[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
OPPORTUNITIES FOR A PRIVATE AND
COMPETITIVE SUSTAINABLE FLOOD
INSURANCE MARKET
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 19, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-101
U.S. GOVERNMENT PRINTING OFFICE
92-876 WASHINGTON : 2015
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
RANDY NEUGEBAUER, Texas, Chairman
BLAINE LUETKEMEYER, Missouri, Vice MICHAEL E. CAPUANO, Massachusetts,
Chairman Ranking Member
EDWARD R. ROYCE, California NYDIA M. VELAAZQUEZ, New York
GARY G. MILLER, California EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey CAROLYN McCARTHY, New York
LYNN A. WESTMORELAND, Georgia BRAD SHERMAN, California
SEAN P. DUFFY, Wisconsin GWEN MOORE, Wisconsin
ROBERT HURT, Virginia JOYCE BEATTY, Ohio
STEVE STIVERS, Ohio STEVEN HORSFORD, Nevada
DENNIS A. ROSS, Florida
C O N T E N T S
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Page
Hearing held on:
November 19, 2014............................................ 1
Appendix:
November 19, 2014............................................ 23
WITNESSES
Wednesday, November 19, 2014
Brown, Don, Florida Property Insurance Expert.................... 10
Ellis, Steve, Vice President, Taxpayers for Common Sense......... 6
Gray, Jordan N., Senior Vice President and General Counsel, WNC
Insurance Services, Inc........................................ 8
APPENDIX
Prepared statements:
Brown, Don................................................... 24
Ellis, Steve................................................. 28
Gray, Jordan N............................................... 31
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Written statement of the American Bankers Association and
American Bankers Insurance Association..................... 37
Written statement of the Big ``I''........................... 47
Written statement of the National Association of Mutual
Insurance Companies (NAMIC)................................ 51
Written statement of the National Association of Professional
Surplus Lines Offices (NAPSLO)............................. 56
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 60
Written statement of the Reinsurance Association of America
(RAA)...................................................... 61
Written statement of SmarterSafer.org........................ 62
Ross, Hon. Dennis:
Letter from Kevin McCarty, Florida Insurance Commissioner,
dated July 11, 2014........................................ 63
OPPORTUNITIES FOR A PRIVATE AND
COMPETITIVE SUSTAINABLE FLOOD
INSURANCE MARKET
----------
Wednesday, November 19, 2014
U.S. House of Representatives,
Subcommittee on Housing and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2123, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Garrett, Westmoreland, Hurt, Ross; and Capuano.
Also present: Representative Murphy.
Chairman Neugebauer. Good afternoon. This hearing of the
Subcommittee on Housing and Insurance will come to order. The
title of today's hearing is, ``Opportunities for a Private and
Competitive Sustainable Flood Insurance Market.'' We will have
opening statements limited to 10 minutes on each side. I also
ask unanimous consent that members of the full Financial
Services Committee who are not members of the subcommittee, and
who have joined us today, will be entitled to participate.
Without objection, it is so ordered.
One of the things that is going to happen is probably right
after we do the opening statements--and I don't know if we will
get through the testimony of the panel before the next round of
votes is called--but the plan is, is when they call votes we
will briefly adjourn. We will go over, vote, and get back as
quickly as we can and continue with this very important
hearing.
As I mentioned, the title of today's hearing is,
``Opportunities for a Private and Competitive Sustainable Flood
Insurance Market.'' One of the things that this Congress has
done in the past is, it initiated a flood insurance program.
Because what they found was, there was not a ready market for
that at that particular time.
Along the way, the Congress also decided that we needed to
provide for private companies to participate in the market. And
then, this Congress also decided that in the future, the
taxpayers shouldn't have to subsidize people who live in areas
that are higher-prone to flooding. And we said that they should
start to pay actuarial rates.
I think one of the reasons that this hearing is so
important is that if we are going to move towards a private
participation in the marketplace, we have to get the government
out of the way, and we need to facilitate the ability for the
private sector to be a part of this.
I am very pleased that today we are going to be examining
H.R. 4558, which is the Flood Insurance Market Parity and
Modernization Act of 2014. And I would like to thank the
cosponsors, Mr. Ross and Mr. Murphy, for their work on this.
Why is this important? One of the things that choice brings
is competitive pricing. And if you have the government
dominating an area, it doesn't really allow for a lot of
private participation. So, one of the things we want to see is
for consumers to have choices.
The other reason this is important is that it would be good
to transition out of the taxpayers backing up the flood
insurance market and letting private capital back that up. Why
that is important to the taxpayers is, we have seen that when
the government is involved in the insurance business it prices
risk politically rather than actuarially. We think it is a
novel idea to let the marketplace price the rules risk, and we
want to provide a pathway to do that. As you probably know,
currently the flood insurance program is in the hole and the
taxpayers have had to ante up about $24 billion to subsidize
people who, unfortunately, were not paying an actuarial rate
for their insurance.
What we will learn today about H.R. 4558 is that it has
some common-sense approaches to providing for private
participation in the flood insurance market. One of the things
we don't need to do is send a signal to lenders, for example,
that there is only really one source for flood insurance. There
are multiple sources for flood insurance. And one of the things
we have heard from the industry, the people in the insurance
business, is we have seen in some areas where the people in the
insurance business don't want to go and participate in those
markets. But particularly, the flood insurance market is, quite
honestly, a part of the market where we have seen an interest
in that participation.
So I thank the witnesses for being here. And, again, I want
to thank Mr. Ross and Mr. Murphy for their thoughtful bill.
With that, I will turn to my ranking member, and my good
friend, Mr. Capuano, for his opening statement.
Mr. Capuano. Thank you, Mr. Chairman. I will be brief. I
came to learn because, like with many things, I don't know much
about this. But I know a couple of things. And the one thing I
know is that we have flood insurance because we haven't found a
better way to do it. That is why we have government-backed
flood insurance. We have a better way to do it if we want to
have--make sure that no one can afford it. That kind of defeats
the purpose of flood insurance.
So I am open to any education on how we can have private
enterprise do this and keep it affordable. Now, it is kind of
funny. Over the last year or so, it turns out that apparently
as a liberal Democrat, I have now become the poster child, or
one of the many poster children for corporate welfare because I
support TRIA and I supported the flood insurance bill and other
such things.
But that is one way to put it. To me, the other way to put
it is, how do I get necessary insurance coverage to people who
need it, that is affordable? And if it is not affordable, it
doesn't matter how good the coverage is; nobody will buy it.
So, for me, that is what I am open to learn. I would love to
hear how the numbers work and why it would not be corporate
welfare for us to change the system we have.
And I look forward to the testimony, thank you.
Chairman Neugebauer. I haven't seen that poster. I would
like to.
Mr. Capuano. I thought you had one.
Chairman Neugebauer. No. Now, I turn to the vice chairman
of our Housing and Insurance Subcommittee, Mr. Luetkemeyer from
Missouri, for 1 minute.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
My district includes many communities that sit in the
floodplains along major rivers, streams, and lakes. In fact,
one lake in my district has more miles of shoreline than the
State of California. So you can see how big a problem this is
to me. I hear from my constituents about the National Flood
Insurance Program (NFIP) nearly every day, and it is clear that
the NFIP is broken.
