[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
HOW TO CREATE A MORE ROBUST AND
PRIVATE FLOOD INSURANCE MARKETPLACE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 13, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-68
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
BLAINE LUETKEMEYER, Missouri, Chairman
LYNN A. WESTMORELAND, Georgia, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico WM. LACY CLAY, Missouri
BILL POSEY, Florida AL GREEN, Texas
ROBERT HURT, Virginia GWEN MOORE, Wisconsin
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
DENNIS A. ROSS, Florida JOYCE BEATTY, Ohio
ANDY BARR, Kentucky DANIEL T. KILDEE, Michigan
KEITH J. ROTHFUS, Pennsylvania
ROGER WILLIAMS, Texas
C O N T E N T S
----------
Page
Hearing held on:
January 13, 2016............................................. 1
Appendix:
January 13, 2016............................................. 41
WITNESSES
Wednesday, January 13, 2016
Birnbaum, Birny, Executive Director, Center for Economic Justice. 9
Bradshaw, Steven, Executive Vice President, Standard Mortgage, on
behalf of the Mortgage Bankers Association (MBA)............... 6
Kelley, Brady, Executive Director, National Association of
Professional Surplus Lines Offices (NAPSLO).................... 8
Miller, Teresa D., Commissioner, Pennsylvania State Insurance
Department, on behalf of the National Association of Insurance
Commissioners (NAIC)........................................... 4
APPENDIX
Prepared statements:
Birnbaum, Birny.............................................. 42
Bradshaw, Steven............................................. 63
Kelley, Brady................................................ 68
Miller, Teresa D............................................. 129
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Letter from PCI, dated June 25, 2015......................... 135
Letter from the ABA, dated July 7, 2015...................... 136
Letter from the AIA, dated January 13, 2016.................. 137
Letter from the Big ``I'', dated July 13, 2015............... 139
Letter from Birny Birnbaum, Center for Economic Justice,
containing supplemental comments for his testimony at the
hearing, dated February 2, 2016............................ 140
Letter from the Council of Insurance Agents and Brokers,
dated July 16, 2015........................................ 145
Letter from the Financial Services Roundtable, dated July 27,
2015....................................................... 146
Letter from the MBA, dated June 30, 2015..................... 147
Letter from NAIC and the Center for Insurance Policy and
Research, dated July 29, 2015.............................. 149
Letter from NAMIC, dated July 20, 2015....................... 151
Letter from NAPSLO........................................... 153
Letter from the NAR, dated July 20, 2015..................... 154
Letter from the NMHC and the NAA, dated January 13, 2016..... 155
Letter from the National Association of Professional
Insurance Agents, dated July 7, 2015....................... 157
Letter from the Reinsurance Association of America, dated
June 30, 2015.............................................. 158
Letter from SmarterSafer.org, dated July 21, 2015............ 159
HOW TO CREATE A MORE ROBUST AND
PRIVATE FLOOD INSURANCE MARKETPLACE
----------
Wednesday, January 13, 2016
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 9:19 a.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Garrett,
Pearce, Posey, Hurt, Ross, Barr, Rothfus, Williams; Cleaver,
Velazquez, Green, Beatty, and Kildee.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representative Murphy.
Chairman Luetkemeyer. Okay. Mr. Cleaver managed to make it
through our Washington traffic here and has joined us. So let's
call the subcommittee to order.
The Subcommittee on Housing and Insurance will come to
order. Today's hearing is entitled, ``How to Create a More
Robust and Private Flood Insurance Marketplace.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Before we begin today, I would like to thank the witnesses
for appearing today. I look forward to your testimony.
And I now recognize myself for 2\1/2\ minutes to give an
opening statement.
Flooding has devastated large areas of my home State of
Missouri as well as the neighboring State of Illinois,
tragically claiming lives and causing millions of dollars of
damage. In the past several months, we have seen similar
situations from South Carolina to southern California.
Unfortunately, these are not isolated incidents. Flooding
continues to be the most prevalent natural disaster in the
United States. As communities in Missouri and across the Nation
begin to put their lives back together, it is fitting that this
subcommittee continues to examine flood insurance and the
current construct of the National Flood Insurance Program
(NFIP). Yesterday, this subcommittee held a hearing to discuss
the state of flood insurance in America.
Last week, I convened a roundtable discussion on flood
mapping. What has become evident is that total reliance on
insurance coverage for the NFIP is inadequate. Members agree
across party lines that policyholders, communities, and
taxpayers deserve better. One of the first steps toward reform
is to allow policyholders to access market-based flood
insurance policies.
H.R. 2901, the Flood Insurance Market Parity and
Modernization Act of 2015, introduced by the gentleman from
Florida, Mr. Ross, and the gentleman from Florida, Mr. Murphy,
would allow for greater consumer choice and private market
participation. It does so under the close supervision of the
State Insurance Commissioners, the foundation of the regulatory
system we have worked in an overwhelming bipartisan fashion to
protect. By removing the ambiguity around what qualifies as
acceptable flood insurance, property owners will be assured of
greater options and flexibility in their choice of policies.
