to move to their full
actuarially-sound (risk-based) level. Risk-based pricing is
critical because it is a signal to buyers and developers about
the relative riskiness inherent in coastal areas. Federal and
state programs that provide insurance subsidies on coastal
property obscure and dilute the informational value that risk-
based insurance premiums bring to the market. Risk-based
pricing will compel more stringent building designs and make
building in highly vulnerable areas less economically viable,
thereby reducing potential losses and future levels of exposure
while at the same time reducing the exposure of taxpayers.
Provide incentives for mitigation using federal
and state tax policy, low interest loans and grants. Insurance
discounts can be used if rates are allowed to first move to
their full actuarially sound level.
Require disclosure of property's hurricane
resistance in real estate transactions. If market participants
are made aware of the strengths and vulnerability of a property
before a real estate transaction, then this will become an
element upon which price is determined. All else equal, a home
with better resistance will be more valuable so long as this
fact is known by all parties. A hurricane resistance index
could be developed (e.g, using a scale of 1-10) that would
incorporate a variety of factors. This could be similar to what
is done now for automobile and crashworthiness. People actually
shop for cars based on safety considerations and will pay more
for safety. Why wouldn't they do the same for homes? I believe
real estate transactions in Japan use such an index to gauge
seismic risk.
Q.2. Are you familiar with the experiences other countries have
had with establishing national catastrophe funds? If so, are
there any lessons that we should learn from their experiences?
A.2. Numerous countries have funds to deal with terrorism risk.
I believe few, if any, have comprehensive national catastrophe
funds for natural disasters. I will research this and report to
you on my findings.
Q.3. Would a natural catastrophe fund have any impact on the
long-term availability and affordability of insurance?
A.3. The answer to this question depends entirely on how the
plan is managed. If, as proposed, the plan is actuarially sound
and is prohibited from receiving any form of taxpayers subsidy,
the answer is that what savings do emerge will be nominal
(limited primarily to the profits that would have gone to
private reinsurers, as well as other costs incurred by private
reinsurers such as taxes). This amount is only a small fraction
of the total cost of insurance at the retail level. Reinsurance
markets have historically been able to bring capacity to
market, as needed, after mega-catastrophes (excluding
terrorism). Price often rises because risk is elevated and
demand goes up, but this incentivizes new capital to enter (at
least $34 billion post-Katrina).
If the natural catastrophe fund is not operated on an
actuarially sound basis, as is the case in the Florida
Hurricane Catastrophe Fund, large discounts are possible, but
only because funds are collected via post-event assessments,
taxes and borrowing and because non-exposed types of insurance
(e.g., auto and liability insurance, are often assessed as
well).
Q.4. The states are primarily responsible for regulating
insurance. What steps can state insurance commissioners take to
improve the availability and affordability of catastrophe
insurance?
A.4. The most important tool at the disposal of commissioners
is to allow price to be fully reflective of risk. This provides
the correct economic incentives to people and businesses
living/building/buying in disaster-prone areas and would be the
most effective, long-run solution to healthy insurance markets
with minimal government intervention. Coverage would generally
be available, with prices tied directly to risk. Markets even
in risky areas could be competitive, providing premiums that
are affordable given the risk that must be assumed.
State insurance commissioners can work to educate the
public on the risks they face living in disaster-prone areas.
They can develop their own initiatives and work with insurers,
disaster-relief organizations and the federal government.
Commissioners cannot under present law require people to buy
coverages such as flood or earthquake, consequently take-up
rates for these optional coverages is low. Commissioners may be
able to raise awareness, however, by forcing a signed waiver in
the event the policyholder declines such coverage. Perhaps in
working with partners at the federal level, such a waiver could
have some real teeth in it (e.g., if you decline flood coverage
and live in a flood zone, you lose eligibility for federal
aid).
Commissioners can also push other state agencies charged
with building codes, zoning and land use into making decisions
that reduce or limit vulnerability.
Commissioners might also seek funding for their departments
that could be used to award grants for mitigation/retrofitting,
etc., or to help pay the incremental cost in building a
``fortified'' home.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM ADMIRAL
JAMES M. LOY (USCG-RET.)
Q.1. Mr. Nutter says in his testimony, ``The insurance industry
surplus grew from $356 billion at December 31 2003 to $439
billion at December 31, 2005. As of December 31, 2006, the
industry's claims paying ability and capital base have never
been better.'' This statement suggests that despite Katrina,
the largest natural disaster in American history, insurance
companies have had no problems paying claims, and in fact, have
a better ability to pay claims now than before that disaster.