I owe it to the families and business owners living in
those communities, and we owe it to all Americans, to create a
flood insurance program that is stable, fair, accessible, and
cost-effective. It cannot continue to be a program that exposes
taxpayers to endless risk, and it doesn't have to be.
To create a more stable and cost-effective program, we need
to allow the private market to enter the space instead of
inhibiting its ability to do so. The bill introduced by my
colleagues from Florida does just that.
Today, we will hear from experts whom I expect will tell us
that there is room for the private market in the flood
insurance space. And we need to encourage this market so we can
deliver a better product to our constituents. I look forward to
hearing from our panelists.
And I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And now, the chairman of our Capital Markets Subcommittee,
Mr. Garrett from New Jersey, is recognized for 2 minutes.
Mr. Garrett. Thank you. And I thank the chairman for
holding this hearing on how we can improve the market for flood
insurance across this country. And I would also like to thank
all of the witnesses who are here, as well.
Speaking as someone who is literally on the ground, who has
viewed the devastation and helped do some of the hands-on
cleanup of our last storm in the State of New Jersey, I know
the importance of a well-functioning flood insurance market.
Unfortunately, we have a government-backed flood insurance
program that simply is not working. In fact, we know that in
the wake of Hurricane Sandy, Congress had to bail out the
National Flood Insurance Program to the tune of nearly $10
billion to make good on the promises the Federal Government
made to the flood-ravaged homeowners here.
The facts seem to suggest that Uncle Sam makes for a
terrible risk manager, let alone an insurance executive with a
monopoly on the marketplace. Congress must do what we can to
encourage Uncle Sam to step aside and let the private market
assume some of the risk rather than let the risk fall on the
U.S. taxpayer?
I am interested to hear what changes Congress can make to
the current law to remove obstacles that discourage private
participation in the flood insurance marketplace.
My initial sense is that an abundance of red tape, future
regulatory uncertainty, and the shadow of the current National
Flood Insurance Program all combine to continue to make private
capital stay on the sidelines. So at the end of the day, we
need to make some changes.
The NFIP isn't fair to homeowners who rely on a bankrupt
system in time of catastrophe. Nor is the current system fair
to taxpayers, who ensure the program remains on a dry financial
footing.
And with that, I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Virginia, Mr. Hurt, is recognized for 2
minutes.
Mr. Hurt. Thank you, Mr. Chairman. Thank you for holding
today's hearing to consider legislative reforms to the National
Flood Insurance Program.
Our current government-provided flood insurance system has
proven ineffective, inefficient, and costly to taxpayers. While
Congress has previously been successful in implementing modest
reforms to the NFIP, we still face a situation where Congress
has chosen to solidify the NFIP's broken balance sheet with
little hope for returning it from the red.
With $24 billion in debt, and the potential for moral
hazard created by the program as it is currently structured, it
is critical that this subcommittee work to pursue significant
reforms. These reforms will allow us to chart a new course for
the NFIP, and put the program on a more sound financial
footing. Hardworking taxpayers deserve a Federal flood
insurance program that is fiscally responsible.
We must enhance the program's integrity, make it self-
sustaining, increase private market coverage, and reduce the
risk to taxpayers across this country. We can no longer settle
for the status quo of a flood insurance program that crowds out
the private sector in order to subsidize insurance premiums for
a few Americans at the expense of the rest of the country.
Going forward, this subcommittee must be a leader in the
effort to reform the NFIP to a private, competitive, and
sustainable flood insurance market. I would like to thank our
distinguished witnesses for appearing before the subcommittee
today, and I look forward to your testimony on the concepts for
NFIP reform.
Thank you, Mr. Chairman, and I yield back the balance of my
time.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Florida, Mr. Ross, one of the
lead sponsors of this piece of legislation, is recognized for 2
minutes.
Mr. Ross. Thank you, Mr. Chairman, and thank you for
holding this important hearing about an issue to which I am
deeply committed. And that is providing Florida and American
homeowners more affordable consumer options in the flood
insurance marketplace.
I would also like to thank our distinguished panelists
today for their testimony. And I would especially like to thank
Representative Patrick Murphy for joining me in introducing
this Flood Insurance Market Parity and Modernization Act of
2014, which we will be discussing this afternoon.
Mr. Chairman, the implementation of the Biggert-Waters
Flood Insurance Reform Act of 2012, or BW-12, has proven to be
problematic. Before Congress acted earlier this year to provide
relief for homeowners with National Flood Insurance Program
policies, I was hearing reports from my constituents of
$15,000-a-year increases in premiums.
The intent of BW-12 was to give consumers additional
insurance policy options beyond the National Flood Insurance
Program. However, today homeowners are trapped in a system that
forces them to purchase the taxpayer-backed Federal insurance
product from a program that was already $24 billion in debt at
the end of 2013.
So why is the Flood Insurance Market Parity and
Modernization Act of 2014 necessary? Section 239 of BW-12 made
clear that the intent of Congress was to allow homeowners the
option to pursue private flood insurance. Unfortunately, BW-12
narrowly defined acceptable flood insurance programs, thereby
limiting the flexibility of State regulators to license private
flood insurance products. These restrictions prevent innovation
and consumer choice.
With Florida homeowners in mind, Representative Murphy and
I introduced legislation that redefines private flood insurance
to remove Federal restrictions and requirements on coverage. In
doing so, we would return the full authority of determining
acceptable coverage of insurance policies to State regulators.
Florida's insurance commissioner, Kevin McCarty, has
offered his support of this common-sense legislation. At this
point, I would ask unanimous consent to submit his letter dated
July 11, 2014, for the record.
Chairman Neugebauer. Without objection, it is so ordered.
Mr. Ross. Mr. Chairman, allowing more consumer choice in
the government-dominated flood insurance market creates
competition and results in better policies and pricing that
will benefit homeowners.
With that in mind, I look forward to this hearing, and I
yield back my time.
Chairman Neugebauer. I thank the gentleman.
And now the other lead sponsor of this important piece of
legislation, the other gentleman from Florida, Mr. Murphy, is
recognized for 2 minutes.
Mr. Murphy. Thank you, Mr. Chairman. I want to thank
Chairman Neugebauer and Ranking Member Capuano for today's
hearing on how we can make flood insurance more affordable for
middle-class families. I would also like to thank the witnesses
for their testimony and their time, and my good friend and
fellow Floridian, Mr. Dennis Ross, for his in-depth
understanding of insurance issues and his commitment to giving
Floridians a choice.
The National Flood Insurance Program has served as a
critical lifeline for many families in my district, enabling
them to have peace of mind and protect their homes which, for
most middle-class families, is their most valuable asset.
Stepping in and creating a market where there is none for
affordable options for middle-class families I believe is an
appropriate use of government. I believe that together we can
and should protect our homes and our housing market.
