[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
APPROACHES TO MITIGATING AND
MANAGING NATURAL CATASTROPHE RISK:
H.R. 2555, THE HOMEOWNERS' DEFENSE ACT
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND
COMMUNITY OPPORTUNITY
AND THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 10, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-108
U.S. GOVERNMENT PRINTING OFFICE
56-772 PDF WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Housing and Community Opportunity
MAXINE WATERS, California, Chairwoman
NYDIA M. VELAZQUEZ, New York SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
EMANUEL CLEAVER, Missouri THADDEUS G. McCOTTER, Michigan
AL GREEN, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri GARY G. MILLER, California
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
JOE DONNELLY, Indiana WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
PAUL E. KANJORSKI, Pennsylvania ADAM PUTNAM, Florida
LUIS V. GUTIERREZ, Illinois KENNY MARCHANT, Texas
STEVE DRIEHAUS, Ohio LYNN JENKINS, Kansas
MARY JO KILROY, Ohio CHRISTOPHER LEE, New York
JIM HIMES, Connecticut
DAN MAFFEI, New York
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York SCOTT GARRETT, New Jersey
BRAD SHERMAN, California TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida JOHN CAMPBELL, California
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi BILL POSEY, Florida
CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
C O N T E N T S
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Page
Hearing held on:
March 10, 2010............................................... 1
Appendix:
March 10, 2010............................................... 39
WITNESSES
Wednesday, March 10, 2010
Ellis, Steve, Vice President, Taxpayers for Common Sense......... 14
McMillan, Charles, Coldwell Banker Residential Brokerage, Dallas-
Fort Worth, and Immediate Past President, National Association
of Realtors (NAR).............................................. 16
Pomeroy, Glenn, Chief Executive Officer, California Earthquake
Authority (CEA)................................................ 12
Witt, James Lee, former Director of the Federal Emergency
Management Agency, on behalf of ProtectingAmerica.org.......... 10
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 40
Grayson, Hon. Alan........................................... 42
Putnam, Hon. Adam H.......................................... 44
Ellis, Steve................................................. 46
McMillan, Charles............................................ 52
Pomeroy, Glenn............................................... 60
Witt, James Lee.............................................. 73
Additional Material Submitted for the Record
Biggert, Hon. Judy:
Written statement of the American Insurance Association (AIA) 78
Written statement of the Cincinnati Insurance Companies...... 83
Written statement of various environmental groups............ 89
Written statement of Americans for Tax Reform, et al......... 91
Written statement of the National Association of Mutual
Insurance Companies (NAMIC)................................ 93
Written statement of the National Wildlife Federation........ 105
Written statement of Nationwide Insurance.................... 116
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 122
Written statement of the Reinsurance Association of America
(RAA)...................................................... 125
Written statement of SmarterSafer.org........................ 127
APPROACHES TO MITIGATING AND
MANAGING NATURAL CATASTROPHE RISK:
H.R. 2555, THE HOMEOWNERS' DEFENSE ACT
----------
Wednesday, March 10, 2010
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity, and
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to notice, at 2:23 p.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the Subcommittee on Capital Markets,
Insurance, and Government Sponsored Enterprises] presiding.
Members present: Representatives Kanjorski, Waters,
Sherman, McCarthy of New York, Baca, Green, Cleaver, Klein,
Foster, Carson, Adler; Bachus, Royce, Manzullo, Biggert,
Capito, Hensarling, Garrett, Campbell, Putnam, Posey, and
Jenkins.
Chairman Kanjorski. This joint hearing of the Subcommittee
on Capital Markets, Insurance, and Government Sponsored
Enterprises and the Subcommittee on Housing and Community
Opportunity will come to order. I yield myself 4 minutes for
the purpose of making an opening statement.
I would like to thank Chairwoman Waters, our ranking
members, other members of our two subcommittees, and our
invited witnesses for joining us today for this hearing to
explore approaches to mitigating and managing natural
catastrophe risk and to examine H.R. 2555, the Homeowners'
Defense Act.
Introduced by Congressman Klein of Florida, H.R. 2555
tackles the complex issue of how to address the growing problem
of the availability and affordability of homeowners' insurance
around the country in the wake of ever-bigger natural
catastrophes. This hearing represents the second time our
subcommittees have met to consider a version of this bill. Last
year, the Oversight Subcommittee also reviewed these matters.
Natural catastrophes can produce devastating effects for
the affected people and communities. Within our hemisphere, we
most recently experienced considerable damage as a result of
earthquakes in Haiti and Chile. We also know that such
earthquakes could, at any time, strike the United States.
In addition to earthquakes, hurricanes are another form of
natural catastrophe that threatens American citizens and
businesses, and which could lead to severe losses and sizeable
rebuilding costs. In Northeastern Pennsylvania in 1972,
Hurricane Agnes ruined more than 25,000 homes, damaged nearly
3,000 businesses, and destroyed 5 major bridges. At the time,
then-President Richard Nixon called the event, ``the greatest
natural disaster in U.S. history.''
Since then, Americans have experienced even greater natural
catastrophes, which have cost the Federal Government billions
of dollars. The Government Accountability Office estimates that
the Federal Government, in response to the Gulf Coast storms of
2005--Hurricanes Katrina, Rita, and Wilma--made about $26
billion available to homeowners who lacked adequate insurance.
Even with this aid, many of the affected communities are still
struggling to rebuild.
In constructing any program to mitigate the structural and
financial damages that natural catastrophes can cause, we need
to ensure that those who benefit bear the costs. The approach
taken in Mr. Klein's bill aims to do just that.
Specifically, the consortium proposed in the legislation
would encourage States with insurance funds to voluntarily pool
their exposures and cede the risk to the capital markets. I
look forward to learning more about the increased role our
capital markets can play in covering the insured losses of
natural disasters. To the greatest extent possible, we should
maximize the risk-bearing capacity of the private sector before
calling on the government to assist.
H.R. 2555 would also provide a Federal guarantee on the
debt issued through the consortium. While the guarantee
approach is slightly different than the loan program proposed
in similar legislation 2 years ago, the U.S. Treasury is still
entitled to recover any payments it makes. Thus, the bill aims
to protect taxpayers.
Mr. Klein's legislation also includes a Federal reinsurance
fund structured to provide capacity above and beyond private
market reinsurance. Lastly, but very importantly, the
legislation includes a grant program to help develop, enhance,
and maintain programs to prevent and mitigate losses from
natural catastrophes. I view these mitigation reforms as a key
part of the bill. The implementation of effective mitigation
plans will help to lower long-term costs.
In sum, proper planning--both structurally and
financially--can help to lessen the devastation caused by
natural catastrophes. It is in this spirit that Mr. Klein has
put forth his important legislation. Questions have been raised
about the need, cost, and potential success of these programs.
I look forward to a productive debate on these matters.
I would now like to recognize Ms. Capito of West Virginia
for her opening statement.
Mrs. Capito. Thank you, Mr. Chairman. And I would like to
thank Chairwoman Waters and Chairman Kanjorski for holding this
joint Housing Subcommittee and Capital Markets Subcommittee
hearing.
The legislation before us today is not new. This committee
has debated this issue for the past two Congresses, and there
is by no means a consensus that this is the best approach to
address the availability and affordability of catastrophe
insurance for residential property owners in Florida as well as
in other States faced with risk management challenges presented
by major hurricanes and other potentially catastrophic natural
disaster threats.
The Homeowners' Defense Act creates new Federal programs to
guarantee the catastrophe--I am having trouble with that word--
catastrophe debt obligations issued by eligible State
catastrophe insurance programs, offer reinsurance coverage to
eligible State catastrophe insurance programs, and provide for
mitigation grants to State and local governments. These
programs would be established by the Treasury and the
Department of Housing and Urban Development.
Before we obligate the United States to hundreds of
billions of dollars of potential liabilities, we should first
have a better understanding of the current marketplace and the
need for this legislation. And the chairman alluded to this in
his opening statement.
Many States and private markets can already address the
concerns brought forth by this legislation. For example, risks
are already spread globally through the reinsurance
marketplace, and States have struggled with how to balance
risks more narrowly among a smaller number of participants.
Furthermore, States already can and do purchase reinsurance
and sell catastrophe bonds through their risk pools and funds.
Finally, if there is an implicit Federal guarantee or
assumption of risk, this legislation would create a massive
potential exposure for the taxpayer.
It is important to note that opposition to this legislation
spans a wide spectrum, including private industry, taxpayer
advocates, and environmental groups. These entities raise
legitimate concerns about the effect this legislation will have
on the ability of private markets to function efficiently, the
environmental impact on coastal areas, and most important, the
risk passed to the taxpayer.
I look forward to hearing from our witnesses today. And
again, I would like to thank Chairwoman Waters and Chairman
Kanjorski for holding this hearing.
Chairman Kanjorski. Thank you very much.
We will now hear from Mr. Klein for 4 minutes.
Mr. Klein. Thank you, Mr. Chairman. I thank the chairman,
the ranking member, and all the others who have made this
hearing possible today. This is a chance to hear from many
people on this committee as well as the experts in the field,
and the American people as well.
Reducing the skyrocketing cost of homeowners' insurance is
one of my top priorities, and I appreciate this committee's
work to stand up for families and other owners of property who
have to deal with what has become a major cost of
homeownership.
It has been more than 15 years since Hurricane Andrew
crashed into south Florida, but homeowners are still feeling
its impact, not only in Florida, but other places as well.
Since that storm, my constituents have seen their insurance
premiums increase dramatically every summer, storm or no storm.
As too many Florida homeowners know firsthand, some
insurance companies cherry-pick their customers and their risk,
refusing to write policies or limiting the scope of coverage.
That is simply wrong, and the time for change is now.
Yet this issue clearly extends far beyond the borders of
the State of Florida. An alarming number of families across the
country have also had their homeowners' insurance coverage
dropped or are currently slated for nonrenewal by their
insurance company, including homeowners in Massachusetts, New
York, North Carolina, South Carolina, Alabama, and Texas. In
Delaware, New Jersey, and Connecticut, in some cases, property
insurance companies have stopped writing new policies for
residents.
When families are priced out of the market, they face
enormous risk. In earthquake-prone California, 88 percent--88
percent--of homeowners have no earthquake insurance at all.
Increasingly, insurance companies are treating homeowners
across the country like they have been treating Floridians for
years, canceling policies and doubling or tripling rates in the
wake of a single claim.
That is why I have worked with my colleagues, Democrats and
Republicans alike, to address and craft a common-sense solution
that works for Americans in every corner of the country.
Through a lot of hard work, we have built a coalition that
includes more than 70 cosponsoring Members representing over 30
States, coming together to fight for a solution that works for
families in each of our diverse districts.
Our legislation, the Homeowners' Defense Act, harnesses the
power of the private market to pool the risk of all kinds of
natural disasters, from hurricanes to earthquakes, wildfires,
winter storms, tornadoes, and more.
For millions of Americans, the question of a natural
disaster hitting their home is not a question of if, but when.
By spreading the risk, we can make sure that insurance is
working like it is supposed to do, to bring down costs for
homeowners across the country and still allow insurance
companies to have a reasonable return on their investment.
With this legislation, we take a proactive approach that
allows States to responsibly plan for disasters ahead of time--
and I am sure our witnesses will talk about that--while
encouraging strong mitigation, which I also believe is
important, to minimize the cost of natural disasters. By
planning ahead, States can reduce their losses and get
homeowners back on their feet as quickly as possible following
a disaster.
It is also very important to note that our program is
completely voluntary. Once we have set up the pool to spread
the risk, States make the choice whether they want to
participate or not. If you don't participate, no
responsibility, no involvement in your insurance policy. States
are free to join the pool or not depending on what is best for
each of them individually.