In addition, Mr. Nutter says that ``reinsurance capacity is
adequate even for peak catastrophe markets.''
At the same time, Americans around the country are finding
it increasingly difficult to secure sufficient and affordable
insurance. We hear reports that people from Texas through the
Gulf and up the Eastern seaboard are seeing their insurance
dropped and their rates and deductibles increased.
How can this disconnect be explained? There appears to be
sufficient insurance capacity, yet working families and
business owners are unable to afford sufficient coverage. What
do we do for these people, so that they can afford needed
insurance coverage?
A.1. The assertion that sufficient capacity exists to defend
the status quo misses the point. The fact is the traditional
insurance model is not serving consumers well. Reform is
needed, and the time to act is before the next crisis.
Moreover, the assertion about capacity is dubious at best.
While the industry's surplus and capital base may be in a
strong position generally, that surplus and capital is
dedicated to risks across many different lines of insurance and
supports risks in every state. There is not $439 billion of
surplus and capital available to cover wind damage to homes
along the Gulf Coast. Even reinsurers limit their coverage by
line and geography. Last Fall, reinsurance industry leaders
acknowledged that there is a sizable gap between the supply and
demand for reinsurance coverage in the southeast U.S.\1\ This
gap demonstrates why the reinsurance market is not a complete
solution for U.S. catastrophes needs. Absent a new model, the
most catastrophe-prone areas, where higher levels of capital
are needed most, will always have trouble attracting capital.
---------------------------------------------------------------------------
\1\ Business Insurance, September 25, 2006 (quoting David Priebe,
CEO-Europe for Guy Carpenter & Co. Inc.)
---------------------------------------------------------------------------
The fact is the homeowner's insurance market is contracting
for primary insurers because they do not enjoy the same ability
to cap losses that reinsurers enjoy. Moreover, the rates of
returns have been historically low. When one lays on top of
these facts the reality that the risk has risen, it is easy to
see why the primary market has contracted. The risk has risen
because more people live in harm's way, property values have
risen significantly, especially in most of the highly exposed
areas, and the forecast calls for more frequent and ferocious
storms and the reality is that major earthquakes are likewise
inevitable.
The disconnect between the reports of industry surplus and
capital and availability issues along the Gulf Coast is also
the result of a misunderstanding of state regulation and the
competitive environment of the insurance marketplace. State
regulation requires insurance rates in each state to reflect
the actual and expected losses in that state. Furthermore, for
a multi-line insurer to remain competitive, each line of
insurance, such as auto and homeowners coverage, needs to stand
on its own in terms of profitability. Profits in auto insurance
or workers compensation coverage, for example, cannot be used
to subsidize losses in homeowners insurance that arise from
hurricanes or other natural disasters. Likewise, insurance
markets in each state must be profitable in their own right and
cannot be subsidized by profits in other states. Hurricane-
related losses to homes in a state like Louisiana, for example,
cannot be subsidized by profits generated by homeowners
insurers in Montana. Conversely, Louisiana homeowners cannot
and should not be called upon to subsidize severe earthquake
losses in California.
These realities clearly present challenges for consumers in
the homeowners insurance market along the coast. The
traditional insurance model does not work well for those
consumers. Consumers exposed to low frequency and severely high
severity events need a new model. The market has contracted and
costs for the available insurance have increased significantly.
The residual market (so-called market of last resort for
consumers) is growing in a dangerous way. The status quo is
unacceptable for consumers, and there is urgency and
opportunity for Congress to act in a way that will address the
challenge. An innovative public-private partnership as part of
a comprehensive, integrated solution provides a better way for
consumers.
A comprehensive solution that includes an integrated state
and national financial backstop model can provide more
protection at lower cost. Milliman, Inc, the international
actuarial consulting firm, analyzed the potential impact of a
national catastrophe fund such as that proposed by
ProtectingAmerica.org and concluded that reductions in
homewoners' insurance premiums could exceed $11 billion a year.
The estimate is based on the savings consumers can expect with
state and national catastrophe funds that serve as a backstop
to private insurance. Consumer savings are attributed to the
fact that rates charged by the state and national funds will
not require the significant margin for return on capital that
investors expect to earn for a high-risk investment like
catastrophe reinsurance. The tax-exempt status of the funds
produces additional savings that will be passed on to
consumers. Milliman also suggests the expense of administering
the catastrophe funds will probably be less than the expense
factor that reinsurance companies build into their rates.