However, what happens when government is the only game in
town and stands in the way of what promises to be a viable
private market? We saw these results on full display: families
waiting on FEMA to decide what is affordable; entire
neighborhoods waiting on Congress to act to shield them from
impossible rate hikes; no customer service hotline and no
ability to switch carriers. I don't believe that any of us,
especially those of us who defend the NFIP and support the
goals of this program, want to do this to our constituents.
Excessively prescriptive, top-down statutory Federal
requirements are crowding innovation and consumer choice out of
the market. Biggert-Waters correctly intended to foster the
creation of a private market. Sadly, in this area, the law has
fallen short.
I could not be happier to work with Mr. Ross and my
colleagues on both sides of the aisle to explore and improve
the bill before us to protect consumers, foster innovation and
choice, and ultimately do what is right for middle-class
families.
I yield the balance of my time.
Chairman Neugebauer. I thank the gentleman.
We will go to our panelists. And I would just remind our
panelists that your oral testimony will be limited to 5
minutes, but your complete written testimony will be made a
part of the record.
Our panel today consists of: Mr. Stephen Ellis, vice
president of Taxpayers for Common Sense; Mr. Jordan Gray,
senior vice president and general counsel of WNC Insurance
Services; and I will turn to Mr. Ross to introduce our third
panelist.
Mr. Ross. Thank you, Mr. Chairman. It is a distinct honor
for me to introduce our third panelist, with whom I had the
honor of serving as a legislator in the Florida House of
Representatives. A former independent insurance agent and past
chairman of several House insurance committees in the Florida
legislature, Mr. Don Brown.
Chairman Neugebauer. I thank the gentleman.
And Mr. Ellis, you are now recognized for 5 minutes.
STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON
SENSE
Mr. Ellis. Thank you, Mr. Chairman. Good afternoon,
Chairman Neugebauer, Ranking Member Capuano, and members of the
subcommittee. I am Steve Ellis, vice president of Taxpayers for
Common Sense (TCS), a national nonpartisan budget watchdog.
Thank you for inviting me here today to testify on H.R. 4558,
the Flood Insurance Market Parity and Modernization Act of
2014, and issues involving the private flood insurance market.
A little bit of background. Since the late 1980s, the
National Flood Insurance Program teetered on either side of
solvency, covering shortfalls with Treasury borrowing and
repaying the loans in years of surplus. Then in 2005, the
inevitable happened, a catastrophic loss year, and the program
was roughly $18 billion in debt to the Treasury. That was
followed by the Super Storm Sandy losses in 2012, and now the
program is more than $24 billion in debt to taxpayers. To put
that into perspective, FEMA data indicates that in 2013, the
5.6 million policies in the program resulted in $3.5 billion in
premium to insure $1.3 trillion worth of property.
The U.S. Government Accountability Office has estimated
that approximately 20 percent of policies are explicitly
subsidized and paying only 35 to 40 percent--45 percent of
their actual full-risk premiums. As this subcommittee well
knows, reforms to the NFIP were enacted in 2012 to increase
premiums to more risk-based rates which would not only help
program solvency, but also help policyholders better understand
their risks and to take measures to mitigate that risk. Despite
some concerns, TCS supported the 2012 legislation, while also
favoring additional efforts to help address affordability
issues.
Unfortunately, earlier this year Congress reacted to a
vocal minority and largely rolled back the 2012 reforms that
could have led to more actuarial rates. To obtain a mortgage,
property owners in special--in designated special flood hazard
areas, typically those with a 1 percent chance of flooding in
any given year, are required to purchase flood insurance. As
long as it met NFIP coverage standards, private flood insurance
could be an alternative to Federal flood insurance to meet the
mandatory purchase requirement. As the shift to more risk-based
rates under reform neared, the private markets started to
strengthen. States like West Virginia and Florida enacted
legislation to regulate new private flood insurance
alternatives in their States.
However, the 2012 flood insurance bill went further than
before and attempted to quasi-regulate what exactly constituted
private flood insurance by including a proviso that private
flood insurance be ``at least as broad'' and essentially mirror
NFIP policy. This resulted in lenders rejecting some private
policies as not meeting legal requirements. For example, a
homeowner may want to purchase a higher coverage limit with a
higher deductible than is available under NFIP. Current law
would result in that policy being rejected by the lender as not
meeting the legislative private flood insurance definition.
The whole point of allowing private flood insurance
alternative is to create competition and choice in the
marketplace and reduce the possible burden on the taxpayer.
Furthermore, insurance is regulated at the State level. The
Federal Government leaves decisions on homeowners insurance and
car insurance to the States. They should do the same for
private flood insurance alternatives.
This is why Taxpayers for Common Sense supports the
aforementioned H.R. 4558. This legislation would remove the
restrictive and confusing language, and define private flood
insurance as an insurance policy that is issued by an insurance
company that is licensed or approved in the State where the
property is located.
This does not remove the mandatory purchase requirement in
minimum coverage level. This just allows insurance
commissioners to regulate the product in their State the way it
is done for other insurance lines.
One recommendation that TCS has would be to clarify that if
a homeowner opts for uninterrupted coverage through a private
policy, the homeowner should not be treated as having a lapse
in coverage under NFIP. This would allow the homeowner to
return to NFIP if they desire, without penalty. The only reason
a policyholder will opt for private insurance over NFIP is
because the private insurance offers a better product, a better
price, or both.
To stifle the private market would be akin to the Federal
Government forcing policyholders to pay more for their
insurance. In addition to the definitional issue, the existence
of subsidized Federal flood insurance is a barrier to the
development of a robust private market. Simply put, NFIP
occupies the space where the private sector would operate. It
is true that the NFIP was created because there wasn't a
functioning private insurance marketplace. But that was nearly
50 years ago. It almost goes without saying that technology and
modeling have advanced dramatically.
Imagery and mapping technology have similarly developed.
The reinsurance and financial instruments to manage risk are
much larger and more diversified. Many countries in the world
have private flood insurance either bundled into property
insurance or as a separate, or add-on, coverage. These are
typically backed by reinsurance. In fact, the United States is
one of the only countries with a State-backed separate policy
of flood insurance.
The development of a private flood insurance market in the
United States would serve to shift some of the post-disaster
recovery and rebuilding burden from taxpayers to the private
sector and those who choose to live in high-risk areas.
It could also be a powerful tool to encourage mitigation in
the face of increased disasters and sea level rise. The
National Flood Insurance Program is $24 billion in debt to the
taxpayer. While the decision to repeal many of the 2012 reforms
was a setback, Congress could enact H.R. 4558 to at least let
private flood insurance have a chance.
Thank you very much.
[The prepared statement of Mr. Ellis can be found on page
28 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Gray, you are now recognized for 5 minutes.
STATEMENT OF JORDAN N. GRAY, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, WNC INSURANCE SERVICES, INC.
Mr. Gray. Chairman Neugebauer and members of the
subcommittee, thank you for the opportunity to testify today.