The reason our bill is so urgently needed and that it is so
strongly supported by disaster experts, senior citizens, and
families is that unfortunately, in many parts of the country,
the system is broken. As things now stand, natural disasters,
no matter where they happen, impact Americans in all 50 States.
Ask taxpayers.
Cleanup in the aftermath of Hurricane Katrina cost American
taxpayers nationwide--every single one of us--a total of nearly
$100 billion. These days, you can't pick up a newspaper or turn
on the TV without seeing scenes from the most recent natural
disaster.
The current system is nothing more than a constant cycle of
bailouts at taxpayers' expense. I won't personally--as I think
many others won't--stand for it any more. I believe it is time
to focus on local responsibility and let the private market do
the heavy lifting rather than the taxpayers.
I want to stress that this strategy is a private market
solution. Although it has become clear in recent weeks that big
offshore insurance companies who oppose this bill in many ways
are saying lots of different things which are misleading the
debate here, I am here to set the record straight. I believe
strongly in the power of the free market, and we have no intent
to eliminate or subvert the insurance industry.
The fact of the matter is in many parts of the country, the
homeowners' insurance market right now is not working. People
have been paying premiums for 20 years; they make one claim,
see their rates shoot up, or they are canceled. This is why
this legislation is so important at this time.
So in conclusion, I would just like to say, Mr. Chairman,
that I think that this committee has come together at a crucial
moment. This bill did pass in a similar form a year and a half
ago, with overwhelming bipartisan support. At that time,
President Bush did not support it. He felt that the market
somehow would figure this out. It has not, as we expected. So
we are now in the position of having the opportunity to bring
smart minds together from all walks of life--and I certainly
welcome everybody's perspectives--to make sure we have a bill
that will accomplish this goal.
A common-sense solution like the Homeowners' Defense Act
will bring real relief to American families, provide structure
to the insurance market, and be a key part of a broader
economic recovery. And I thank the chairman.
Chairman Kanjorski. Thank you very much, Mr. Klein.
We will now hear from the gentleman from New Jersey, Mr.
Garrett.
Mr. Garrett. I thank the Chair, and I thank the sponsor of
the bill for trying to address this important issue. But I must
respectfully disagree with the approach.
At first blush, I believe that the underlying legislation,
quite candidly, will not solve the major problem of trying to
manage natural catastrophic risk but, rather, really could
exacerbate the problem that we face today.
This legislation also potentially will create additional
moral hazard for people to build and live in these catastrophe-
prone areas, and subsidize risky homeowners by--well, how does
it do that? Reallocating and spreading the risk to less risky
taxpayers.
When you think about it, we sort of see the same thing
going on right now with the cross-subsidy in the National Flood
Insurance Program. There you have people who are paying higher
rates on flood insurance, basically to cover the losses
sustained by those living in the high-risk area.
I would also point out I am a little bit disappointed that
Chairman Frank would endorse this legislation, considering the
good bipartisan efforts we have made in the past in trying to
phase out these types of subsidies within the Flood Insurance
Program. But here we do the opposite.
I know the coalition of supporters of this legislation have
made a really good attempt to try to frame the debate as a
nationwide debate. It is really a debate, basically, about
Florida and, to a lesser extent, California. Florida citizens
currently have an underfunded disaster insurance liability of
around $20 billion. California needs about $5 billion for
earthquake protection. And conveniently, the legislation before
us allows for multi-peril coverage for $20 billion, and
earthquake coverage for $5 billion. Coincidence? Maybe not.
So it seems to me that every day--I know they wouldn't say
this is a bailout, but every day, we seem to wake up in this
country to someone else getting bailed out. First, it was the
banks. Then, it was irresponsible homeowners. Then, it was
Fannie Mae and Freddie Mac. Then, it was the unions. Then, it
was the States. And just earlier this week, we heard reports
that the entire European continent is now planning one massive
bailout for European countries.
I heard someone suggest that perhaps what is going on here
is we are going to come to the day when the Federal Government
is going to need a bailout. And when that happens, perhaps
Chairman Frank will have to rethink his efforts and his
opposition to the space program, as we may need some other
planet to come back here and to help bail out this country and
this Earth.
But more to the point. The main reason that we are in this
situation is because the governor and a number of elected
officials in Florida have not had the political will to charge
actuarial rates on residents living in these disaster-prone
areas.
Now, I have heard some make the argument that we need to do
this because, well, the Federal Government is on the hook
anyway, and we will wind up footing the bill when disasters
inevitably come. But I respectfully disagree.
In most cases, the Federal Government picks up the tab on
infrastructure and other related costs, but not specifically on
the homeowners' insurance policies. An example that Director
Witt highlights in his testimony, the $10 billion that went to
homeowners in Katrina, well, that really happened in large part
because of the mistakes by the Federal Government with their
own mitigation programs, not building the levees in the correct
way.
So this idea that the Federal Government needs to add this
burden now to prevent it from more later is really a red
herring. There are many other positive solutions to this
problem, such as further increased mitigation efforts and
additional regulatory reform. And I believe that Mr. Ellis is
going to discuss the South Carolina and the Virginia way to
handle this situation much better and more responsibly than
perhaps Florida has.
So in the end, I will conclude by saying I think it is a
safe bet that we should be addressing these issues, and we can
come up with solutions to the problems. And I do look forward
to ways to try to tackle these problems of mitigation and
managing natural disaster risk.
With that, I yield back.
Chairman Kanjorski. Thank you very much, Mr. Garrett.
Now we will hear from the gentlelady from California, Ms.
Waters.
Chairwoman Waters. Thank you, Chairman Kanjorski, for
joining me for this joint hearing on approaches to mitigating
and managing natural catastrophe risk, H.R. 2555, the
Homeowners' Defense Act. I am delighted to see all of our
panelists here today.
But I am especially pleased to see Mr. James Lee Witt,
former Director of FEMA, who will be testifying here today. I
had the opportunity to work with him on one of the biggest
earthquakes we had in California. He did such a magnificent
job, I am sure he is able to share with us a lot of information
that will be helpful to us.
In the wake of Hurricane Andrew almost 18 years ago, 11
insurers became insolvent and another 63 announced plans to
withdraw or limit their insurance-writing ability in the State.
But the costs associated with Hurricane Andrew pale in
comparison to those of the 2005 hurricanes, Katrina, Rita, and
Wilma. Insured losses from those storms total over $56 billion.
Although only one insurer became insolvent as a result of
paying claims resulting from those storms, following Katrina,
some insurers began pulling out of areas along the Gulf Coast.
Those who haven't left yet have raised rates on homeowners,
with some families seeing a 600 percent increase in their
insurance premiums. In the meantime, the capacity of wind and
earthquake insurance companies has declined by 61 percent and
22 percent, respectively.
As we all know, much work is still needed to rebuild the
Gulf Coast. However, without affordable and available
homeowners' insurance, many families will either never return
to this region or will risk losing everything in another storm.
The bill introduced by Mr. Klein seeks to address the
reinsurance crisis facing the Nation's insurers by creating a
consortium to encourage risk transfer into the capital markets,
a new Federal reinsurance program for State catastrophe funds,
and allowing the Federal Government to guarantee loans to State
catastrophe insurance programs.
I am especially interested in how this bill would increase
the availability of earthquake insurance. The California
Earthquake Authority, CEA, is the sole provider of earthquake
insurance in the State of California. However, only 12 percent
of Californians have earthquake insurance.
Moreover, since its inception 11 years ago, CEA has been
unable to accumulate the amount of capital it projects it will
need in the event of catastrophic earthquake. I am looking
forward to hearing Mr. Pomeroy's testimony on how this
legislation will allow the CEA to reduce its claims-paying
costs and accumulate more capital.
Thank you, Mr. Chairman, and I yield back the balance of my
time.
Chairman Kanjorski. Thank you very much, Ms. Waters.
And now, we will hear from the gentleman from Texas, Mr.
Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
By any honest accounting standards, the President's push on
his health care agenda is going to cost the Nation $2 trillion.
Already, the President has submitted to us a budget which will
double the national debt in 5 years, and triple it in 10 years.
According to the latest Congressional Budget Office
baseline, at the end of the 10-year budget window, our Nation
will be paying $916 billion a year, over $8,000 per household,
in interest alone on the national debt. Half of our national
debt is now owned by foreign interests, mainly China.
When you look at our Nation's spending patterns, it has
caused Congressional Budget Director Elmendorf to state, ``The
outlook for the Federal budget is bleak. U.S. fiscal policy is
on an unsustainable path.'' Economist Robert Samuelson says
this spending could ``trigger an economic and political death
spiral.''
Former Comptroller General David Walker has said that our
spending patterns represent a ``fiscal cancer that threatens
catastrophic consequences for our country.'' And we recently
read where Moody's has announced that America's bond offerings
may soon lose their AAA rating.
On top of that, we now have H.R. 2555, which creates new
Federal guarantees, a new Federal reinsurance program, and a
new Federal grant program: Title 1 authorizes $100 million for
a national catastrophic risk consortium; Title 2, $25 billion
for catastrophic obligation guarantees to the States; Title 3,
up to $200 billion for reinsurance coverage to eligible State
programs; and Title 4, $75 million for a mitigation grant
program.
I ask the question: How much more money are we going to
borrow from the Chinese and send the bill to our children and
our grandchildren?
This bill simply represents a bad idea whose time has not
come. Our Nation is currently on the road to bankruptcy. If we
do not change our spending ways, then we are looking at a
massive tax increase, up to 60 percent by the end of this
decade, which will crush jobs, or massive inflation, which will
make us look longingly and nostalgically upon the Carter era.
I know there are those who maintain that the taxpayer has
nothing to lose. But we heard these same voices about Fannie
and Freddie. And now, over a trillion dollars of taxpayer
exposure later, we know how wrong those opinions were.
We have gone from bank bailouts to beach condo bailouts.
What is next? And I haven't even mentioned the wisdom or the
fairness of forcing my constituents in Dallas to subsidize
someone else's constituents in Daytona.
In a free society, how people choose to risk their money is
their business. How they choose to risk the taxpayer money is
my business. H.R. 2555 is unwise, unfair, and unaffordable.
I yield back the balance of my time.
Chairman Kanjorski. The gentleman from Texas, Mr. Green, is
recognized.
Mr. Green. Thank you, Mr. Chairman. I thank the chairwoman
of the Subcommittee on Housing, Chairwoman Waters, and I also
thank Ranking Member Capito.
In response to something that was said about the chairman
of the full committee, Chairman Frank, it is no secret that he
is not shy when it comes to expressing his opinion. It is also
equally as true that he will listen to others, and while he may
not agree, he does allow differing opinions to be heard. And I
salute the chairman for his willingness to hear from other
persons.
With reference to the statement about the amount of money,
the $3 trillion, CBO seems to differ with the $3 trillion
estimate that was called to our attention. There may be many
who are reviewing these numbers, but CBO seems to be the gold
standard that we all rely on and refer to. And their number is
decidedly different from the $3 trillion number that was called
to our attention.
With reference to Title 1 of the Homeowners' Defense Act,
it is voluntary. I think it is important to note that it is
voluntary, that States may or may not participate. Usually,
States will do what is in their best interest. If it does not
benefit a given State, then the people of that State will not
participate. If it does, then it bodes well for what we are
trying to accomplish, and the people do participate.
I think it is worth our consideration. I look forward to
hearing from the witnesses. I believe that this consortium, a
national catastrophic risk consortium, is something worthy of
review. I look forward to hearing the witnesses, and I yield
back the balance of my time.
Chairman Kanjorski. Thank you very much, Mr. Green.
We will now hear from the gentleman from California, Mr.
Campbell.
Mr. Campbell. Thank you, Mr. Chairman.