Implementation of the other elements of a comprehensive
catastrophe plan--preparedness, prevention and mitigation--will
also produce meaningful savings for consumers and must be part
of a comprehensive, integrated solution.
The private reinsurance market is too volatile to provide a
reliable, predictable and enduring solution to the problems
facing consumers along the Gulf Coast. It was no surprise that
in the aftermath of the 2004 and 2005 hurricane seasons,
reinsurance prices increased dramatically, while the amount of
available coverage shrank, especially in states where it was
needed most.
In its annual study of the international
reinsurance market, Guy Carpenter & Company, Inc. reported that
reinsurance rates in the United States increased 76 percent in
2006.
In 2006, the New York Times reported that higher
reinsurance costs contributed to steep premium increases along
the coast from Texas to Maine; homeowners face premiums up to
ten times as much as they paid in 2005. Rates on Cape Cod have
tripled, and they're up 50 percent on Long Island even as
deductibles have increased.
Homeowners' insurance rates in Gulf Coast states
increased dramatically in 2006 after reinsurance rates doubled.
Several factors have contributed to increase the demand for
reinsurance and a decrease in supply, causing the upward
pressure on rates:
The catastrophe reinsurance market experienced
record losses and at least four reinsurance company failures in
the aftermath of the 2004-05 storm seasons.
Predictions of increased storm activity in the
Atlantic, including more frequent and intense storms in the
Northeast;
Pressure from regulators and rating agencies on
homeowners' insurance companies to increase the capital
available to pay catastrophe claims;
Increased projected loss estimates due to rapid
development and rising home values in coastal areas.
Even the most optimistic estimates of private reinsurance
capacity fall well short of the magnitude of losses that will
occur some day, according to many experts. A major hurricane or
earthquake in a densely populated urban area could cause well
over $100 billion in damage and totally exhaust the capacity of
the private reinsurance market. Will the market collapse as it
did in Florida after Hurricane Andrew and in California after
the Northridge earthquake? At the present time, there is no
guarantee that private capital will be available after a major
catastrophe to restore the market and protect consumers so they
can repair, rebuild and recover, and if it is available, at
what cost. A national catastrophe fund will provide market
stability, and its tax-exempt, not-for-profit status will mean
more protection at lower prices for consumers.
The bottom line is that unless America rethinks its
approach to better preparing and protecting its citizens with
respect to natural catastrophes, the era of readily available
and affordable homeowners coverage in the private market for
such losses is behind us. Today, the homeowners insurance
coverage that people need every day is tied to coverage for
natural catastrophes. When insurance companies can no longer
write catastrophe coverage because of the enormous
unpredictable risk it presents, they are often forced to also
drop the non-catastrophe coverage too--even though we believe
companies would be willing to compete vigorously for non-
catastrophe homeowners policies in every state.
Q.2. All of the witnesses appear to support the proposition
that mitigation efforts are an important part of preparing
Americans to withstand and hopefully minimize damage from a
large-scale natural disaster. I agree, which is why I have
called for at least doubling the federal investment in
mitigation effort. What do you see as the current barriers to
mitigation efforts and what can be done to remove those
barriers?
A.2. Doing more to save lives and to prevent and mitigate
losses must be a part of a comprehensive, integrated solution.
The solution should force policymakers to make this component
of the solution a top national priority, including do more
research and development of ways to help consumers build
stronger, safer homes and strengthen their existing homes with
effective, affordable retrofits.
One of the largest barriers to mitigation efforts is the
demand for housing in catastrophe-prone areas. There has been,
and continues to be, a significant population migration to
hurricane exposed areas. Property values along the coast are
also rapidly increasing. In addition, all forecasts predict an
increase in the frequency and strength of hurricanes for the
foreseeable future. These factors mean that the future holds
more devastating storms. In fact, a repeat of the great Miami
hurricane of 1926 could cause $500 billion in damage by 2020,
given current demographic trends.\2\ A direct hit by a Category
5 hurricane on Miami could cause $130 billion in commercial and
residential damages according to AIR Worldwide. Yet, people
continue to build along the coast and those living inland
continue to subsidize them. Unless and until the cost of living
along the coast reflects the true risk of living there, the
coastal migration will continue.