My name is Jordan Gray. I am senior vice president and general
counsel of WNC Insurance Services. My testimony today is on
behalf of my company, WNC, and my full testimony has been
submitted to the subcommittee in writing.
Founded in 1962, WNC is an independent managing general
agency and surplus lines broker representing several A-rated
private flood insurance carriers. Today, WNC serves nearly
3,000 small and mid-market community banks and credit unions,
hundreds of independent agents and brokers, and thousands of
homeowners and businesses, providing insurance products and
services, including private flood insurance.
WNC is grateful for the National Flood Insurance Program.
The NFIP is the entrepreneurial catalyst that created an
important industry. The industry is now ready for the next
phase of its growth and evolution: privatization.
WNC is also grateful for the Biggert-Waters Flood Insurance
Reform Act of 2012. Biggert-Waters is evidence that both sides
of the aisle can work together to--
[Audio drop.]
Was my testimony that bad?
[laughter]
Chairman Neugebauer. It does that to me, too.
Mr. Gray. --both sides of the aisle. We are pleased with
this idea. We support H.R. 4558. It is a simple bill that
provides an appropriate fix to an unintended consequence of
Biggert-Waters. One unintended consequence of Biggert-Waters is
that it makes it more difficult for lenders to accept private
flood insurance in satisfaction of the mandatory purchase of
flood insurance requirement, thereby impeding the long-
established public policy goal of private market involvement in
flood insurance cited in Biggert-Waters.
What was intended to liberate both borrower and lender
alike has now placed them in a straitjacket of regulatory
compliance, mandating that bankers become insurance
professionals and insurance professionals become bankers,
leaving these industries in confusion.
So what does this confusion look like? Here is an example.
When a loan is about to close, there is a mandatory purchase
obligation if the property is located in a special flood hazard
area. But the problem is that the Federal flood policy only
provides $500,000 of coverage for the $5 million building at
risk.
So the borrower purchases a private policy. The carrier and
the broker are certain that this private policy is exactly what
the borrower needs. The borrower takes the policy to the lender
to close the loan, but the compliance department tells the
borrower that it cannot accept the private policy if it doesn't
follow the National Flood Insurance Program general property
insurance form exactly as written. The lender is frustrated
because it knows that it must comply with the regulations or
face potential fines and penalties, but it doesn't really have
the expertise to tell what is truly a good policy.
The borrower is frustrated because they cannot purchase the
product they want, and cannot close the loan on time. The
carrier and the agent are frustrated because they have a
perfectly good product that fails to meet a perceived or actual
technical definition of private flood insurance. But yet the
policy will perform as good, or better than, the Federal policy
when a loss occurs.
The solution is simple. Give lenders and borrowers the same
discretion to evaluate flood insurance as they have to evaluate
all insurance products. H.R. 4558 does this.
In conclusion, there is a private market waiting to provide
flood insurance. There is a hopeful lending market looking for
some regulatory relief. There are eager policyholders looking
forward to quality coverage becoming widely available in the
private market. H.R. 4558 is the next step.
And I thank you for the opportunity to testify today.
[The prepared statement of Mr. Gray can be found on page 31
of the appendix.]
Chairman Neugebauer. I thank the gentleman, and apologize
for the slight interruption there.
Mr. Brown, you are now recognized for 5 minutes.
STATEMENT OF DON BROWN, FLORIDA PROPERTY INSURANCE EXPERT
Mr. Brown. Thank you, Mr. Chairman. It was my intention as
I open my remarks to refer to you by your name. But, Mr.
Chairman, because of my Southern accent I was really afraid to
maybe--that I might mess it up.
Chairman Neugebauer. Mr. Brown, it is very easy. It is
``RAND-D.''
Mr. Brown. Mr. Chairman, Ranking Member Capuano, and
members of the subcommittee, thank you for having me here
today. My name is Don Brown and I currently work as a lobbyist
representing insurance and reinsurance companies in the State
of Florida. Previously, I served in the Florida House for 8
years, and was an insurance agency owner for 28 years.
When the NFIP was established, of course, flood was
generally considered an uninsured peril and few private
companies were willing to write the risk. There was no history
of loss, no models for flood, and generally the insured knew
much more about their potential for loss than the insurance
company.
A flood is no longer an uninsurable risk, and the private
market is no longer unwilling to write flood. There are several
reasons for this development. In the last few years, commercial
flood models have been developed that have given insurance
companies a wealth of information regarding flood risk.
Consequently, there has been an influx of capital into the
reinsurance and insurance arena. And that capital is interested
in underwriting flood risk. These developments provide new
options for consumers when buying flood insurance.
One additional consumer benefit to the development of a
private flood market is that it is regulated by State insurance
departments, which have a long history of consumer protection
as their very foundation.
I believe there will always be a need for a program like
the NFIP, but there is plenty of flood risk out there that can
be written by private companies. And I can tell you that many
of my clients are eager to write flood policies. There are
three obstacles that I believe the bill before you today
addresses, but it is important that we recognize these.
The first obstacle is that the law currently permits
several different Federal agencies, as many as five, to
regulate flood companies. These agencies could issue different
requirements even years in the future that would throw the
private market into disarray. This creates uncertainty and has
a stifling effect on the private market. H.R. 4558 addresses
this problem by removing some of that uncertainty. Please allow
me to expand briefly on the notion that uncertainty can be an
impediment to the formation of a healthy private insurance
market.
In his landmark book, ``Risk, Uncertainty and Profit,'' Dr.
Frank H. Knight defined the difference between risk and
uncertainty like this: Risk is present when future events occur
with measurable probability. Uncertainty, on the other hand, is
present when the likelihood of future events are indefinite or
incalculable. Dr. Knight goes on to explain in his book that in
addition to uncertainty about our natural environment, in this
case the weather, political and regulatory uncertainty can also
impede private capital formation. Today the greatest
impediment, in my opinion, to capital formation in the private
flood market is political and regulatory uncertainty.
The second obstacle that the law defines: coverage to
include deductibles. Deductibles are not usually considered
part of coverage when discussing a policy of insurance. As
someone who sold insurance policies for decades, I can tell you
that when I discuss coverage with a customer, I am usually
talking about the exclusions and the conditions precedent, not
the point at which the coverage actually attaches.
The problem is this: It is unclear if private companies can
offer additional options regarding deductibles and still have
the policy considered to be comparable coverage to the NFIP.
The term ``deductible'' should be removed from the law so that
consumers have a wide variety of options.
The third obstacle is what I will call ``grandfathering''--
it has been referred to earlier in the testimony--of subsidized
rates for NFIP consumers who go to a private carrier. Under
current law, it is not clear how the NFIP would rate a policy
when a property moves from the NFIP to the private carrier and
then wishes to come back to the NFIP. Clarifying that a
customer can return to the NFIP on the same glide path that
they are currently on would make me, as an agent, feel more
comfortable selling a private flood policy.
Notwithstanding the unprecedented capital inflow to the
global catastrophe market over the last several years, one
other obstacle to the expansion of a private flood program
would be to impose a new tax on the reinsurance market. In my
written testimony, you can read further about my comments on
that regard.