As has been mentioned, after Katrina, the Federal taxpayer
sent tens of billions of dollars to help reconstruct things in
Louisiana. Whether it is a hurricane, an earthquake, a tsunami,
as we have heard about recently, tornado, flood, land
subsidence, whatever--if a similar natural disaster hit any of
our States here, does any of us reasonably believe that we are
not going to come here to the Federal Government and say, ``You
helped out Louisiana; help us out, too.''
Of course, we are. But that is not the best way to finance
this stuff. That is not the best way to deal with this. And as
has also been mentioned, only 12 percent of homeowners in
California have earthquake insurance, and it is less than that
for businesses. Why? In part, because everyone expects the
Federal Government will come bail them out because, look, they
did it over there.
What this bill attempts to do is to replace that very
broken, wrong way of dealing with natural disasters and enable
a government-supported and assisted, yes, but private insurance
market so that people can have private insurance for these
things. We can build up insurance around the States.
Now, I know some people have problems, as has been
expressed, with the specific mechanisms used in this bill.
Fine. Let's debate those. But we need something other than what
we have because this is just not going to work, either for the
taxpayer or for homeowners and residents.
Thank you. I yield back.
Chairman Kanjorski. Thank you very much, Mr. Campbell.
We will now hear from Mr. Posey.
Mr. Posey. Thank you, Mr. Chairman. I would like to echo
the comments of my colleague from California and express my
appreciation to my colleague from Florida for bringing forth
this legislation.
Whether people know it or not, or whether they like it or
not, major parts of nearly every State are merely one natural
disaster away from catastrophe. And you can sit around and do
nothing and bury your head in the sand, and wait for that to
happen, and then come crying to the Federal Government for
help; or you can try and be a little bit forward-thinking, as
the proponent of this bill has done, and explore ways to
prepare better for the future.
This concept has worked in many States, to the salvation of
homeowners and some insurance companies. This is not perfect
yet. It is not ripe. But we will never find the perfect
solution if we don't take the time and give the necessary
attention to exploring the various options that are out there.
Sadly, a lot of people, based on the comments I have heard,
do not understand the concept of reinsurance. And maybe when
they find out a little bit more about it, they will be
supportive.
Thank you.
Chairman Kanjorski. Thank you very much, Mr. Posey.
Are there any other members of the committee who seek
recognition for an opening statement? The Chair seeing none--
oh, I am sorry, Mrs. Biggert.
Mrs. Biggert. Mr. Chairman, I don't have an opening
statement. But I would like to submit several statements from
groups for inclusion in the hearing record: the National
Wildlife Federation; an environmental groups joint letter;
SmarterSafer; Cincinnati Insurance; RIAA; PCI/AIA; fiscal
conservative groups joint letter; and NAMIC.
Chairman Kanjorski. Without objection, it is so ordered.
I am pleased to welcome our distinguished panel here today.
We want to thank you all for appearing before the subcommittee.
Without objection, your written statements will be made a part
of the record.
You will now each be recognized for a 5-minute summary of
your testimony. Our first witness--I introduce him actually
with pride because I had the experience of working with Mr.
Witt on several occasions in several Administrations, and if
all Federal leaders and managers were of his capacity, we would
have a perfectly functioning government.
So Mr. Witt, we welcome you here as a former Director of
the Federal Emergency Management Agency and on behalf of
ProtectingAmerica.org.
Mr. Witt?
STATEMENT OF JAMES LEE WITT, FORMER DIRECTOR OF THE FEDERAL
EMERGENCY MANAGEMENT AGENCY, ON BEHALF OF PROTECTINGAMERICA.ORG
Mr. Witt. Thank you, Mr. Chairman. Mr. Chairman and members
of the subcommittees, I want to thank you for the opportunity
to appear before you today to discuss ways to better prepare
and protect American families from the devastation caused by
natural disasters.
Congressman Klein, I also want to thank you for your
leadership on this very important issue.
I was honored to serve as the Director of FEMA under the
Clinton Administration from 1993 to 2001. Today, I will speak
on these issues in my capacity as the co-chairman of
ProtectingAmerica.org.
ProtectingAmerica.org is an organization formed in 2005 to
raise national awareness about the important responsibilities
we all have to prepare and protect consumers, families, and
communities from natural catastrophes. My fellow co-chairman is
Admiral James Loy, former Deputy Secretary of Homeland Security
and Commandant of the U.S. Coast Guard (Retired).
Together, we have built a coalition and a campaign to
create a comprehensive, integrated management solution that
protects homes and property at a lower cost, improves
preparedness, and reduces the financial burden on consumers and
taxpayers, all in an effort to speed recovery, protect
property, and save money and lives.
There are over 300 organizations in our coalition,
including the American Red Cross, the International Association
of Fire Fighters, State Farm, Allstate, municipalities, small
businesses, Fortune 100 companies, and more than 20,000
individual members. The membership is truly broad, diverse, and
representative of virtually every State in the union.
We all believe that this hearing is timely. With headlines
around the world relaying stories from recent tragedies in both
Haiti and Chile, and on Monday in Turkey, many here at home are
taking a harder look at whether or not we would be prepared if
a similar catastrophic event were to happen in the United
States.
A catastrophic event, whether an earthquake striking one of
our great American cities, a massive hurricane making landfall
near any of the metropolitan areas from New York to Houston, a
wildfire spreading quickly through the western States, or a
twister tearing through Tornado Alley, would cause such damage
that our economy would be stunned, private resources quickly
depleted, and an immediate Federal bailout of hundreds of
billions of dollars could potentially be required. As a result,
they would be far better served by a program that uses private
insurance dollars to pre-fund coverage for the eventuality of a
catastrophic natural event.
I believe that there are three key points critical to any
comprehensive solution to a homeowners' insurance crisis.
First, a national reinsurance program will generate
additional capacity, bring more stability to the market, make
higher-quality insurance more available, and ensure that
consumers realize significant cost savings on their homeowners'
insurance. The best way to accomplish this is to enable and
encourage more States to create well-structured, actuarially
sound catastrophe funds to supplement the protection offered by
the current State catastrophe programs in California and
Florida.
Second, catastrophe obligation guarantees will provide
helpful support to the debt issuance of State programs that
could serve these programs well in distressed market
conditions.
Finally, we believe that a hybrid approach to the
prevention and mitigation provisions is important. This
approach would keep the program under the Department of Housing
and Urban Development, but incorporate a privately financed
national catastrophe fund that provides significant investment
income to groups like the Red Cross and others.
Stated simply, the status quo is not acceptable. A 2009
report by Jonathan Orszag, an economist who formerly served on
President Clinton's National Economic Council, found that the
current system for post-catastrophe financial preparedness is
riddled with inefficiencies, and there is a significant gap
between the ability of the private insurance and reinsurance
sectors to provide the protection that is required.
Specifically, Mr. Orszag found that the current system is
an ad hoc, backward-looking program that makes the government
and the taxpayers essentially the insurers of last resort.
Further, his report suggests that a better approach would be
one that not only ensures that resources are available to fund
recovery, but also funds prevention, mitigation, and
preparedness.
To that end, we support a comprehensive, integrated plan
linking the national catastrophe fund with support to first
responders, as well as strong education and mitigation
provisions. A national catastrophe fund will create a privately
financed, federally administered layer of reinsurance to
complement and stabilize the private market reinsurance
alternatives, and ensure greater availability and affordability
for consumers of residential property insurance.
And let me close with this. The 8 years that I was Director
of FEMA, 1993 to 2001, based on a 5-year average less the
Northridge Earthquake--at that time one of the costliest
disasters we had--the average cost was $3 billion a year in
disaster supplemental recovery efforts. And that cost has
escalated tenfold from those 8 years.
There are people for whom insurance is not available and
not affordable, or who are underinsured. With these conditions,
it will be a bailout every time one of these events happens. We
have to make insurance available and affordable if we expect
communities to recover and to replace the things that they
worked all their lives for, and help their economies recover
faster.
So I thank you, and any questions you may have, I will be
happy to answer.
[The prepared statement of Mr. Witt can be found on page 73
of the appendix.]
Mr. Klein. [presiding] Thank you, Mr. Witt. We appreciate
your leadership on behalf of FEMA, and you have been a great
resource in the consideration of this issue, most particularly
as understanding the before, the during, and the after, which
is a comprehensive approach here.
Our next witness: We would like to invite Mr. Glen Pomeroy,
chief executive officer of the California Earthquake Authority,
to share with us your thoughts.
Mr. Pomeroy?
STATEMENT OF GLENN POMEROY, CHIEF EXECUTIVE OFFICER, CALIFORNIA
EARTHQUAKE AUTHORITY (CEA)
Mr. Pomeroy. Thank you very much, Congressman Klein, and
subcommittee members.
On a Monday morning in January 1994, the Northridge
earthquake struck southern California. Many lives were lost,
and homes and businesses were destroyed. It remains one of the
most expensive natural disasters in our Nation's history.
In its wake, most private insurers were desperate to shed
their California earthquake exposure, but State law still
required them to offer it as long as they were selecting
homeowners' policies in the State. So most companies stopped
writing homeowners' insurance altogether, and California had a
crisis on its hands.
That is when the State created the California Earthquake
Authority, a publicly managed, privately financed, not-for-
profit enterprise with the public purpose of making earthquake
insurance broadly available.
So, fast-forward 14 years. Today, the CEA insures over
800,000 homes. We are the largest earthquake writer in the
United States, and one of the largest in the world. But even
though we know another Northridge-sized event will strike
within 30 years, only about 12 percent of California homes have
earthquake insurance.
Some may be hoping that the next ``Big One'' will miss
their home, or that the Federal Government will help them
rebuild and recover following a disaster. We know that there
are many others who believe they simply cannot afford
earthquake insurance, especially given its high cost and high-
deductible structure.
After almost 14 years in this business, and knowing that
seven out of eight California homes have no quake insurance, it
is in the interest of everyone--the homeowners in harm's way
and the taxpayers of our State and our Nation--to find a way
for more Californians to be able to insure their homes.
Otherwise, families and communities will not recover when the
``Big One'' happens.
Government aid can't be the only solution, and no one
should have to surrender their home to foreclosure. The reality
is this: We are hitting a brick wall in insuring more people
because we depend too much on expensive reinsurance.
Reinsurance makes up only one-third of our claim-paying
capacity, but it is two-thirds of our overall expenses. Forty
percent of every premium dollar we collect goes right out the
door as reinsurance premium, paid to reinsurers in Europe and
London and Bermuda. Since 1996, we have paid $2.6 billion for
reinsurance, and we have made reinsurance claims of $250,000.
And despite that history, our reinsurance rates shot up 15
percent last year.
It is time for CEA financing to become more efficient, and
in the process, less dependent on expensive reinsurance. Title
2 of H.R. 2555 is an innovative tool that will allow us to do
just that, and we are grateful to Congressman Klein for
including this provision in the bill.
It is not a bailout. It is not a giveaway. It is not an
expensive government program. It is none of those. In fact,
Title 2 simply provides a limited Federal guarantee so
qualified, creditworthy State programs like the CEA have
guaranteed access to private debt markets.
This year, CEA will spend $224 million on reinsurance. With
the Title 2 guarantee, we could save about $150 million each
year, and we would pass these savings directly to our
policyholders by cutting rates and slashing deductibles. We
will still use reinsurance in the structure, just less of it.
And we will maintain our financial strength to handle
anything Mother Nature may throw in our way. Lower prices,
better products, more choices--with those ingredients, we think
we can double our policyholder count in 5 years.
We are not seeking to push off our risk on others. Just the
opposite: We want to manage our capacity better and more
efficiently, continue to rate the risks appropriately, and ask
Californians to bear the risk of loss from California
earthquakes.