---------------------------------------------------------------------------
\2\ Hurricane Season of 2005: Impacts on U.S. P&C Markets in 2006
and Beyond, Insurance Information Institute, March 2006, page 12.
---------------------------------------------------------------------------
Another more significant obstacle is the perception that
prevention and mitigation can only be accomplished at a
substantial cost. In reality, it is only marginally more
expensive to build a home with storm-resistant features. The
same is true for retrofits. What we have to do is make it a
higher priority to bring into this work the best and the
brightest to help consumers. In doing so, we can leverage
consumer education and drive consumer demand in this area. An
analogy we would offer is to automobile safety. Some
manufacturers for years fought efforts to require automobiles
to include passive restraint systems and air bags. Before long,
consumers demanded more safety features, and the manufacturers
responded in a competitive way to meet the demand. Now, you see
active efforts to market safety to respond to the consumer
demand. The same will happen for home safety as well if we make
this a priority and knock down or overcome the obstacles.
The public-private partnership model again has perfect
application in this area. A recent Wall Street Journal article
detailed insurance industry efforts to encourage mitigation,
such as shutters and fire-resistant roofs, and the complaints
and resistance they encountered from politicians and consumer
groups.\3\ More specifically, we recommend the following
actions as part of the comprehensive solution:
---------------------------------------------------------------------------
\3\ Bracing for Disaster: Insurers Require Homeowners to Make
Expensive Upgrades to Protect Property: Using Google Earth for
Inspections, Wall Street Journal, June 7, 2007.
(1) Congress should consider amendments to the
Stafford Act to provide additional funding for states that
---------------------------------------------------------------------------
adopt and enforce a strong state-wide building code.
(2) Community Block Grant funds could be given to
communities to provide the funding to offer incentives for
disaster-resistant construction or retrofitting, especially for
low-income families.
(3) Congress could amend the National Earthquake
Hazard Reduction Program (NEHRP) to give greater emphasis to
construction and retrofitting to mitigate earthquake risks.
(4) Federal tax credits could be offered to home
owners and business owners for cost of retrofitting, such as
the cost of installing shutters or the incremental cost of
installing a hail-resistant roof.
(5) The state sales tax could be waived for
disaster-resistant products.
(6) States and/or local governments should
consider discounting the value of disaster mitigation in
property tax assessments.
(7) The Federal government should encourage
Freddie Mac and Fannie Mae to offer mortgage discounts for
disaster-resistant homes.
A key point to remember is that the comprehensive,
integrated solution that includes the financial backstop will
also provide seed money to help finance and facilitate (and
continuously improve) the prevention, mitigation and consumer
education that will help drive this component of the solution.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM ADMIRAL
JAMES M. LOY (USCG-RET.)
Q.1. If a national catastrophe fund was established, what in
your view should be the minimum amount of losses that would
trigger coverage by the fund? In other words, if the national
catastrophe fund aims to provide a backstop for only truly
catastrophic events, what would be the minimum amount of losses
that a catastrophe would have to inflict for those losses to be
covered by the fund?
A.1. The fund should extend protection to maximize consumer
benefits and provide meaningful relief given limitations in the
private market and to take into consideration the level of
current capacity that state funds have or would have. In
setting the trigger at some level, Congress should realize that
there is a trade off, the higher the trigger the lower the
consumer benefit. The proposals to set a trigger at a 1 to 50
year event seem reasonable, such as Senator Nelson's bill that
was pending last session.
Milliman, Inc., the international actuarial consulting
firm, analyzed the potential impact of a national catastrophe
fund such as that included in H.R. 91 (currently pending in the
110th Congress) and concluded that reductions in homeowners'
insurance premiums could exceed $11 billion a year. For the
study, Milliman assumed a flat trigger of $10 billion. The
savings estimate is based on the savings consumers can expect
with state and national catastrophe funds that serve as a
backstop to private insurance. Consumer savings are attributed
to the fact that rates charged by the state and national funds
will not require the significant margin for return on capital
that investors expect to earn for a high-risk investment like
catastrophe reinsurance. The tax-exempt status of the funds
produces additional savings that will be passed on to
consumers. Milliman also suggests the expense of administering
the catastrophe fund will probably be less than the expense
factor that reinsurance companies build into their rates.
It is important to note that the financial backstop model
would augment private capital. Private capital, including
private reinsurance capital, would continue to be important.