In conclusion, I want to thank the committee for all your
work, all the work you have done on flood insurance to date.
Amazing progress has been made, and I do believe there is an
opportunity for a vibrant private flood market. Thank you for
your time and for inviting me to testify before you, and I
would be happy to answer any questions.
Thank you.
[The prepared statement of Mr. Brown can be found on page
24 of the appendix.]
Chairman Neugebauer. I thank the gentleman. And we now have
three votes so we are going to recess until right after votes.
The Chair intends to start the hearing back up ASAP, as soon as
we get back. So I ask Members to continue to vote and hurry on
back. And with that, we are in recess.
[recess]
Chairman Neugebauer. The subcommittee will come to order.
Thank you for your patience. What should have been a 30-minute
exercise turned into nearly an hour exercise. I guess we are
trying to stretch out this little bit of work that we were
doing as to make it look like we are working a lot harder, or
something. Each Member now will go into questions for the
panel. Each Member will have 5 minutes. I will begin that
questioning now.
The NFIP program was created in 1968. And at that
particular time, as I think one of the witnesses mentioned,
there wasn't credible data and it was hard to predict, and it
made it difficult to underwrite those risks. But things have
changed today, and we have the data, the mapping has been done.
Are there any other barriers that you see outstanding there
that would keep us from moving back to a private system? Is
there a missing piece here? I will start with Mr. Ellis.
Mr. Ellis. Yes, Mr. Chairman. I think one of the missing
pieces is being addressed by this bill. And that is, actually,
this clarification as to what is private flood insurance and
how can it be implemented or how will it meet the mandatory
purchase requirement. And I think that is one of the things
that this really clarifies. Because even before Biggert-
Waters--Biggert-Waters really codified some of the informal
criteria that FEMA had that also was sort of limiting the
acceptance of private insurance coverage as an alternative for
the mandatory purchase requirement.
So I think this is one of the big hurdles. And then,
obviously, the other big hurdle will be the private sector has
to make a profit. And, if you have a subsidized Federal
program, particularly in the case of the pre-firm properties,
it is going to always keep those people, those properties, in
the program and inhibit the development of a private
marketplace.
Chairman Neugebauer. Mr. Gray, Mr. Brown, anyone want to
elaborate on that?
Mr. Brown. I would just simply concur that the uncertainty
that I spoke about is really the greatest impediment to the
private market coming in. I can assure you that interest has
been expressed. In fact, just before I came today I got an e-
mail from one of my clients. Let me just share it with you. I
won't attribute it, but they said the real private market
really, really, really wants to cover risk in the United
States. It is getting boring only paying flood claims in most
of the rest of the world.
The private market pays flood claims everywhere else, but
not here. The impediment is that when there is enough
certainty--I think of uncertainty in the context of Dr.
Knight's statement. If you think of it as a spectrum and, on
the one hand, you have risk and on the one hand you have
uncertainty, the extent to which you move across that spectrum
from uncertainty to risk is the extent to which capital will
come in and take the place of a government program. So the more
certainty that Congress can provide about what coverage is
going to be required, and provide some flexibility, is the
extent to which the private sector will step in and take up
this risk.
Chairman Neugebauer. One of the things that--unfortunately,
we are in a situation right now where the Federal Government
controls about 90 percent of the mortgage market. And
obviously, in the mortgage finance area, in many cases, there
are requirements that properties in certain flood areas are
required to carry flood insurance. If you have an FHA loan, I
guess you have to have the loan guaranteed by Freddie Mac and
Fannie Mae--those have to. Have you detected any bias out
there, where those agencies are, say, looking more favorably
upon an NFIP policy versus a private policy?
Does that prejudice, do you think, exist in the
marketplace? Do we need to address that? Does anybody have any
data or thoughts on that?
Mr. Ellis. Mr. Chairman, it is true that even though there
is this mandatory purchase requirement it is not incredibly
well-enforced by the lenders. I think it is less than half of--
estimated less than half of the properties that are required to
have it actually do. And so, in some cases, it is that the
person gets the insurance to get the loan and then drops
coverage a few years later. The lender is not necessarily
enforcing it, particularly if it has gone into the secondary
market. So, the GSE is one of the things--if they were pushing
the lenders more to require just flood insurance--whether it is
Federal or private--that would actually help drive that
marketplace, as well.
Chairman Neugebauer. So what you are saying is, enforcing
the servicers to make sure that they are complying with that?
Mr. Ellis. Yes, Mr. Chairman. And they are actually--in the
2012 bill, there were actually increased penalties for lenders
that were not doing that. And it is just this question of
whether there is actually this enforcement and oversight.
Chairman Neugebauer. And how do we--Mr. Brown, you have
been in the insurance business and had an agency for a number
of years. And what happens in a lot of business, is it just
gets more comfortable. Would you say across the country that
the agents are more comfortable selling an NFIP policy versus a
private policy, because the NFIP has been a long-established
program? And if so, how do we break that mold?
Mr. Brown. I think one of the most important ways to break
that mold is what we are doing right here today. And that is,
bringing clarity to the fact that coverages can be offered by
admitted carriers in States where the State regulator has
certified that the coverage being offered is something that
would serve their constituency. And yes, there is, I believe,
some built-in bias in favor of the program because it is a
known quantity. And the extent to which we can make the private
offer of flood coverage a known quantity is the extent to which
we are going to have success moving this risk from the
government to the private sector.
Chairman Neugebauer. When you look at where the insurance
industry is spending its money they talk about we want to
insure your house, your car, your life, your health insurance,
your business, et cetera. Do you think if the industry felt
like there was a better opportunity for expansion in that area
that they would be more focused on promoting the fact that they
offer private flood insurance?
Mr. Brown. I don't think there is any question of that. And
that goes hand-in-hand with the willingness of the reinsurance
market to step in and take some of that risk. Yes, there are
some uncertainties. They haven't been doing flood. They don't
have access to as much data as they might have in the case of
wind risk because they have been doing wind risk for a long
time. But there has to be a starting place, and once companies
get comfortable with--based upon the developments of the new
models, I believe that they will--it won't be a rapid move into
this marketplace, but it has to start somewhere. And I think
the more certainty we can bring to it, the more likely we are
going to see this develop.
Chairman Neugebauer. I thank the gentleman. My time has
expired.
And now the vice chairman of the subcommittee, Mr.
Luetkemeyer, is recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. I want to quickly
ask a question of Mr. Brown here. I recognize that there have
been concerns expressed about the consumer protections in
private flood insurance. However, I think it is important to
bear in mind that even as an insurer becomes insolvent, a
State-guaranteed fund system would step in to provide
policyholders support. Do you think consumers are better
protected through the provisions included in H.R. 4558 or by
private flood insurance generally than they are through the
NFIP?
Mr. Brown. Interesting question. I spoke with some folks
back in Florida today to determine how we handle--how our
Florida insurance guarantee fund would respond to flood claims.
And what I have learned is, it confirmed what I thought I knew.