There is a less than 1 percent chance we will need to
borrow using the guarantee. But in an event such a magnitude
happens and we do need to borrow money in the private debt
markets, we will repay that debt from premium income going
forward.
We believe, based on discussions between CBO staff and a
Senate sponsor of a similar measure, that the CBO score of this
approach will be minimal, perhaps as low as $25 million over 10
years.
And so the bottom line is this. Today, we ask the CEA
policyholders every year to pay in full for huge events that
almost never happen. There is a better way. Finance a structure
using our capital and financial tools like reinsurance in
reasonable amounts for the ready funds to pay for all the more
expected events, and use the powerful certainty that if that
huge and unlikely event occurs, we would have guaranteed access
to the private debt markets to ensure that we could pay all
policyholder claims.
Ending our overdependence on expenditure reinsurance means
that more Californians can get the protection they need. And
they won't have to pay in advance over and over again for that
mega-catastrophe California has never experienced.
Title 2 of this bill is a new approach. It will be
effective, and it can be a real game-changer. But we need your
help, and we thank you for your consideration.
[The prepared statement of Mr. Pomeroy can be found on page
60 of the appendix.]
Mr. Klein. Thank you very much, Mr. Pomeroy. I appreciate
your involvement today, and your experience in this.
Our third witness is Mr. Steve Ellis, vice president of
Taxpayers for Common Sense.
Mr. Ellis, please proceed.
STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON
SENSE
Mr. Ellis. Thank you very much. Good afternoon, Congressman
Klein, Ranking Member Garrett, and members of the
subcommittees. Thank you for inviting me to testify. I am Steve
Ellis, vice president of Taxpayers for Common Sense, a
national, nonpartisan budget watchdog.
Unfortunately, Taxpayers for Common Sense believes H.R.
2555 is fundamentally flawed, and strongly opposes the
legislation. The bill would actually end up putting taxpayers
at risk, and subsidizing people to live in harm's way.
Americans across the country would be forced to pay for a
narrow bailout that primarily helps the well-off. It doesn't
make sense.
We are joined in our opposition by SmarterSafer.org; Allied
Groups, which run the gamut from American Rivers to Americans
for Prosperity; the National Association of Professional
Insurance Agents; and the National Wildlife Federation.
The breadth and depth of the taxpayer, environmental, and
industry groups opposed underscores the broad-based concerns
with H.R. 2555. Much of the argument for the programs under the
bill relies on a ``pay me now or pay me later'' approach.
Essentially, by providing reinsurance and debt guarantees,
taxpayers will avoid fiscally messy and expensive bailouts of
State programs in the aftermath of large disasters.
Unfortunately, we have heard that seductive siren song
before with the National Flood Insurance Program. Cheap Federal
flood insurance helped fuel the coastal development boom.
Although intended to provide only limited, short-term subsidies
and encourage responsible construction, it actually served to
increase subsidies.
Today, a program that takes in roughly $2 billion in
premiums annually is $20 billion in debt to the taxpayer. It is
extremely likely that most, if not all, of that debt will be
forgiven.
We walked down that primrose path decades ago, and we are
now stuck with Federal flood insurance. But today, staring into
a budgetary abyss, with predicted average deficits of $1
trillion a year over the next 10 years, we cannot afford to
make that costly mistake again.
Let's be clear about a few points. This bill does not pre-
fund response. In any major disaster like Katrina, taxpayers
will still have to pay for infrastructure repair, debris
removal, emergency relief, and services. Furthermore, nothing
in this legislation forces States to use the subsidies to help
lower-income homeowners obtain insurance.
The three major components of H.R. 2555 are all directed at
accomplishing the same thing: shifting the cost and risk from
bad decisions by a few to the rest of the country. And in so
doing, they would enable continued subsidized insurance rates,
which promotes unwise development and increased risk.
The bill creates a Federal reinsurance program for eligible
State programs. Currently, only Florida and California qualify,
although others could join. Curiously, the bill stipulates that
the program not compete with private markets, and that prices
be actuarially sound.
First, reinsurance is available, so it will compete. And
second, at actuarial rates, the program would be more expensive
because it would be forced to sell reinsurance to a very narrow
pool of high-risk States, whereas the private market could
distribute the risk worldwide.
The debt guarantee program would put taxpayers on the hook
to back State programs that insure earthquake losses at $5
billion or other perils at $20 billion. The $20 billion figure
fits fairly closely with the gap between the total liabilities
faced by the Florida Hurricane Catastrophe Fund, the State
reinsurance program, and the fund's available hard assets.
Beware of Federal guarantee programs. They are presented as
having little or no cost to taxpayers. But if the Federal
Government picks up the tab for enormous State losses,
particularly those of politically powerful States such as
Florida and California, much of that amount could be forgiven.
H.R. 2555 creates a National Catastrophe Risk Consortium
chaired by the Secretary of the Treasury. Although the
legislation stipulates that the consortium is not part of the
U.S. Government, it is pretty clear that with board membership
and a Federal charter, it will be viewed as such. And its
financial actions will be viewed as activities with the backing
of the Federal Government, similar to what occurred with Fannie
Mae and Freddie Mac.
H.R. 2555 notes that natural disasters are going to
continue to damage and destroy homes, and that the United
States needs to be better prepared for and better protected
against catastrophes. We agree. We have long supported efforts
to mitigate or eliminate impacts associated with natural
disasters. A few ideas:
Eliminate the parochial earmarks that have littered FEMA's
pre-disaster mitigation program in recent years. Separately,
little of the $5 billion in stimulus funds that was given to
States for weatherization has been spent. Some of these funds
should be redirected to catastrophe mitigation efforts.
Florida should look slightly north to South Carolina and
Virginia for examples of good policy. South Carolina's programs
have let risk, not politics, determine rates in coastal areas,
and the State has helped residents mitigate their homes. In
Virginia, the FAIR plan provides a true last-resort coverage
for those who can't get coverage elsewhere, and the State has
private reinsurance to cover claims.
The major provisions in H.R. 2555 would actually serve as
an impediment to a better way forward, expanding subsidies to
high-risk development and removing market incentives to
mitigate future storm damages and move people out of harm's
way.
Higher insurance premiums are never popular, and
politicians are in the business of being popular. This is a key
reason why government-run insurance programs are fraught with
fiscal peril.
Taxpayers for Common Sense's mission is about making
government work. Sometimes, the best way for government to work
is to not make matters worse. H.R. 2555 would pile subsidy on
top of subsidy to preserve an insurance house of cards. In
these difficult budgetary times, we cannot afford to bail out
one State for politically expedient decisions of the past.
Thank you very much.
[The prepared statement of Mr. Ellis can be found on page
46 of the appendix.]
Mr. Klein. Thank you.
And our final witness will be Mr. Charles McMillan from
Coldwell Banker Residential Brokerage, Dallas-Fort Worth, and
immediate past president of the National Association of
Realtors. Congratulations on your leadership on the Board of
Realtors, which is a very important organization in all of our
communities. And we appreciate your testimony today. Mr.
McMillan?
STATEMENT OF CHARLES McMILLAN, COLDWELL BANKER RESIDENTIAL
BROKERAGE, DALLAS-FORT WORTH, AND IMMEDIATE PAST PRESIDENT,
NATIONAL ASSOCIATION OF REALTORS (NAR)
Mr. McMillan. Thank you, Congressman Klein. I also want to
thank Chairwoman Waters, Chairman Kanjorski, Ranking Members
Capito and Garrett, and the members of the subcommittees for
inviting me to present the views of the more than 1.2 million
members of the National Association of Realtors on approaches
to managing natural catastrophic risk.
Recent earthquakes in Chile and Haiti should remind all of
us of the need for a comprehensive, forward-looking national
natural disaster policy. However, as it stands today, U.S.
policy toward natural catastrophic risk is largely reactive
rather than proactive.
For example, when Hurricane Katrina struck, the Federal
Government paid for much of the cleanup, all with taxpayer
dollars. Of the total provided, $26 billion went directly to
underinsured property owners, according to the Government
Accountability Office. That money would not have been paid to
taxpayers had a proactive Federal policy been in place to make
property insurance more widely available as well as affordable.
NAR believes that a comprehensive natural disaster policy
should include property owners, the insurance companies, and
each of the different levels of government in preparing and
paying for future catastrophic events. My testimony today
offers suggestions for what Realtors believe must be a
comprehensive approach to addressing future catastrophic
natural disasters.
Specifically, we support the creation of a Federal policy
to address catastrophic natural disasters that: ensures the
insurance coverage is available and affordable; acknowledges
the personal responsibility of those living in high-risk areas
to mitigate, which includes adequate incentives; acknowledges
the importance of building codes and smart land use decisions;
recognizes the role of States as the appropriate regulators of
property insurance markets, while identifying the proper role
of Federal Government intervention in cases of mega-
catastrophes; and reinforces the proper role of all levels of
government for investing in critical infrastructure, including
levees, dams, and bridges.
Several pieces of legislation that would accomplish many of
these goals are currently pending before you. Your bill,
Congressman Klein, H.R. 2555, which has been mentioned several
times during the testimony, the Homeowners' Defense Act, would
offer the most comprehensive solution, in our opinion, by
providing access to Federal reinsurance and a guarantee for
State loans.
It provides stable funding sources so there is more
consistency in insurance availability, as well as
affordability. Key components of the bill have also been
introduced as stand-alone measures by Representatives Ginny
Brown-Waite and Loretta Sanchez.
Others have introduced legislation which provides tax
incentives, including H.R. 308 by Representative Gus Bilirakis
for property mitigation, and H.R. 998 by Representative Tom
Rooney for insurance company reserve funds to pay claims
arising from catastrophic events.
All of these ideas could work together as critical elements
of a comprehensive solution. Not only would such measures
protect the private market from collapse, but they also ensure
that resources are available to rebuild after the next mega-
catastrophe.
Simply stated, these ideas would create a national policy
to proactively address the inevitable rather than waiting for
the next crisis to occur and rely upon taxpayer-funded
bailouts.
Realtors thank Representative Klein for your efforts, sir,
and we urge the committee to hold a markup at the earliest
opportunity. NAR believes that all reasonable proposals should
be considered as a part of a comprehensive solution to address
future catastrophes, and we look forward to working with you on
such measures in the months ahead.
Thank you again for inviting me to present the views of the
National Association of Realtors, and I will be happy to answer
any questions that you or other members of the subcommittees
may have.
[The prepared statement of Mr. McMillan can be found on
page 52 of the appendix.]
Mr. Klein. Thank you very much, Mr. McMillan. And I would
like to thank all of you for coming today and being part of
this discussion. This is something I think all four of you
understand, although some of you had some different opinions on
how to approach this, it is not if, it is when.
And we understand that whether it is maybe 50 States, maybe
45 States, maybe 30 States, but there will be natural disasters
over the next number of years. We have had an ad hoc approach
for a long time.
So I think what we will do is, I would like to thank you. I
am going to just reserve 5 minutes for myself for asking some
questions, and then we will move it along to other members.
First of all, as I said, I know the question is: How do you
manage the risk? And what I have been most intrigued by in
working on this for the last number of months, and with a lot
of input from people who like some of the ideas, we really
molded something that ended up being a good bipartisan
consensus.
But I think the most important thing, and Mr. Witt, maybe
you mentioned this, and I think Mr. McMillan as well: It is the
view of a comprehensive approach. Before understanding, there
is planning, whether it is mitigation, whether it is building
codes, all the things that take place before, and the
management of insurance in a way that will help homeowners
manage one of the most expensive pieces of homeownership.
Secondly, it is how you deal with an event during and then
after. We also know that there are a lot of expenses that occur
right after major natural disasters. And those can even be
mitigated with proper State planning.
And again, we are not here to say to each State, you have
to do it a particular way, because each State will be dealing
with it differently. But the eligibility for participation in
this does require a great amount of mitigation, a great amount
of responsibility for planning properly.
