[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

                              ----------                              

                       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.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

  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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