This approach would provide additional capacity to protect
consumers and much needed stability to the market. It would
also provide the predictability and certainty that the market
will survive major events and will continue to extend
protection year after year.
Q.2. In your written testimony, you stated that a national
catastrophe fund would ``provide more protection at lower cost
to consumers.'' Please explain how a national catastrophe fund
would provide more protection at lower cost and whether such
cost reduction would be financed through subsidies from other
policyholders, direct federal appropriations, or tax-breaks
financed by the taxpayer, or other funding mechanisms?
A.2. Critics of a national catastrophe fund allege that
consumers in low-risk states will subsidize those who live in
states threatened by earthquakes and hurricanes. The
speciousness of this argument is apparent by virtue of the fact
that the national catastrophe fund provides reinsurance only to
state catastrophe funds. Consumers in states without
catastrophe funds won't pay anything into the national
catastrophe fund. This is consistent with the basic tenets of
insurance and cognizant of the political reality that
legislators from low-risk states will make sure their
constituents are protected from paying more to subsidize those
who live in high-risk states.
The legislation supported by ProtectingAmerica.org requires
rates to be actuarially sound. This applies not only to the
rates charged by the national catastrophe fund, but to the
state catastrophe funds that are protected by the national
fund. Both on a national basis, and within different regions of
high-risk states, rates would be required by law to be based on
actual risk. Hence, the argument that those who live on
Florida's beaches or California's earthquake faults will get
cheaper insurance at the expense of consumers in less perilous
areas doesn't withstand scrutiny.
See also the answer to item 1 above. While there are many
ways to structure a fund, the cost reductions would not have to
be financed through subsidies from other policyholders, direct
federal appropriations, or tax-breaks financed by the taxpayer,
or other funding mechanisms. We have attached a report that
shows American homeowners will save $11.6 billion annually if
privately funded catastrophe protection programs are
established in disaster-prone states and backed up by a similar
national program, according to Milliman, Inc., one of the
nation's leading actuarial and consulting firms. This report
explains in detail how the savings would be generated.
More protection would be provided because coverage would be
more widely available and consumers could afford more coverage.
Insurers in a competitive market may also lower deductibles or
take other steps to increase coverage knowing that the state
and federal backstop is in place. Very importantly, as stated
above, the public-private partnership model will provide
additional capacity to protect consumers and much needed
stability to the market. It would also provide the
predictability and certainty that the market will survive major
events and will continue to extend protection year after year.
Q.3. In your written testimony you stated that ``we must also
reduce the taxpayer subsidy of recovery efforts'' and noted
that ``of the first $85 billion in taxpayer dollars spent on
Katrina recovery efforts, more than $10 billion went to cover
losses for uninsured and underinsured properties.'' Your
statements suggest that a national catastrophe fund would
provide funds to cover uninsured and underinsured persons. The
national catastrophe fund you proposed in your testimony,
however, would provide reinsurance only to state catastrophe
funds to assist them in paying claims of policyholders in the
event of a natural disaster. Accordingly, how would a national
catastrophe fund, using actuarially sound rates as you proposed
in your testimony, provide funds to uninsured and underinsured
persons following a natural disaster? In addition, would you
please identify the specific federal appropriations for the
disaster recovery in connection with Hurricane Katrina that
would have been unnecessary had a national catastrophe fund, as
you proposed in your testimony, been established and
functioning at the time Hurricane Katrina hit the Gulf Coast?
A.3. A national catastrophe fund would not provide funds to
cover uninsured or underinsured persons. However, as the
Milliman study concluded, a national catastrophe fund could
help reduce the cost of insurance for consumers. The study
estimates an average savings of $174.81 per household. These
savings increase in more catastrophe-prone areas--up to $538.92
per household in Florida. We believe that these savings would
reduce the number of persons who would otherwise be uninsured
or underinsured.
In addition, our plan addresses stronger building codes and
improving mitigation efforts. Living on known faults without
earthquake insurance, building in a flood plain without flood
insurance, allowing brush to grow unchecked in areas prone to
wildfire and building homes in coastal areas that cannot
withstand hurricane force winds are irresponsible actions,
which should not be subsidized by tapayers when the inevitable
occurs.