Mr. Witt, you were FEMA Director for a number of years, and
I think you handled, in my notes here, over 360 disasters,
which is extraordinary. If you could just discuss with us how
this notion of a prefunded system created by the bill--how that
is better than a system on the back end, in which we are just
cutting a check after the fact.
Mr. Witt. Thank you, Congressman Klein, for the question.
First, let me just say that when I was Director of FEMA, we
created what we will call a public/private partnership with the
private sector. We had over 2,500 core business partners in a
program called Project Impact.
It worked. The funds were leveraged to mitigate the risk in
these communities, 250 communities across the United States.
This program is a pre-funded catastrophe fund. And if a State
wants to join, pass, and create the fund, it is a partnership
from the private sector industry. By creating this fund, the
Federal Government then would be the backstop if it was so
catastrophic that the fund was depleted.
But the idea of trying to create a cost-effective insurance
homeowners' premium in today's world is difficult. We have to
do better. This is not a bailout. If you look at every event,
the 360 disasters I responded to, who funded that? The
taxpayers, in every single event; and not only the response,
but also in the longer-term recovery.
If you were a homeowner and your home got destroyed, or it
was minimally damaged and you were underinsured, that family,
if they could make it habitable, was eligible for up to a
$10,000 FEMA grant to make it liveable, or 18 months of
temporary housing, all funded by the taxpayer.
Now, I think that a pre-funded, private sector catastrophic
fund at the national level, with funding from each State as
they come on board, is a smarter way to go.
And you talked about mitigation and prevention. We did a
cost/benefit analysis on mitigation and prevention after the
Midwest floods in 1993, and we found that every dollar spent
saved $4 to $5 in future losses.
The mitigation, prevention, public awareness, and education
is a really important part of this because we can continue to
minimize the risk and the loss, and continue to drive down the
premiums so more people can afford to buy them.
Mr. Klein. Thank you. And if I can ask Mr. McMillan: You
and your colleagues are in the business of selling homes. Can
you tell me how, in many places around the United States, the
lack of available or affordable homeowners' insurance is
affecting the overall recovery and our general economy?
Mr. McMillan. Absolutely. I would be delighted to. One of
the myths that is often fueling the divisiveness in this debate
is that this is about a bailout for luxury homeowners in
Florida and California. And the final exhibit, I have from 2005
to 2008, a number of instances within which a tornado took a
turn from Florida and went into Indiana and Illinois and what
have you, tornadoes and hurricanes and things of that nature.
The bottom line is, whereas there is a statistical
probability that there are areas that might be more affected,
we have found in the past 5 years, that the entire Nation is at
risk at some point or another for things that are happening
that statistically haven't happened in the last 100 years.
So I am in agreement that we must have a comprehensive
policy. And past discussion was to leave it on those homeowners
so affected. The result of that is that the homeowners in the
entire infrastructure of the Nation have been left ill-prepared
because of the lack of availability of homeowners' insurance
when these catastrophes occur.
Mr. Klein. Okay. Thank you very much. I will turn it over
to Mr. Garrett for 5 minutes.
Mr. Garrett. Thank you.
First, a question to the panel, and anyone can answer. In
Florida, you have a couple of programs right now. Right? You
have the Florida Hurricane Catastrophe Fund, which provides
reinsurance to insurers on hurricane losses. And you have the
Florida Citizens Property Insurance fund as well. Both, to my
understanding, are underfunded in terms of being able to meet
their potential claims to going forward.
So before we were to implement this legislation, before we
set up a Federal backstop for any State catastrophe fund,
shouldn't we make sure that those funds are already properly
capitalized and funded? Mr. Ellis, it seems like you are
grabbing the microphone.
Mr. Ellis. Yes. Thank you very much, Ranking Member
Garrett.
You are correct that--well, one is that the Citizens
Insurance, the State insurance fund in Florida is the largest
insurer, and the rates are artificially low. They buy
reinsurance from the State reinsurance fund.
The State reinsurance fund, and it is hard to tease out
exactly what the numbers are, but when you look at it through
both some other documents and then you look out from their
annual report or their audit, it looks like there is about a
$20 billion gap between assets and total liabilities.
Total liabilities, basically there is about $4 billion in
assets, and then plus $20 billion gets to the total
liabilities. Obviously, it is unlikely that the full $20
billion would be called upon at any one moment. But certainly,
you are looking at--potentially, if there was a large natural
disaster, an enormous bond issue would have to come out from
the State of Florida to actually try to fill that gap.
So certainly Florida--and they are taking steps. They are
looking at--Citizens has agreed to--or the State legislature
has indicated that they want to have a 10 percent increase in
homeowner insurance rates each year for the next several years.
And so they are doing work to close that gap. And I think
that is certainly something that Florida needs to be looking at
as one of our concerns about this overall program, stepping in,
that it will actually be a disincentive to trying to do those
measures.
Mr. Garrett. Okay. Mr. Witt, it looks like you were--were
you going to grab the microphone?
Mr. Witt. Yes. Thank you.
Mr. Garrett. Sure.
Mr. Witt. Really, the problems with the Florida CAT fund
are actually an indication of the need for a national backstop.
The Florida CAT fund actually worked in 2004 and 2005. It paid
out $37 billion that the taxpayers across the country didn't
have to pay out. So it actually worked.
Also, I think that a few comments made earlier about this
was a bailout for property on the coast or helping to build up
the coast--let me tell you something. If you can afford to
build a house on the coast, on the oceanfront, you probably
don't need to worry about insurance. You probably can afford
it. So I don't think this is going to enhance that.
But the Florida CAT fund actually worked. And it paid out
almost $10 billion in hurricane funds in 15 years.
Mr. Garrett. But the rates on these funds, to date, have
not been actuarially sound. Is that correct?
Mr. Witt. They are actuarially sound in Florida on the CAT
fund that they have.
Mr. Ellis. I don't know how exactly they could be if it is
tremendously underfunded compared to the liabilities. But--
Mr. Garrett. Yes. I have never heard anybody make that
assertion before, that they are actuarially sound rates. I have
always heard that they have not been soundly set, that they
have been set too low that it is basically that they have not
been able to get the wherewithal to change that.
Mr. Ellis. But even beyond that, Ranking Member Garrett, I
would just point out that in 2007, there was a change done by
the State of Florida under Governor Crist that actually
expanded Citizens Insurance.
So even though the CAT fund responded well in 2004 and
2005, in 2007, under Governor Crist, they expanded the ability
to get coverage under the Citizens Insurance, which then
dramatically increased the risk. And that is also what
catapulted Citizens to being the largest home insurance company
in the State.
Mr. Garrett. And it looks like I only have 1 minute left,
so I will throw this out quickly. I wanted to get to Mr.
McMillan's comment with regard to mitigation and enforcement of
State laws. And I think you said it should be done on the State
level, that is a really good way to make sure of building codes
and what have you.
I don't have time to get to that, but I think that is a
good point that you made in your testimony. That is the way to
get it done, and unfortunately that is not being done. And I
think that is to the chagrin and to the detriment of both the
municipalities, the counties, and the States, and also the
homeowners there.
Would you just agree with that, in short?
Mr. McMillan. I would agree with that.
Mr. Garrett. I thank you, and I think that is a point that
we need to make. I appreciate that.
If I have 30 seconds left, one major point that was made,
and maybe it is conflicted on, is whether or not--what the
Federal Government actually pays out. The Federal Government
right now pays our temporary assistance and infrastructure
assistance in these cases when you have these things.
Katrina was a little bit different because, hey, the
Federal Government messed up there--oh, there is a light on
this one--and does anybody want to just quickly say whether or
not we are--are we really subsidizing the insurance in these
situations, or will that be an added subsidy once these plans
go into place? Mr. McMillan, do you want to respond?
Mr. McMillan. If I might, briefly, I think this is one of
the areas where we talk about reinsurance. Without this
government backstop, we have to depend on the open market. And
one of the things that is making this reinsurance--and
subsequently the insurance to the homeowner--unaffordable is
that they have to work with extremely fluctuating market rates.
With this backdrop, there would be much more stability. And I
would dare say, in California and Florida and throughout, we
would have many more participants in that pool.
Mr. Klein. Ms. Waters, for 5 minutes.
Chairwoman Waters. Thank you very much.
Mr. Pomeroy, even though Mr. Klein started this work and
has worked diligently because of the hurricanes and floods, you
and I are a little bit more focused on earthquakes because of
where I come from and where you come from.
I would like to just take a moment to explore, given that
you have been insurance commissioner of North Dakota and you
are now head of the largest provider of earthquake insurance in
California, can you explain in greater detail how the
mechanisms in this bill make good risk management sense to
States like California and North Dakota, that are exposed to
such very different natural catastrophe risk? What can this do
for us?
Mr. Pomeroy. Thank you. Thank you very much, Congresswoman
Waters. Actually, my strong opinions as to why this is
absolutely the direction we need to be heading to in terms of
risk management were formed by my time as an insurance
commissioner in North Dakota from 1992 to the year 2000,
commissioner during a time, during 1997, when we had a horrible
disaster in Grand Forks, North Dakota.
The City entirely evacuated, entirely flooded. A horrible
disaster. And fortunately, James Lee Witt was the FEMA Director
at that time, and marshaled an incredibly impressive Federal
response to come into that community, help it recover, help it
get back on its feet. And North Dakotans forever are grateful
for not only Mr. Witt's leadership, but for the response of the
United States Government.
Well, now we are talking about California, and California
earthquakes. If there is a similar but different natural
disaster in our State, and you have a massive earthquake with
massive destruction, most of which is uninsured, of course,
there will be a similar Federal relief effort, as Californians
will then look to North Dakotans and others for the kind of
help that they have been providing other States during their
times of disaster.
It just makes more sense to get more people to take the
steps to privately insure their own homes so they can quickly
recover, and get their families back in their homes, and get
their communities moving again without having to go stand in
line to try to seek assistance from various agencies.
It is better for folks to take the responsibility up-front,
and insure their properties. The problem is, it is hard to do
right now because it is expensive. So what we are trying to do
is make it more affordable, thereby making it more available.
Chairwoman Waters. In your testimony, you mentioned the
goal of the California Earthquake Authority through this
legislation is to double the percentage of Californians who
have earthquake insurance from 12 percent to 25 percent in 5
years, as I understand your position. The CEA believes that
this goal can be achieved with the $5 billion debt guarantee
provided in Title 2 of the bill.
Please explain how the $5 billion debt guarantee in this
bill can double the number of Californians with access to
earthquake insurance following the next inevitable California
earthquake.
Mr. Pomeroy. Thank you, Congresswoman. Yes. We are
currently limited today by the fact that we are dealing with a
risk that the private sector basically walked away from. And
yet we need to figure out a way to manage it and provide
coverage for Californians who wish to obtain it.
Yet the financing that is available to us makes it tough
because we really have no choice today other than to acquire a
tremendous amount of our claims-paying capacity from the global
reinsurance markets. It is very expensive, and prices do
fluctuate.
And so 40 percent of everything we collect from our
policyholders goes right out the door by way of reinsurance
premium. Almost zero dollars have been paid back to us over
time, despite the fact that we have paid $2.6 billion for that
coverage since we opened our doors.
And so by moving into this new and innovative approach that
is called for in this bill, we will be able to lower our costs
substantially. We will still obtain reinsurance. We will still
have claims-paying capacity. We will still have our financial
strength. But we will make our coverage more affordable, so we
will get more people covered. We will grow our capital base
during the process, lower premiums, we will lower our
deductibles, and therefore have a policy that is going to be
more meaningful as earthquakes actually do occur because we are
going to be able to pay for claims.
By creating a better value proposition for consumers, we
are going to get more homes insured.