But what I learned is that private offers of flood coverage,
whether it is offered on an allied lines basis or as a part of
a homeowners policy, is covered under our insurance guarantee
fund in Florida if it is offered by an admitted carrier.
Mr. Luetkemeyer. And it is a State-approved plan?
Mr. Brown. It is a State-approved plan.
Mr. Luetkemeyer. Okay. I would assume so. My guess is
that--or, really, my question is, that provides the backstop,
really, the State guarantee fund provides the backstop for an
insurance solvency problem that could arise with a catastrophe
of some sort that causes an insurance company to go belly up as
a result of paying all the claims. And--
Mr. Brown. That is correct.
Mr. Luetkemeyer. --as long as you have taxpayers on the
hook for an NFIP policy, that probably is not a concern. But
the fact that we have a guarantee fund there would allay that
one fear.
Mr. Brown. That is correct.
Mr. Luetkemeyer. I think it is a point we need to make.
Okay. I am kind of concerned about--I am interested. This
sounds like really good stuff, and I am really excited about
the gentlemen from Florida and their work on the bill here. But
I am kind of concerned, curious anyway, with regards to adverse
selection. It would seem to me that the private sector would be
ready to take on some of the less risky parts of the business.
And something that is sitting in the middle of a hurricane or
tornado belt of some sort would be where they want to stay away
from. Is that something that concerns you? Is the modeling that
goes on with the private companies here--are they taking that
into consideration?
Are they just going to cherry-pick and then force all the
worst pieces, or most exposed pieces of property into the
government program. Which would mean those--they are going to--
because of adverse selection have more risk there, and
therefore more cost and raise the premiums accordingly?
Mr. Brown. I think that is a reality. And, in fact, if you
think about, originally--as government moved into the space--in
Florida we have had a lot of experience with Citizens Property
Insurance Carrier, a company which took risk when there was not
enough capacity in the marketplace. But government programs are
really intended to take those risks as a facility of last
resort. So--
Mr. Luetkemeyer. So you are saying--excuse me for
interrupting here. But you are saying, then, that you would see
a continued need for the Federal Flood Program? That there
wouldn't be a way to wean them out of this space here, and take
it over completely by the private sector?
Mr. Brown. I think in the foreseeable future, in the
midterm, there is going to continue to be a need for some form
of NFIP program until this transition can mature and develop.
How long, I don't know. But I do believe that there are going
to be some properties which may just simply not be
economically--it doesn't make economic sense because they are
receiving such a heavy subsidy now. We are probably trapped
with some of those.
Mr. Luetkemeyer. Okay. This is a hypothetical question, but
do you see that by doing this--if the private sector cherry-
picks all of the less exposed properties, and the more exposed
properties are underwritten by the Federal Government--the
Federal Government is, by the very inference, then,
incentivizing building, or expanding your real estate holdings
or whatever, in areas that are more prone to flooding, which
would mean that they are incentivizing people to be able to do
things in areas for which eventually, we as taxpayers, are
going to pick up the tab.
Mr. Brown. Unfortunately, that is a part of the original
design of the NFIP program. Whether intended or not, when
government creates a program, and they conspire if you will, to
cloak the true cost of that program there are perverse
incentives that are created. Price does far more than
compensate a seller for his goods and services. It communicates
valuable information about the appropriateness of human
behavior.
Mr. Luetkemeyer. One quick question, if I could indulge the
chairman for a second. You talked about the rest of the world.
Was it Mr. Gray who talked about the rest of the world, or Mr.
Ellis, that there are insurance companies that insure other
places in the world. And so are they doing that, as well? Are
they cherry-picking everything, or are they insuring everything
across-the-board, and accepting all the risks and underwriting
accordingly?
Mr. Ellis. At least in the studies that I have read, there
are different models of how to do this. Whether it is a bundled
policy, so it is within your homeowners insurance, and then it
is laid-off risk to the private sector. Some of them have some
government involvement. It is a whole bunch of different
things. But there is enormous amount of appetite for risk in
the catastrophe realm and for the reinsurance. And so, the
marketplace is there. In the last 7 years, reinsurance rates,
in an aggregate, have gone down. And so there is this amount of
appetite for risk which is pushing some of this interest in
getting into the marketplace.
And then just to your earlier comment, Congressman, I just
want to add that most States have service in insurer's last
resort, even on homeowners insurance. So there is always this
sort of potential leftover that is going to be an issue. But I
would also argue that would then concentrate the policymaker's
mind, Congress' mind, on dealing with some of these underlying
issues and the subsidies because it isn't being masked by a lot
of these property owners who are paying more they actually
should, more than a market price, to be a part of the flood
insurance program.
Mr. Luetkemeyer. Very good. I appreciate the chairman's
indulgence.
Thank you, my time is up.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Virginia, Mr. Hurt, is
recognized for 5 minutes.
Mr. Hurt. Thank you, Mr. Chairman.
Mr. Brown, I was intrigued by your last answers to the
questions posed by Mr. Luetkemeyer, talking about the--what is
built into the sort of structure of the National Flood
Insurance Program to begin with, and how people are allowed to
make decisions that may not make good economics. And I think at
the heart of what we are talking about, really--that gets to
the heart of it. And so I commend Representatives Ross and
Murphy for putting this forward, and I am glad to hear your
testimony today.
I guess my question, though--my first question would be,
okay, so we know what the economic realities are, and risks
are. But there is also a very real moral hazard that translates
into--if you are encouraging somebody to live in a place that
is dangerous, it is not just dollars and cents, it is not just
insurance policies, it is not just insurance companies, it is
not policyholders. You are encouraging them to do something
that is risky to their life. And to the property. And I wonder
if you could talk about that.
Mr. Brown. Yes. Frederic Bastiat, in the middle 1800s,
wrote a book entitled, ``The Law.'' And in that book, he says
this: ``There is this common tendency among all people, when
they can they choose to live and prosper at the expense of
others.'' The essence of what he is getting at is that when you
cloak the true cost of something you are depriving individuals
of the signals that would otherwise cause them not to engage in
that behavior.
And when government does that, they actually--it can rise
to the extent that it creates a life safety issue. Yes, when
someone hears that they can insure their property for $1,000,
and they move into a floodplain, they might make that decision
a lot more cautiously if it were going to cost them $10,000.
So there is no question that it has an effect on human
behavior. In some cases, it is knowingly, and in some cases,
the government is going to be blamed when there are life safety
issues that arise and they said, well, I thought it was okay
because the government subsidized my coverage.
Mr. Hurt. Thank you. My next question would be to Mr. Ellis
and Mr. Gray. I was wondering if you could talk a little bit
about--we are talking about, because of the bill that has
been--considering today will be forward-looking and reform
going forward, I guess my question would be, how do we deal
with the shortfall, the problem that we currently have? Can you
talk a little bit about what you think that we can do to
accelerate getting the program into the black? And if you--
maybe, Mr. Ellis, I will start with you.