Stronger building codes, which are vigorously enforced, and
sensible land use policies are needed to reduce the impact of
catastrophes on consumers and taxpayers. Successful mitigation
efforts can have dramatic impact on reducing damages caused by
these storms. One study estimated the damage from Hurricane
Andrew would have been $8.1 billion less if the building code
now in Miami-Dade had been in effect in 1992. Further,
Louisiana State University noted:
Economic losses, which include damage to buildings and
contents, would be reduced an estimated 68%, from $4.8 billion
to $1.5 billion. The loss reduction estimate does not include
such additional benefits as reduction in loss of life, human
suffering, reduced disruption of communities and local
economies, reduced emergency response costs, reduced post-storm
sheltering and housing costs and other very significant but
difficult to quantify losses.\4\
---------------------------------------------------------------------------
\4\ Louisiana State University Hurricane Center Residential Wind
Damage in Mississippi: Potential Hurricane Loss Reduction Through
Improved Building Codes and Construction Practices (December, 2005).
Prior to Hurricane Katrina, had cost savings measures,
better land use policies and mitigation incentives been in
place, we believe that there would have been fewer uninsured
and underinsured persons and less property damage. While we are
not familiar with every post-Katrina federal appropriation, it
is our understanding that H.R. 2863 provided $11.5 billion to
pay for uninsured and underinsured losses incurred as a result
of Hurricanes Katrina and Rita through HUD's Community
Development Block Grant Program, If the comprehensive plan we
propose was in place prior to Katrina, we believe that the need
for such a large appropriation would have been reduced.
The comprehensive, integrated solution we support would
also include better consumer and public education to make sure
consumers are aware of the steps they can and must take to
protect themselves. The financial backstop model can help
finance and facilitate those initiatives. Moreover, policy
makers should examine the system of mandates that apply in some
areas but not in others. For example requirements that apply to
flood coverage do not seem to be uniformly enforced. Moreover,
it seems incongruous to apply such requirements to flood but
not for earthquake exposure. ProtectingAmerica.org is not
proposing more mandates, but the issue in this regard should be
reviewed and better understood by policy makers. We would be
happy to assist in that process.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM CHARLES
CHAMNESS
Q.1. Mr. Nutter says in his testimony, ``The insurance industry
surplus grew from $356 billion at December 31, 2003, to $439
billion at December 31, 2005. As of December 31, 2006, the
industry's claims paying ability and capital base have never
been better.'' This statement suggests that despite Katrina,
the largest natural disaster in American history, insurance
companies have had no problems paying claims, and in fact, have
a better ability to pay claims now than before that disaster.
In addition, Mr. Nutter says that ``reinsurance capacity is
adequate even for peak catastrophe markets.''
At the same time, Americans around the country are finding
it increasingly difficult to secure sufficient and affordable
insurance. We hear reports that people from Texas through the
Gulf and up the Eastern seaboard are seeing their insurance
dropped and their rates and deductibles increased.
How can this disconnect be explained? There appears to be
sufficient insurance capacity, yet working families and
business owners are unable to afford sufficient coverage. What
do we do for these people, so that they can afford needed
insurance coverage?
A.1. It is important to understand the relationship between
insurance and reinsurance capacity, and the price insurers and
reinsurers charge for their products. The price of global
catastrophe reinsurance rose after the 2005 Gulf Coast
hurricanes in response to forecasts by climate scientists and
catastrophe risk modelers that coastal regions of the U.S.
would experience more frequent and severe storm activity for
the next several years. The ability of reinsurers to increase
premiums served to attract new capital to the global
reinsurance market, which explains Mr. Nutter's observation
that ``reinsurance capacity is adequate even for peak
catastrophe markets.''
Primary insurers, for their part, have responded to the
rising cost of reinsurance by seeking rate increases for
property insurance coverage in catastrophe-prone regions. Some
primary insurers have withdrawn from, or stopped writing new
policies in, certain catastrophe-prone regions, either because
state regulators refused insurers' requests to raise premiums
to a level commensurate with the prevailing risk of loss, or to
reduce their exposure levels to ensure their ability to pay
future claims. This accounts for the fact that some consumers
in catastrophe-prone regions ``are seeing their insurance
dropped and their rates and deductibles increased.''
In short, catastrophe insurance capacity has remained
adequate to the extent that the price of insurance and
reinsurance coverage has risen sufficiently to attract new
capital. Understood in this context, there is no ``disconnect
between sufficient reinsurance capacity and rising primary
insurance rates or reduced availability of coverage in markets
where rates have been suppressed through regulation.