Chairwoman Waters. That makes good sense. Thank you very
much. I yield back the balance of my time.
Mr. Klein. The gentlelady yields back.
Mrs. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman. I would ask
unanimous consent to submit the testimony of Nationwide
Insurance to the hearing record.
Mr. Klein. Without objection, it is so ordered.
Mrs. Biggert. Thank you. It really is a shame that our
environmental groups and the reinsurance industry and any
regulator, State regulator, are not represented here today. And
Mr. Chairman, I think it is important that we have, with such a
bill, which could cost many of our constituents, taxpayers who
are not residents of Florida or California--that we hear from
all sides of this debate. And so I would request of the
committee that we hold another hearing on this bill so we can
hear from these other stakeholders.
And then my question to the panel is: Do Florida and
California allow insurance businesses to charge actuarially
sound risk-based rates? And I guess, Mr. Pomeroy, maybe you
could answer that for me.
Mr. Pomeroy. Yes. Thank you, Congresswoman. The answer is
absolutely, yes. And in fact, the California Earthquake
Authority is required by law to charge actuarially sound rates
for the coverage that we write.
Mrs. Biggert. Are there price controls and caps?
Mr. Pomeroy. There is State regulation of insurance,
obviously, and the California Earthquake Authority is a
regulated entity. We submit our rates to the department for
their review. There are not price caps; however, there is the
appropriate State oversight, as there is throughout the
country.
Mrs. Biggert. Do you think that there--it seems like in
some of these States that competition--it really drives out
competition and leaves the consumer with fewer choices and
higher rates. If Florida and California--and that happens in
Florida and California. Is that true?
Mr. Pomeroy. If I may, Congresswoman, what drove companies
out of California in terms of earthquake coverage was the
Northridge earthquake. Companies were devastated by the losses
that far outstripped premiums that they had collected or sought
to collect. And companies really wanted nothing more to do with
that risk.
And so the State was left with having to have homeowners go
it alone and shoulder their own risk, or put together some
creative solution, which has been in existence and operating
successfully for 14 years. It is just that we want to take it
to the next level and make coverage more affordable, and
therefore get more homes within the program.
Mrs. Biggert. And do you think that, for example, my
constituents in Illinois should provide a subsidy for the State
of Florida and California or the consumers of those States?
Mr. Pomeroy. Congresswoman, I think that is an excellent
question. And we are not here seeking any subsidy. We don't
believe a subsidy is necessary. The California Earthquake
Authority stands on its own. It is just that as we seek to put
our financing structure in place, we have the ability to borrow
money currently; it is just that after a huge and devastating
event, we don't currently have the certainty that the private
debt markets would be responsive.
We can pay the debt back. We just have to make sure that we
have access to the debt in the first place. And so our request
is give us this little assistance in the form of the Federal
guarantee. Allow us to get more homes properly protected. We
will pay the claims when they occur so that the State will be
less in a position of having to come out to you all after a
devastating event, when we have all this uninsured loss.
Mrs. Biggert. I guess I just have to put in a plug for
Illinois, which has been kind of a model State for insurance.
And one of the reasons is because there are no price controls
or rate control, and that we get more competition because more
insurance companies are willing to come to the State.
Mr. Ellis. Congresswoman Biggert?
Mrs. Biggert. Yes, Mr. Ellis?
Mr. Ellis. There are, in Florida, some challenges there as
far as--it is part of the reason why many of the companies have
left the State. The State is trying to force more companies to
come back in through a variety of means.
And then I would just point out that in the testimony of
the California Earthquake Authority, there was a lot made about
how there is no State money that is going into the California
Earthquake Authority. It is under the auspices of the State
government.
But essentially, what we are asking here is that the
Federal taxpayer back the bonds there for the California
Earthquake Authority, and actually to then make it so that they
are less reliant on reinsurance.
And I would just point out that, unfortunately, I have not
made a claim on my car insurance for many, many years, but I
have paid my car insurance every single year. That is
unfortunately the way insurance works--or fortunately that's
the way it works.
And so the idea that they have paid a lot of money to
reinsurance and haven't gotten any return, well, thankfully.
That means that there hasn't been an earthquake. They haven't
actually had to tap it. That is part of what insurance is
about.
Mrs. Biggert. Well, what about--let's turn to Florida. And
Florida doesn't allow risk-based pricing. Right?
Mr. Ellis. I am not--I have never lived in Florida. I would
have to look exactly to get to that level of detail. But my
understanding is is that there is not--that they are not able
to charge commensurate with risk such that--and are actually
undercut. And it is probably more that they are undercut by low
prices from Citizens.
Mrs. Biggert. Okay. Just one other quick question. And I
understand that the--
Mr. Klein. You are out of time.
Mrs. Biggert. I yield back.
Mr. Klein. Okay. Let's see. I now recognize Mrs. McCarthy
from New York for 5 minutes.
Mrs. McCarthy of New York. Thank you.
Mr. Ellis, I think that you just made a case on why we need
to have some sort of catastrophe insurance, basically saying
the insurance companies wouldn't come into the States. I know
we are hearing about California and I know we are hearing about
Florida.
But I just want to ask the experts out there, like New
York, most of our insurance companies have moved out even
though we haven't had a major hurricane since maybe the 1960's.
I'm not sure. But they have all pulled out, mainly because they
think we are going to get a hurricane soon.
But I guess the question I really want to ask is: How many
States do you think will actually partake in this? Because,
obviously, the more States that would take it, the better.
But the other thing is, too, the government right now
doesn't--I need to know exactly why the government should back
the States on these issues because we don't do anything on
guaranteed municipal bonds now for local areas. And during this
time of recession and our States, our cities, are having a hard
time just paying their bills, how do we know that they will be
able to pay us back, the Federal taxpayer back?
I guess those are the concerns I have. And I will just pick
up one thing that Mrs. Biggert had said, too. If we are going
to rebuild in areas that have hurricanes, earthquakes--I know
California, they have their codes. But some States are still
building on hurricane areas along the coastline and not taking
the proper precautions of putting the correct piles, I guess,
the house on the piles and things like that.
If we are going to do something like this, shouldn't we
have language in there that, to be covered, that you have to
have the best technology out there? Anyone can answer that.
Mr. Witt. Let me first answer part of it, and I know that
Mr. McMillan wants to say a few words.
First of all, it is not--this is not just about California
and Florida. This is about the whole country. This is about
those high-risk States where we have events frequently and more
often than others.
New York, in 1938, was hit with a very large nor'easter
hurricane. New York has an earthquake fault. And when you get
in the middle United States, you start out from Tennessee,
Arkansas, Indiana, Illinois, all with the New Madrid earthquake
fault, which had an 8.0 earthquake in 1811, 1812; had two of
them that rang the church bells in Boston. It just wasn't
inhabited at that time as much as it is today.
So the risk that we face today is nationwide, not just
Florida and California. And I think the most important--I was
the CEO of the International Code Council for 3 years in
building codes, building standards, electrical, plumbing. And
the State of Florida at that time, when Governor Jeb Bush was
down there, they did not have statewide building codes in all
of Florida. But they do now.
After Katrina, the State of Louisiana did not have
statewide building codes, and it was just along the coast. But
Governor Blanco and the legislators passed a statewide building
code.
So it is really important that part of this, and the
funding from this, goes for the support of statewide building
codes, the enforcement of them, and the mitigation and
prevention side of it. It is very important because we can
mitigate a lot of these losses.
Mr. Ellis. Congresswoman, I would just point out that in my
testimony, I talked about South Carolina and how South Carolina
has allowed prices of insurance to be commensurate with risk
along the coast. And they have actually seen insurance
companies coming into the State.
And so certainly that is one of the things, that you can
move insurance out of the State by having more restriction or
underpricing them, like Citizens has done; or you can do things
that will try to encourage that.
And then secondly, absolutely other regulatory measures and
other means and building codes and everything else along those
lines are critically important. I don't think anybody here has
indicated that we don't need to be doing something more. We are
just saying, not this.
Mrs. McCarthy of New York. Just to follow up on that, it
just so happened my brother-in-law was talking to me about this
the other day. He does live in North Carolina on the coast. He
bought the property and built a house probably 15 or 20 years
ago.
His insurance for that area was close to $8,000 a year.
North Carolina just came in with their own fund, and I think he
is paying $3,000 a year now. That is quite a big difference.
And I think, knowing my brother-in-law, if there was another
insurance company around that would have given him a cheaper
price, believe me, he would have.
So I think that we still have a problem with people. And I
am one of those who believed if you were going to take an FHA
loan out for a house, and if you were anywhere near--whether it
is a flood coast or an earthquake, that you had to have the
right insurance behind that. I still believe in that.
I think this is a debate, but I think it is a debate that
we need to have because I think the Federal Government ends up
paying an awful lot of money for any of the national--we call
emergency funding around here. But it still comes out to a lot
of money.
Thank you.
Mr. Klein. Thank you. And just to reserve myself 1 minute
here, just to clarify. On Florida's issue, for example, Florida
by law has to be actuarially sound. I am not here to tell you
what risk-based pricing is, Mr. Ellis. Maybe you can define it.
What is risk-based pricing?
Mr. Ellis. Well, certainly. For instance, the Flood
Insurance Program is supposed to be actuarially sound. It is
stipulated in law. But it never took into account catastrophic
losses, which is why, even though it was dipping along and
basically being able to pay out its losses, borrowing from the
government and paying it back, we ended up with a program that
takes in $2 billion a year and is $20 billion in debt.
Mr. Klein. Well, I understand that. What is risk-based
pricing? How do you--
Mr. Ellis. Well, risk-based pricing is going to be about
characterizing the actual risks to that property, that area,
and then being able to pay out that price over a long term in a
macro sense.
Mr. Klein. How is that different from being actuarially
sound?
Mr. Ellis. It is not necessarily different than being
actuarially sound.
Mr. Klein. All right. And just also to clarify, I think the
gentlelady from New York was talking about the fact that we
talk about property on the coast, not on the coast, as it
relates hurricanes.
I will just tell you from our experience, in the four
hurricanes that did hit Florida after not having any hurricanes
in my area for 50 years, people paying their premiums in every
year, the four hurricanes, although people on the coast were
paying more--and should pay more; I am all for the recognition
that people who live in high-risk areas should pay more, and
that is appropriate--most of the damage took place inland
because the hurricanes came from the west inland.
So it was very interesting. I used to call it the I-95
mountain range. That was how they used to charge one price on
one side of--I-95 is a road; I know you know that. It has
nothing to do with any topography, no mountains, no nothing. It
is just sort of an arbitrary point, which was a little
interesting the way it was handled.
I will now recognize Mr. Campbell from California for 5
minutes.
Mr. Campbell. Thank you, Mr. Chairman. And I first want to
thank Mr. Witt for mentioning that this isn't just a Florida
and California thing. In fact, but for circumstances that
didn't quite turn out, we could have been talking about a
tsunami in Hawaii and Oregon today, from last week, perhaps.
And another thing: We talk about big disasters, but just
another little thing that can happen. In my district about 6 or
7 years ago or so, there was a landslide that was just caused
by a lot of rain. A hillside gave way. Twelve houses were
destroyed. Not hundreds, not thousands; 12 houses were
destroyed.
But in checking into it, I found no one was insured. And
the reason no one was insured is there is no insurance for that
available, period, anywhere. And these people not only lost
their homes, they lost the land because the land disappeared.
So these 12 families were destroyed, absolutely devastated.
There was no insurance available, and it was not a big enough
disaster to get any attention for anything here.
So I think part of what we are talking about here is that
there are disasters of one sort or another that can occur--I
think Pennsylvania has insurance for this, by the way, because
I think it is required because they have land subsidence issues
there frequently.