Mr. Ellis. Thank you, Congressman. It is a big hole. You
are talking right now--the last year, I think I mentioned in my
testimony, the premiums that came in were $3.6 billion. You
have a $24 billion hole. Obviously, there are claims that are
being paid; that the program hasn't actually reduced any of the
debt since 2010. And that is owed with interest. And so, you
are looking at an enormous hole. The borrowing authority, I
think, is about $30 billion after the additional funding that
went in through Sandy so that it has room to borrow more. There
was a surcharge in the bill.
I think it is--part of the reason that we opposed forgiving
that debt, which was something that was being debated, is
because it helps concentrate the mind. If you eliminated the
debt, the program wouldn't change that much at all. And I think
it is important to keep that there, and I think it is a
challenge that we all are going to have to--I don't have any
silver bullets in dealing with $24 billion, and I didn't come
here with $24 billion in my pocket. So I think that is going to
be a real challenge, going forward.
Mr. Hurt. Thank you. Mr. Gray, quickly? In 30 seconds?
Mr. Gray. Sure. I think it is mitigation and risk
spreading, and trying to get the private market involved. And
the sooner you can do that, then the better off our society is
in handling the monster debt that we have right now.
Mr. Hurt. Thank you, Mr. Chairman. I yield back the balance
of my time.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Florida, Mr. Ross, one of the
primary authors of this bill, is recognized for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman. We talk about the $24
billion of debt that NFIP has. And it begs the question, if we
are going to transition to a private market, is there
sufficient capacity in the capital markets to do this? I will
ask you, just going down the line, beginning with Mr. Ellis.
Mr. Ellis. As I indicated before, there is an appetite for
risk, particularly in the reinsurance markets. And there is an
interest of insurance, and we saw that--for instance, in your
State, Mr. Ross--when they--when you--right after Biggert-
Waters there was an interest in trying to write flood insurance
and growth in that marketplace. And so, clearly, there is an
appetite for risk. How great that appetite is, it is not
entirely clear. But there is definitely a significant appetite
for that risk.
Mr. Ross. Would you agree, Mr. Gray? As a broker, do you
feel that there is sufficient capacity to meet the need at the
NFIP?
Mr. Gray. There is capacity out there, and lots of it. Now,
how long that stays and what the pricing looks like, who can
say? But right now--
Mr. Ross. There definitely is. Would you concur, Mr. Brown?
Mr. Brown. Yes.
Mr. Ross. Now, Mr. Gray, you spoke on something just a
second ago with regard to mitigation. And I think that is
something that needs to really be addressed here. There are
studies that have been done that for every one dollar of
prevention in the mitigation, you save $3 or $4 from relief
after the post-event relief. And I think that the NFIP has not
been necessarily stellar in advocating mitigation. Let's face
it, you get discounts in homeowners for storm shutters, you get
discounts for ABS if you--in your automobile. There are
discounts that you--that the consumer gets as a result of
mitigating any risk.
But that is more a function of not the private sector,
would you not agree? And, I guess, Mr. Gray, what I want to ask
you is, could you expound on how the private sector entering
the market can impact the extent of greater mitigation in
flood?
Mr. Gray. Sure. Remember, insurance is only one piece of
this puzzle that we have been looking at.
Mr. Ross. Right.
Mr. Gray. And you have mentioned some of those other
pieces. The private market coming into, and appropriately
pricing the risk would hopefully encourage homeowners and
others who are involved in this process to take a look at what
they can do to actually save on their premium dollars. And
certainly, if the program is functioning properly--where there
is more than just reinsuring the same risk over and over again,
and suffering repetitive losses over and over again--then I
think you will see some improvement in the properties, where
people will abandon what becomes economically unfeasible
properties.
Mr. Ross. And economically, or actuarially speaking, would
you say that there is more than one way to value risk?
Mr. Gray. Well, sure.
Mr. Ross. And, unfortunately, now you have only one
valuation of risk that is being done, and that is by NFIP.
Mr. Gray. Yes, it is whatever the government says that
valuation is.
Mr. Ross. Right. And then, supposedly, they are supposed to
start sharing some of that with us. But we will see where that
goes.
Mr. Brown, you are very familiar with the State regulatory
schemes. I think McCarran-Ferguson has been good for the
insurance markets. It has been very good for the consumers. And
one of the things that State regulatory environments provide is
strong consumer protections. Would you have any comments as to
what would be in the benefit of the consumer in terms of
protections if we were able to pass a bill such as this that
allowed for the licensing of private carriers into the market?
Mr. Brown. In particular with regard to claims paying, I
think what happened in New Jersey is a lesson that we can
learn. States have an extensive consumer protection in place.
And they also have unfair claims practices in place which
protect consumers for all coverages offered in that State
except NFIP coverage.
Mr. Ross. So if a consumer has a problem with an NFIP
policy, they can't go to their State regulator. They have to go
to NFIP and hope that they can get it resolved.
Mr. Brown. That is correct. And I would tell you, from my
experience as an agent, as a legislator, and as a lobbyist,
that in Florida, in particular, regulators are very interested
in doing what is right for consumers. If I had a flood policy
in a floodplain, I would much rather rely upon my State
regulator than having to go to the NFIP.
Mr. Ross. I appreciate that.
Mr. Ellis, you spoke just briefly about the consumer
protections. You also spoke about the grandfathering in. And I
think the situation we are in is that if we were just starting
fresh today, we would redesign how a private market should be
able to cater to, and influence, behavior in terms of building
and not building in high-risk areas. But since we are dealing
with reality, and we are trying to wean people off of a
government program, I agree with your assessment--in fact, I
agree with Mr. Brown's assessment--that there must be a safety
net in there that allows for the consumer to go back if it
doesn't work out in the private market.
And if you would just expound on that in the few seconds
that I have left, if you could.
Mr. Ellis. Sure. It is just that--basically, just trying to
clarify that if you went from the NFIP policy to what was
deemed to be an equivalent private flood insurance policy, and
then went back to NFIP or wanted to go back to NFIP, there
wouldn't be interpreted a lapse in coverage as long as it was
continuous. And so in that respect, I think it has that
protection for the policyholders. It envisions that we are not
going to get rid of NFIP tomorrow nor maybe should we, at this
point.
Mr. Ross. Right.
Mr. Ellis. And so, I think that is just a recognition that
you have to have.
Mr. Ross. Thank you.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the other gentleman from Florida--one of the major
sponsors of this piece of legislation, Mr. Murphy--is
recognized for 5 minutes.
Mr. Murphy. Thank you, Mr. Chairman.
Mr. Gray, just following up on Mr. Ross' comments there, do
you think there is any reason to believe that the State
insurance regulators need any help from Congress when so many
other types of insurance are based at the State level? Do you
see this as any different?
Mr. Gray. No, I don't. I think State regulators are well
able to take a look at the carriers and license holders that
are within their borders and manage audits, and control and
regulate those folks. Make sure that the citizens of the State
are protected.
Mr. Murphy. And can you tell me, in your opinion, how the
mechanics of this would work at the State level in the context
of private flood insurance? And whether you think State
insurance regulators could assure that the private flood
insurance policies provide no less coverage than that available
through NFIP?