The last part of your question--``What do we do for these
people, so that they can afford needed insurance coverage''--
poses what I believe is the central challenge for government
policy makers. In response, I can do no better than reiterate
the follow statement from my written testimony: ``The federal
government has a long history of designing and administering
programs that provide grants and other forms of direct
financial assistance to individuals on a means-tested basis for
the purchase of essential goods such as food and shelter. There
is no reason why Congress could not provide a similar form of
aid to selected property owners for the purchase of insurance.
Such an approach would have many advantages over the current
system of generalized rate suppression and cross-subsidization,
not the least of which is that the assistance could be targeted
to particular individuals based on financial need. Moreover,
its availability could be limited to those currently residing
in disaster-prone areas, and would thus avoid creating
incentives for people not currently living in those areas to
move into harm's way.''
Q.2. All of the witnesses appear to support the proposition
that mitigation efforts are an important part of preparing
Americans to withstand and hopefully minimize damage from a
large-scale natural disaster. I agree, which is why I have
called for at least doubling the federal investment in
mitigation efforts. What do you see as the current barriers to
mitigation efforts and what can be done to remove those
barriers?
A.2. NAMIC believes mitigation efforts can play an integral
part in protecting homes and businesses from a large-scale
natural disaster. As I testified before the committee in april,
NAMIC endorses strong statewide building codes and responsible
land-use planning.
We applaud your efforts to double the federal government's
investment in mitigation efforts. Our recent experience in
Louisiana and Mississippi suggests that a major impediment to
enacting stronger building codes is the perception by local
government officials that the codes effectively create unfunded
mandates. Governors Blanco and Barbour were eventually able to
secure funding from the Federal Emergency Management
Administration to enable their county governments to hire and
train building inspectors. We believe that building code
legislation could be more readily enacted in other states if
affected jurisdictions new in advance that FEMA funding was
available to assist them in implementing new building
standards.
Another barrier to effective mitigation is the fact that
property owners currently lack sufficient incentives to invest
in mitigation measures. Congress could encourage risk
mitigation by offering property owners appropriate incentives.
To that end, S. 930, the Hurricane and Tornado Mitigation
Investment Act of 2007, would create federal tax incentives to
encourage property owners to mitigate wind-related risk.
Similar legislation at the state level has already been enacted
in Florida and Mississippi, and is currently under
consideration in South Carolina.
Q.3. Governor Racicot testified on behalf of the American
Insurance Association that 95 percent of the 1.1 million
homeowners claims in Mississippi and Louisiana have been
resolved. Do you agree with that statement? If not, please
explain the areas of disagreement. If you do agree, please
clarify whether the 1.1 million figure includes claims where
the insurance company determines that the damage is not covered
under the policy. If it does not, please tell me how many
claims were filed overall in Mississippi and Louisiana, both
those which were determined to be covered by the homeowners
policy and those which were determined not to be covered.
A.3. I agree with Governor Racicot regarding the number and
dollar amount of the claims paid by the insurance industry as
the first anniversary of Hurricane Katrina approached in 2006.
These figures were based on information compiled at the time by
the Insurance Information Institute. As for the additional
statistics you request, I recommend that you contact the
departments of insurance in Louisiana and Mississippi, as my
trade association is not in a position to collect industry-wide
data of this kind. The Louisiana and Mississippi departments
issued bulletins in the immediate aftermath of Hurricane
Katrina, ordering insurers in those states to regularly file
several types of information related to claims handling. The
data you seek should be available from these insurance
departments.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM CHARLES
CHAMNESS
Q.1. What role could mitigation efforts play in helping to
reduce the price of insurance?
A.1. Research has shown that mitigation efforts can play an
important role in helping to reduce the price of insurance.This
is why NAMIC believes that strong statewide building codes are
needed to reduce property damage caused by severe wind storms.
However, this view is not universally shared by others,
including some home builders who argue that stronger building
standards result in higher home prices. While this may be true,
the fact is that the use of fortified construction techniques
and wind-resistant building materials, made mandatory by strong
building codes that are vigorously enforced, is critical to
mitigating catastrophe risk and reducing the cost of insurance.
In the aftermath of Hurricane Katrina, both Louisiana and
Mississippi adopted stronger building standards. Louisiana's
new building code applies to the entire state, while the
Mississippi code applies to the state's six most southerly
counties. It is worth noting that during the legislative
debates that led to the enactment of these laws, many county
commissioners in both states expressed reservations about the
proposed building codes because, in their view, being forced to
create building departments to administer and enforce the codes
without proper funding sources constituted an unfunded mandate.