But there are natural disasters like this that can occur in
small groups or big groups all over the country, in all kinds
of different places. Some are insurable. Some are not. Some
have expensive insurance. What we are talking about is trying
to figure out a way to provide something for all of those
people in all 50 States.
I would like to spend the rest of the time talking about
California and earthquakes, because I am from California, and
because Mr. Pomeroy is here. But I actually want to address the
questions to the other 3 of you because we have talked about
the fact that only 12 percent of homes in California have
earthquake insurance.
A few other facts you may or may not know. California law
requires that everyone who is shopping for or who is offered
homeowners' insurance be offered earthquake insurance. So
everyone has to be offered it.
Someone earlier said the California Earthquake Authority is
the only insurer of earthquake insurance. That is not true. I
am insured in my house with earthquake insurance not from the
CEA. And there are various other insurance companies that offer
earthquake insurance in California. But 12 percent is the
total, not just the CEA.
Now, Mr. Pomeroy has said that given one of the proposals
in this bill, he thinks perhaps we could double it to 25
percent of total. That is still not enough.
Let me ask the rest of the three of you because there is
all this talk about high risk and so forth. Earthquakes in
California, unless you want to eliminate San Francisco, Los
Angeles, and just about everything in between, this isn't about
people building in high-risk areas. This isn't about only
expensive homes or whatever. This is about everybody,
``everybody'' representing 1 out of every 12 people in the
United States, just in California.
So what can we do? What else can we do? What other ways are
there to get this thing up? You heard Mr. Pomeroy say some
people just say, oh, the Federal Government will bail me out.
I'm not going to buy this insurance because they'll come in and
take care of me. And we have to break that cycle, certainly.
And as Mr. Pomeroy suggested, right now it's relatively
expensive. The deductibles are high. And so there is that as
well.
Ideas from the rest of you, please, because I think it
could--it is not just about California. This sort of thing, it
is so broad and so diverse that it is a lesson for the whole
country, I think.
Mr. McMillan?
Mr. McMillan. I would like to make a quick comment,
Congressman Campbell, and that is the next thing that we can do
is to have a national comprehensive disaster preparedness plan.
As I see the balking in the discussion about whether to approve
or jump on certain sections of H.R. 2555, it is that the
taxpayer will pay for this.
The taxpayer is paying for it now, without a plan. And I
think it is so important, as we have suggested in our
testimony, that we be proactive as opposed to reactive. Now a
disaster happens, it is declared a Federal disaster, and the
taxpayers pay it without any discussion about repaying it. At
least that will be in the discussion with the comprehensive
Federal plan.
Thank you for the privilege of sharing that.
Mr. Campbell. Other thoughts? Mr. Ellis?
Mr. Ellis. Yes, sir. Certainly, we certainly agree with
preparedness. And actually, there has been some stuff on
wildfires in the last decade or so that has dealt with
preparedness and trying to figure out communities to have
wildfire plans and figure out what is going to burn, how they
are going to deal with this, and all these type of issues. And
certainly that is important.
I will just point out that unfortunately, no matter what we
do, the taxpayer is going to pay after a natural disaster. It
has done that. It will do that. There is critical
infrastructure that is going to be rebuilt that is either going
to be paid for by the State taxpayer or, even more likely, the
Federal taxpayer.
But beyond that, unfortunately we are talking about human
nature here that we are trying to adjust. And there are people
who don't buy health insurance. There are people who don't buy
flood insurance who live in the flood plain, who are in the
100-year flood plain. And so these are issues that we have to
deal with.
Some of it is education. Some of it is trying to do--in
building codes to make communities less resistant. And some of
it is about the fact that we have to have some tough love
sometimes when people don't actually--don't pay, and how much
we are willing to bail them out.
Mr. Campbell. Mr. Witt?
Mr. Witt. Thank you, Mr. Chairman. It is interesting. I
don't know how many people in this chamber have ever been
through an event of any magnitude. But I have. I lost our home
and everything in it when I was 12 years old with a fire. A
tornado blew our house off of the foundation when I was 6. My
wife says I am a disaster.
[laughter]
Mr. Witt. But let me just say, when you talked about the
mudslides in California--and I remember them really, really
well, several of them, particularly after the Laguna Beach fire
and the Malibu fire and others--those 12 homes, that was a
catastrophic event to those 12 families. Whether it is 1 home
or 5,000, it is a catastrophic event to that family.
I think that we can do more, and we can do it better, and
we can put less burden on the taxpayers by supporting the
private funded catastrophic fund and have more people insured.
This is really, really critical in this day and age, with the
economy the way it is right now. And it just really frustrates
me to no end when I see these type of losses.
I was just in Haiti. I made three trips to Haiti with
President Clinton. Those people there make $2 max a day in
labor. They don't have anything. We are blessed with
everything. And it is time to make the change in giving people
an opportunity to not only protect themselves, but to protect
the things that they have worked so hard for all their life.
And a lot of these people don't have that ability because they
can't afford it and it is not available.
California has probably done more than any State in the
country in seismic building codes, retrofit, particularly of
critical care facilities, schools, nursing homes, and
hospitals. Every country around the world looks at California's
seismic building codes as a model for their own country. Japan
does. Everybody does.
So the mitigation, preparedness, and a public/private
partnership in developing a catastrophe fund is really critical
in this time of our lives. And I just hope that everyone
listens to this and everybody looks at it this way: it is not
about any one. It is about everyone. And we need to make a
difference here.
Mr. Campbell. I thank the gentleman. Thank you. I yield
back.
Mr. Klein. Thank you, Mr. Campbell.
Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Mr. Ellis, thank you for being here, first. Thank all of
your for the generosity of your time.
Mr. Ellis, in your prepared remarks, you mention that the
FEMA pre-disaster mitigation program has been littered with
earmarks. What earmarks?
Mr. Ellis. What earmarks? I think, the last time I looked,
out of the $100 million program, about a quarter of that was
earmarked. I would have to get you the exact numbers, sir,
but--
Mr. Cleaver. No. I'm not asking for numbers. What--and
maybe the disconnect is the definition of an earmark. So, I am
not sure--
Mr. Ellis. Congressionally defined earmarks, sir. It is--in
the DHS bill, under FEMA's pre-disaster mitigation program, in
the last couple years there has been a growth of earmarks in
that particular program to individual projects.
It is not completely earmarks, but it is one of the areas
that we are concerned about because it is a competitively
awarded program, and it has earmarks scattered through it.
Mr. Cleaver. So members are designating money to that
area--
Mr. Ellis. To some project in their particular district.
Mr. Cleaver. --because, if they don't, badly needed
mitigation won't occur. Is that--
Mr. Ellis. I don't know if that is necessarily the case,
sir. What I am saying, Congressman Cleaver, is that this is a
merit-based program. There are parameters that are established
by FEMA to try to award the funding under the pre-disaster
mitigation program.
But in some cases, lawmakers are earmarking funding. They
are jumping the line. And so, essentially, some other community
that also has critical--
Mr. Cleaver. Jumping the line?
Mr. Ellis. Jumping the line, meaning that FEMA gets a pot
of money to assign out to various things. They have a bunch of
parameters that communities need to meet to qualify.
Mr. Cleaver. Yes, sir.
Mr. Ellis. They award the funding to these various
entities.
Mr. Cleaver. Yes, sir.
Mr. Ellis. Some of these, Congressman, are now, because
lawmakers are getting earmarks, are going ahead of other
communities that don't have as powerful of a lawmaker to get
the earmark into that program and designate it to go to their
particular project.
Mr. Cleaver. So they should wait on a bureaucrat to do it?
Mr. Ellis. No, sir. Essentially, this comes down to the
whole issue of earmarks. But, Congress should bring the
bureaucrats in front of them and work with them to develop the
program to make sure that it is done correctly. And if they
don't do it right, haul them back the next year and hold them
accountable, sir.
Mr. Cleaver. Okay. I wish you were a Member of Congress. I
hate to say that is completely unrealistic. It sounds good on
the evening news or something like that. But it is not real.
And I think even my colleagues on the other side will tell you
the same thing.
Congress has only a few responsibilities, and one of them
is spending the money.
Mr. Ellis. Absolutely, Congressman.
Mr. Cleaver. And so, I hate to give that responsibility to
some guy in the basement of some building--I live in Kansas
City, Missouri--who has never crossed the Mississippi and
wouldn't know Kansas City, Missouri, from Milwaukee, Wisconsin.
But the other point here is that you suggested that our
money should be used to do this, on page 5. You say, under the
American Recovery and Reinvestment Act--
Mr. Ellis. Correct. Yes, sir.
Mr. Cleaver. --the stimulus, nearly $5 billion has been
given to States. And you go on to say, ``Maybe this money
should be taken.''
Mr. Ellis. Not taken, sir. I am suggesting that
essentially--just recently the Inspector General came out with
a report saying that an alarming amount of money--I think it is
like $4.7 billion out of the $5 billion that has gone out for
weatherization--has not actually been spent by the States,
mostly because the States' weatherization programs are
incredibly overwhelmed. I think Connecticut got 16 times what
it had in the past.
And so all I am saying is here is a place where we could
redirect some of that funding, still as stimulus still going
out in this--I am not trying to reclaim it--and still saying
the States should use that money, but allow it to be used in
mitigation efforts as well as weatherization.
Mr. Cleaver. Okay. Two points and I am through, Mr.
Chairman.
The first point is--well, I am assuming you supported the
statement?
Mr. Ellis. We did not come out one way or another. We were
mostly for making sure the money was spent accountably and
transparently.
Mr. Cleaver. So you were neutral on the stimulus?
Mr. Ellis. We did not take a position one way or another,
no, sir.
Mr. Cleaver. So you were neutral on the stimulus?
Mr. Ellis. Correct.
Mr. Cleaver. Okay. The last part of it is, I agree with the
slowness with which the money has gone out, but that is a
statement about running that program more effectively. And one
of the things that we are elected to do is to try to deal with
problems in the districts from which we come. And that is why
they have been using any pot of money that they can in order to
address problems.
That is what we are supposed to do. And I would not
criticize a Republican or a Democrat or an independent or an
Oakland Raider for--I am from Kansas City--
Mr. Ellis. I know, sir. So is my dad.
Mr. Cleaver. --to remind you--but to try to deal with
problems. I wish a Republican, could get as much money as there
might be needed to deal with problems in New Orleans. And so I
guess we may have a philosophical difference about what Members
of Congress are supposed to do.
But I do agree with you that the money has gone out slowly,
and it means we have to do a better job of getting that money
out, not necessarily transferring it to another agency.
Mr. Ellis. I certainly agree that it needs to be dealt with
better. Yes, sir.
Mr. Klein. Okay. I thank the gentleman from Missouri.
And now the gentleman from Florida, Mr. Posey, for 5
minutes.
Mr. Posey. Thank you, Mr. Chairman.
I am a free market guy. But experience has shown me that
unregulated insurance markets do not mean they are free markets
as people are taught in academia. They are manipulated. You can
talk about all the availability of reinsurance. I know, in
Florida, every single reinsurance company had the exact,
identical, same rate. That is a free market. What a
coincidence. Just what a coincidence.
Comparing South Carolina's exposure to Florida's exposure
doesn't pass the straight-face test in front of anyone that
knows the difference between the Florida coastline and the
South Carolina coastline.
And I think it ought to be stated for the record that when
Florida did expand its catastrophe fund, much to the chagrin of
many insurance companies, big insurance companies, it brought
in--it was responsible for bringing in--the only new business
that we had.
The big insurance companies were allowed at one time to
have pup companies in Florida, so that means your home office
in Bloomington or wherever was no longer responsible for paying
claims in Florida. It would be the new company that was founded
with no more than the minimal amount of capital. And if it blew
away in the next storm, it was just too bad for all the
policyholders. And the CAT fund was to guard against that.