Mr. Gray. I think it is important to understand what the
idea of no less coverage means. And trying to create a cookie-
cutter approach to that is not really how State regulators
work. They take a look at the policy forms and the rates that
are being charged, and take a look at the justifications that
the carrier provides for those rates, and then make a
determination, or ask questions, for future determination on
the nature of that risk. And then ultimately, they approve or
deny the rate regulation or form regulation.
Mr. Murphy. And, I think, more to the point of each State
being different, you have river flooding in Missouri and flash
floods in Colorado and storm surges in Florida and sea level in
Miami--we have a road, Alton Road, in Miami Beach, which is
underwater all the time now, I guess to the point here that the
States are going to know best.
Mr. Gray. That is absolutely correct. Certainly, the local
jurisdictions are going to understand the nature of their risks
within their borders better than somebody who is trying to fit
a single approach to 50-some jurisdictions.
Mr. Murphy. Okay. And, Mr. Brown, Biggert-Waters includes
several provisions intended to encourage the development of the
private flood insurance market. And the law also makes clear
that private flood insurance should provide no less coverage
than available through NFIP. In light of the sort of American
system of insurance regulation, how do you make certain that
the private insurance provides no less coverage--similar to
what I asked Mr. Gray--than NFIP? And how does this process
compare to what you do for homeowners policies and compliance?
Mr. Brown. Okay. And some of the same answers apply here.
And that is that when State regulators are allowed to certify
on this, at the State level that coverage being offered in
their State complies with the requirement that the coverage be
similar to, and no less than, I believe there is the answer.
They have the most knowledgeable team to make a determination
as to whether or not somebody is trying to offer a stripped-
down policy. What I think you are going to find is that
companies who come to this marketplace are going to offer
coverages that are not even available now under the NFIP.
For instance, if you have an above ground swimming pool at
your home and the thing ruptures and water gets into your
house, it is not covered under the NFIP policy. I think you
will see enhanced coverages. And there is one exception to
this, and I think--I want to be very clear. Coverages, in a
traditional context, does not include deductibles. The ability
to offer alternate deductibles is a management tool, a cost
management tool, that has been used for decades by insureds and
agents when recommending coverages.
So I would encourage you, when you make a final
determination of what you want to do here, is to not tie
States' hands on the ability of carriers in the private sector
to offer alternate deductibles.
Mr. Murphy. Good point.
Anybody can answer this. It relates to timing. One of my
frustrations, especially with the Congress now, is that--the
lack of clarity and certainty. If this were to be a logjam and
nothing happens for 5 years, Mr. Gray, I think in your comments
you alluded maybe to the point that this may disappear if we
don't act soon. That this market, the private market may
disappear. Is that what you were getting at, or do you think
there is always going to be this market in the private sector?
Mr. Gray. I think that we need to keep it moving. There is
an appetite for the risk and there are some at least view
within the insurer world that this is something that is an
opportunity that they would be interested in writing. I want to
make clear, though, when I say that State regulators are able
to take a look at these risks and regulate them locally, I
wholeheartedly believe that. But I also believe that regulation
should be according to the State's purview of what is important
rather than the Federal Government telling the States you have
to make this policy look like an NFIP policy.
Mr. Murphy. Thank you.
Chairman Neugebauer. If the gentleman has additional
questions, I would yield him additional time.
Mr. Murphy. I'm good.
Chairman Neugebauer. Okay. I think Mr. Luetkemeyer had an
additional question he wanted to ask.
Mr. Luetkemeyer. Yes. Thank you, Mr. Chairman. Just one
follow up for Mr. Ellis. Maybe I misunderstood what you were
saying awhile ago, but you said something about mandatorily
being forced to purchase health--or flood insurance. Can you
explain what you are talking about there? Because I--
Mr. Ellis. There is a--under existing law, there is a
mandatory purchase requirement if you live in the special flood
hazard area to purchase flood insurance. It is generally still
what people call the 100-year floodplain or the 1 percent
floodplain.
Mr. Luetkemeyer. Right.
Mr. Ellis. And so, that exists. It isn't, as I was
indicating to the chairman, forced as much as they are saying.
I think the estimates from GAO is as little as 50 percent of
the people who should be purchasing flood insurance under the
law are actually purchasing flood insurance that their lender
should be requiring.
Mr. Luetkemeyer. Okay. I understand what you are saying.
But I would think that the regulators who look at the loans
that the banks or credit unions or whoever are making would be
the best judge of whether that actually needs to have flood
insurance on it. Because you may just--you may have a half a
million dollar home, but you may have a $10,000 mortgage
against it, sits in a floodplain. The lot is worth more than
the--
Mr. Ellis. I--
Mr. Luetkemeyer. So there is no need for the flood
insurance. I am not sure that I agree with your premise, unless
you are talking about--
Mr. Ellis. It is not my premise. It is just the law. I am
just pointing out what the existing law is right now, which is
there is a mandatory purchase requirement for high-hazard
areas.
Mr. Luetkemeyer. Okay, I guess--do you--with the private
insurance market trying to take over, do you support continuing
to have mandatory purchases of it when you could live in a
floodplain, or you leave that up to the individual--
Mr. Ellis. If you don't have a mortgage, you don't have to
have it. The question is, are we protecting the--if you have a
federally-backed mortgage, are we protecting the Federal
Government in that context, as well. And so, I think it is an
issue worth discussing about the mandatory purchase
requirement. But at least in this context, I was just basically
saying that if you purchase private flood insurance, that
should meet your mandatory purchase requirement. Which has been
one of the limitations in the past, is that it is not
interpreted to actually meet that requirement.
Mr. Luetkemeyer. Okay, thanks for your clarification.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman. I think one of
the observations about increasing the take-up rate for private
insurance is, if we get the Federal Government actually
charging actuarial rates would help do that, bring some
competition to that process. So, I am hopeful.
I think we have had some great testimony here today. I want
to thank the witnesses for their time and for their patience. I
want to also thank Mr. Ross and Mr. Murphy for a very
thoughtful piece of legislation. I think this is something that
has bipartisan support, common sense. And while we may not be
able to act on this in the 113th Congress, I would hope that
this is something that we will work on in the 114th Congress.
I think there was--hopefully, there was not the thought
that when we did that little adjustment to flood insurance, we
had fixed flood insurance on a permanent basis. We have not, as
the point--the fact that we still owe $24 billion and have a
$30 billion line of credit.
And so, certainly, these discussions need to continue. I
would also like to ask unanimous consent, without objection, to
submit statements for the record from the American Bankers
Association, the National Association of Mutual Insurance
Companies, the Property Casualty Insurers Association of
America, the Independent Insurance Agents and Brokers of
America (Big ``I''), the National Association of Professional
Surplus Line Offices, and a letter from the Reinsurance
Association of America.
Without objection, it is so ordered.
I would also like to thank the witnesses again.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, with no additional business, we are
adjourned.
[Whereupon, at 4:01 p.m., the hearing was adjourned.]
A P P E N D I X
November 19, 2014
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