The county commissioners have a point. Fortunately,
Governors Blanco and Barbour were eventually able to obtain
funding from the Federal Emergency Management Administration to
help the affected counties hire and train building inspectors
to enforce the new building code standards. However, if local
officials could be assured in advance that federal funds are
available to assist in implementing new building standards, the
resistance to new building codes might be lessened or even
eliminated.
It is also important to consider ways to encourage
catastrophe risk mitigation with respect to the existing
housing stock, since building codes apply only to new
structures. Following the 2005 hurricanes, three states
considered legislation designed to create incentives for owners
of existing properties to invest in risk mitigation measures.
In 2006, Florida lawmakers created ``My Safe Florida Home''
disaster mitigation program, which was expanded earlier this
year. The Florida program offers homeowners free home
inspections and advice on how to make properties more wind
resistant. In addition, the program offers grants to help
defray the cost of purchasing risk-mitigation equipment and
devices (such as storm shutters). A similar program was enacted
this year in Mississippi, and another is currently being
considered by the South Carolina legislature.
NAMIC believes disaster mitigation programs like the ones
described above can and will help to protect properties,
especially in catastrophe-prone states, and thus help keep
insurance rates more affordable for homeowners. S. 930, the
Hurrican and Tornado Mitigation Investment Act of 2007, appears
to closely approximate the goals of the state disaster
mitigation program and should be seriously considered by
Congress.
In addition to mitigation, responsible land-use practices
can also play a vital role in reducing insurance costs. Given
the widespread concern among policymakers over the escalating
cost of insuring properties in catastrophe-prone areas, it is
difficult to understand why developers are allowed to build
multi-million dollar luxury condominiums on coastal lands that
are prime targets for hurricanes. Because insurers are often
prevented by regulators from charging risk-based premiums for
these properties, the cost of insuring them must be partially
borne by property owners in less risky areas, driving up their
insurance costs. Florida Chief Financial Officer Alex Sink
apparently shares my dismay over this state of affairs.
Speaking recently to a group of insurers, she lamented that
``the state [of Florida] is doing nothing in the area of zoning
codes to discourage building in coastal areas.''
Q.2. It has been widely reported that in the aftermath of
Hurricane Katrina, some insurance companies may have failed to
adequately assess claims and may have chosen to litigate claims
rather than pay them, with the expectation that policyholders
would agree to smaller settlements. Could the insurance
industry have done a better job settling claims in the
aftermath of Katrina and what are the member companies of NAMIC
doing to improve their claims payment procedures to prepare for
the next natural disaster?
A.2. The managers and employees of NAMIC member companies know
that they are engaged in a highly competitve business. They
understand that they can never be totally satisfied with their
performance and must always strive for improvement. Any
insurance company that deliberately pursued a strategy of
litigating legitimate claims in an attempt to force
policyholders to agree to smaller settlements would stand to
lose market share to companies known for treating their
customers fairly.
The media reports to which you allude are largely anecdotal
and are refuted by data released by the Louisiana and
Mississippi insurance departments, which indicate that most
claims were adjusted to the satisfaction of policyholders in a
timely manner, with only two percent of claims going to
mediation or litigation. This is not surprising, given
insurers' desire to attract and retain policyholders in a
highly competitive market. Another reason that insurance
companies generally try to avoid litigating claims is that it
is a costly option that does not always lead to an outcome
favorable to the insurer, regardless of the merits of a
particular case. If anything, insurers tend to err on the side
of paying questionable or suspect claims to avoid litigation
costs and potential harm to their reputations.
That said, it is important to note that no matter how well
a claim is handled and how fair the settlement offer, some
policyholders will not be satisfied. In those instances,
insurance companies work diligently to try to resolve
outstanding issues with their policyholders. Where a resolution
is not possible, insurers often turn to mediation. In the
aftermath of Hurricane Katrina, the insurance commissioners in
Louisiana and Mississippi quickly implemented mediation
processes that were successfully utilized by several hundred
individuals.
In closing, I would note that the sheer magnitude of
Hurricane Katrina--the largest natural disaster in the
country's history--placed an enormous strain on the ability of
several of our member companies to respond to this
unprecedented event. Our member companies have taken the
lessons of Hurricane Katrina to heart, and each in its own way
has learned from that experience and is likely to respond
differently when the next mega-catastrophe occurs.
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