And because we have an expanded CAT fund, we have new
business, new companies coming into Florida, hopefully that
will stay there and will continue to invest there and not just
reap the year's profits and cry when the storms come later.
I have been an accountability wonk for many years. I am a
former ALEC, National Legislator of the Year, for passing
accountability legislation ALEC called the best to come out of
any capital in over a decade. But I have never heard of
Taxpayers for Common Sense.
And I wonder--you keep referring to ``we.'' Who is that?
Who is ``we?''
Mr. Ellis. Taxpayers for Common Sense? We are happy to
celebrate our 15th anniversary. We are a national, nonpartisan
budget watchdog. We are based here in D.C. I have been with the
organization for 10 years. I would be glad to answer any other
questions.
My colleague is the person who dubbed the ``Bridge to
Nowhere'' the ``Bridge to Nowhere.'' I don't know exactly what
you are--we have some members. We have mailing lists for our
products. We do advocacy work on budget issues.
I don't know exactly, Congressman, what else--
Mr. Posey. Well, I just--I know Mr. McMillan's group and I
know the other people's groups and I have had experience with
them. I have never seen you before or heard of your
organization before. So I just wanted some information for my
own--
Mr. Ellis. Absolutely. I would be glad to come by and talk
to you about us any time at your leisure, sir.
Mr. Posey. Okay. Thank you, Mr. Chairman. I yield back.
Mr. Klein. I thank the gentleman.
Mr. Sherman from California?
Mr. Sherman. Thank you.
Mr. Witt, I represent Northridge. People all over the San
Fernando Valley thank you again and again every day for the
help FEMA extended to us in 1994.
Mr. Pomeroy, thanks for your work to try to prepare us to
recover from the next earthquake.
Mr. Ellis, I want to thank you for your tireless efforts to
move this country away from democracy and toward empowering
bureaucrats, bureaucracy or bureaucratocracy. Your hard work
has not gone unnoticed.
There are those who say that, oh, we shouldn't provide
better disaster insurance because that will just encourage
people to live where we don't want them to live. And if you are
talking about a few areas near rivers that flood every year,
that may be; maybe we shouldn't build there.
But if you want to say that nothing should be built near an
earthquake fault, you lose your largest State, or at least your
most populous State. I think Mr. Pomeroy would agree with me
that well over half the population of California--I see him
nodding--lives near an earthquake fault.
And if you wanted to vacate every area that might be hit
with a hurricane--Mr. Klein, is that your whole State or just
two-thirds of it?
Mr. Klein. Probably a good two-thirds, if not the whole
State. Every county.
Mr. Sherman. So those who support vacating areas subject to
hurricanes and earthquakes ought to tear some stars off the
flag as their symbol of their position.
We have to encourage people to buy earthquake insurance.
Either you can help me now, or you can pay me later. That is to
say, if nobody in California buys earthquake insurance, when we
are hit, we are coming to Washington, and we are coming for
everybody who is uninsured.
Right now, you have to be offered earthquake insurance when
you buy a house. The only problem is enormous deductible,
enormous premium, and I know Mr. Campbell buys it; I don't know
anybody else who does. The reason is that the reinsurance is so
expensive that is passed on to consumers.
And so we need a system in which we can provide reasonable
insurance even if the Federal Government undertakes some slight
risk, or you can live in a world where you believe the Federal
Government isn't at risk as long as we have no program because
God knows there is no risk of an earthquake in California and
there is no risk that Californians would come here to try to
collect their uninsured losses from the Federal Government.
Neither of those is a significant possibility. The only
thing that is an actuarial risk to the United States is if we
pass a bill. Then, we acknowledge that there is some possible
risk to the Treasury, a diminished risk, I might add, but then
we would have to acknowledge it.
Mr. Pomeroy, does the CEA operate on an actuarially sound
basis? Title 2 of Mr. Klein's bill creates a conditional
guarantee program like CEA, in effect a CEA for CEA. What are
the chances that the CEA would need to borrow more money? Could
you handle another Northridge earthquake without access to
Title 2?
Mr. Pomeroy. Thank you, Congressman. That is an excellent
question. And yes, the answer is clearly yes, the CEA does
charge actuarially sound rates, which is why it is so expensive
and most people feel they can't afford it.
Moving to this more efficient structure, we would maintain
our financial strength. We would be able to pay the claims of
all of the earthquakes that we are going to see. We would not
need to borrow--and I should have emphasized this more in my
testimony--we would not need to borrow, in the vast majority of
any scenario we can imagine.
All of our modeling, our scientific-based modeling,
indicates that the probability of our needing to borrow, if
H.R. 2555 becomes law, is between .5 and 1 percent, a minuscule
probability of the need to borrow.
We look back over history, we have had earthquakes in
California going back to 1906: the great San Francisco shake;
Northridge; the famous World Series earthquake back in the
1980's, Loma Prieta. We could handle any one of those without
the need to borrow.
Mr. Sherman. Let me try and squeeze in one more question.
Mr. Ellis, your testimony in opposition to this bill is
largely premised on comparisons to the National Flood Insurance
Program. Since the National Flood Insurance Program is in the
jurisdiction of another subcommittee, I wanted to make the
differences clear between this bill and the NFIP.
Isn't it true that the rate subsidies you reference when
discussing the NFIP are written in as part of the National
Flood Insurance Act, and that there are no similar subsidies or
grandfathering in the bill that we are considering today?
If Mr. Klein's bill doesn't include provisions like the
subsidies specifically written into the National Flood
Insurance Act, wouldn't you agree that Mr. Klein's bill--or how
can you argue, rather, that Mr. Klein's bill will lead to the
same subsidized insurance rates that you blame on the NFIP? You
are comparing apples and oranges--
Mr. Ellis. No, sir. There is an explicit subsidy in the
NFIP for pre-firm properties before the flood insurance rate
maps were created. Separately--
Mr. Sherman. And is there such a subsidy--
Mr. Ellis. There is separately--in the Flood Insurance
Program, there is a subsidy that exists because they did not
take into account catastrophic risks, which is why you end up
with a $2 billion-a-year program having $20 billion in debt to
taxpayers.
Clearly, properties other than flood--other post-firm
properties are flooded. You have cases of repetitive losses
within that program. You have a variety of different
characteristics of that which are replicated. And I think at
this is still--
Mr. Sherman. Excuse me. You mentioned the grandfathering.
Is there any grandfathering in Mr. Klein's bill?
Mr. Ellis. No, sir. There is no grandfathering. But that is
not the only subsidy in the Flood Insurance Program, sir.
And on the democracy issue, I would just argue that we are
about democracy and democratizing the budget. That is why we
publish a variety of objective documents, to make the budget
more transparent and more accountable to the American taxpayer.
Mr. Sherman. Sir, reclaiming my time, you have a point of
view. You are not just a library. And you work every day to try
to diminish the power of elected officials--
Mr. Ellis. No, sir.
Mr. Sherman. --and increase the power of bureaucrats. I
yield back.
Mr. Ellis. No, sir.
Mr. Klein. Our last member, Mr. Royce from California, for
5 minutes.
Mr. Royce. Yes. I guess I will ask Mr. Ellis some questions
as well from Taxpayers for Common Sense. One of them has to
do--I take it part of his concern, perhaps, is with the
liability issue here, really, because if we consider the
current liabilities that taxpayers face, we have $104 trillion
in unfunded liabilities for Social Security. That might give
this organization pause. It certainly seems to give our Federal
Reserve Chairman a lot of worry.
We have that $104 trillion I mentioned in Social Security
and Medicare liability. We have $12 trillion in debt. We have
$1.6 trillion in deficit this year. Obviously, there is a
concern that taxpayers might be overextended.
But I think the real worry on the part of the Federal
Reserve Chairman is that when Moody's made that call--what was
that, 3 weeks ago--where they said we might have to downgrade;
they warned they might have to downgrade the AAA rating of
sovereign debt, of our U.S. Treasuries--that, in tandem with
the comments by the Fed Chairman that we are on an
unsustainable path, when he testified to the Financial Services
Committee, I think that probably gives some organizations a
reason to wonder how much weight, how much of a burden, can you
add without it breaking the back and creating a reaction over
at Moody's or just in the public in terms of all of the
liabilities we have taken on.
We have double-digit increases in the Federal
appropriations bills this year. We have the argument, on the
new health care entitlement program that it is going to break
even, but I think a lot of people are somewhat suspicious that
an entitlement program is going to break even. So eventually we
have to take a step back. And I would ask Mr. Ellis if I could
get his thoughts.
Mr. Ellis, are you concerned with the broader implications
this bill will have in terms of setting a precedent that cannot
easily be reversed when it comes to guaranteeing State and
municipal debt?
Mr. Ellis. Well, certainly this would be the first time
that I am aware of that we would be starting to back--well, not
the first time, but it certainly would be a big step towards
backing State debt and then potentially, yes, moving towards
the municipal debt. It would be one of the only ones today that
is doing that. Yes, sir.
Mr. Royce. So your best judgment when you look at this, you
see a government program that is going to guarantee State and
municipal debt, probably grow, and probably have liabilities
there that are going to add eventually to the debt and the
pressures on the dollar, I would suspect, and on our
Treasuries?
Mr. Ellis. Well, certainly, at least right now, it is going
to be State debt, at least under this program. And $25 billion
is where it is capped right now, $5 billion in earthquake, $20
billion for other losses.
Clearly, programs like this, if it becomes more popular,
could grow and it could mushroom. Yes, sir.
Mr. Royce. So we would set a precedent if we passed it. The
one aspect of this that I'm a little encouraged about, unlike
previous drafts, this attempts to go beyond simply cleaning up
the mess Citizens Insurance created in Florida.
But I think the overriding concern has to be our current
fiscal situation, especially at the Federal level, and the
message that we are sending, and how that translates out of the
market.
And I don't know how--after the words of warning we got
from the Federal Reserve Chairman here, I don't know why we
would want to stampede down this road because it would be one
more signal to Moody's and to others, to the credit rating
agencies, that we are taking on additional risks. And those
would be my observations, Mr. Chairman.
Mr. Ellis, would you like to close with any other
observations?
Mr. Ellis. No. I think that certainly sums it up,
Congressman Royce, very well. And thank you for your comments.
Mr. Royce. Thank you.
Mr. Klein. I would like to thank the gentlemen and the
members of the committee. Just if I can reserve 1 minute here,
just to make a point.
The discussions about the debt, obviously, everyone in
Congress and every American is concerned about debt, our
national debt. And again, what we have tried to think through
very carefully, and we will look forward--as a work in process,
we will look forward to continuing to make this bill better, is
to reduce that national exposure, which I think is very open-
ended at this moment and has been for many years.
And if we can manage this in a way in which we can
hopefully reduce that amount of liability and underwrite it
through private insurance, I think that seems to be a better
model.
But again, we thank Mr. Witt, Mr. Pomeroy, Mr. Ellis, and
Mr. McMillan for taking time out of your very busy days and
your professions to be here today. We appreciate that. I will
note that some members may have additional questions for this
panel, which they may submit in writing.
Before we adjourn, the written statements of the following
organizations will also be made a part of this record of this
hearing: the testimony of Congresswoman Loretta Sanchez; the
American Red Cross; International Association of Fire Chiefs;
National Multi-Housing Council and National Apartment
Association; National Catastrophe Policy Coalition; Association
of State Flood Plain Managers; and Independent Insurance Agents
and Brokers of America.
Without objection, the hearing record will remain open for
30 days for members to submit written questions to these
witnesses and to place their responses in the record.
The panel is now dismissed and the hearing is now
adjourned.
[Whereupon, at 4:17 p.m., the hearing was adjourned.]
A P P E N D I X
March 10, 2010
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