Providing private competition to the publicly administered NFIP
will also promote competition in markets which have previously
been underserved.
I owe it to my constituents back in Missouri, and to all
Americans who have suffered from flood damage, to create a
program for flood insurance that is stable, accessible, and
cost-effective.
Before I yield to the ranking member, I ask unanimous
consent to insert into the record letters on H.R. 2901 from the
NAIC, PCI, AIA, NAMIC, NAPSLO, the Big ``I,'' CIAB, the
National Association of Professional Insurance Agents, the
Financial Services Roundtable, the SmarterSafer Coalition, the
Reinsurance Association of America, the National Association of
REALTORS, MBA, ABA, and the National Multifamily Housing
Council and the National Apartment Association. As you can see,
there is wide support across the industry spectrum for this
alternative to our present system.
Without objection, it is so ordered.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Missouri, Mr. Cleaver, for 5
minutes for an opening statement.
Mr. Cleaver. Thank you, Mr. Chairman. Let me, again, thank
you, as I did yesterday, for the very proactive step you have
taken toward dealing with the issue of insurance before it
becomes caught up in a critical year where we are not going to
have a lot of workdays. And I think it is appropriate for us to
continue, as you have already begun, hearing issues that relate
to flood insurance. We discussed yesterday, I think rather
broadly, the NFIP, and we highlighted areas where there is room
for improvement and discussed ways in which the NFIP could be
reauthorized.
Today is our second hearing on flood insurance, and today
we will be discussing the role of private insurance in the
flood insurance market, which is a significant issue and a
significant concern. And we dealt with it yesterday, but I
think the key to this whole issue is whether or not the private
sector is interested in and willing to become intimately
involved in this program. We have attempted this over the
years. The program was created in 1968 to provide flood
coverage to consumers who were unable to get coverage from the
very limited private market. The NFIP is responsible not only
for providing flood insurance, but for developing flood maps
and promoting mitigation activities.
One of the things that I think we all have come to see is
that flooding can occur anywhere. I grew up in a flat part of
Texas, the Dallas area on toward probably until you get to Palo
Duro Canyon around Amarillo is just flat. And last summer, in
this flatland, there was all kinds of flooding. And we do know
that it can and does occur everywhere, and can have a
devastating impact on our communities. But one of the things we
have also learned is that when these major events occur, like
Hurricane Katrina, it pretty much decimates any private
participation and the government has had to do a lot of
backstopping, both for Sandy and Katrina.
And then as we begin to discuss reauthorization of the
program, I think we have to ensure products remain affordable
and available. Our conversation must also focus on the
importance of obtaining accuracy in our mapping, which is a
really big issue in the rural part of the 5th District, which I
represent in Missouri. And as mapping and risk technology has
developed since the creation of the NFIP, the appetite for
private insurers to re-enter the flood market has grown.
And so, I look forward to hearing our witnesses today
discuss ways in which the private role in flood insurance could
grow.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Luetkemeyer. The gentleman yields back. With
that, the Chair now recognizes the gentleman from Florida, Mr.
Ross, for 2\1/2\ minutes for an opening statement.
Mr. Ross. Thank you, Mr. Chairman. And thank you very much
for holding this important hearing about an issue to which I am
dedicated. And that is, providing American homeowners more
affordable consumer options in the flood insurance marketplace.
I would also like to thank our distinguished guests for their
testimony today, and Representative Patrick Murphy for joining
me in introducing the Flood Insurance Market Parity and
Modernization Act, which we will be discussing this morning.
Since joining the House Financial Services Committee, I
have urged my colleagues to work with me to address the
shortcomings of the current government flood insurance model
known as the National Flood Insurance Program. Yesterday, we
held our first in a series of hearings to examine the problems
with this Federal program, and to explore solutions that
benefit homeowners. Floridians and Americans across the country
would greatly benefit from more choices when it comes to flood
insurance policies, and private competition in this market will
lead to greater innovations and more affordable and
comprehensive policies for consumers.
Unfortunately, regulatory barriers and the bias of
regulators favoring NFIP policies have prevented the
development of a private flood insurance marketplace. This was
not the intention of the Biggert-Waters Act. Rather, it was an
unintended consequence. With Florida homeowners in mind, I
introduced H.R. 2901, the Flood Insurance Market Parity and
Modernization Act. This bipartisan legislation will remove the
unnecessary regulatory barriers that are hindering consumers'
flood insurance options.
As the primary insurance regulator for my home State of
Florida, I am proud that our Commissioner of Insurance
Regulation, Kevin McCarty, has offered his full support of this
legislation. I urge my colleagues on both sides of the aisle to
join me in enacting this commonsense, bipartisan legislation
that will encourage the expansion of a well-regulated, more
affordable private flood insurance option for homeowners. And I
yield back.
Chairman Luetkemeyer. The gentleman yields back.
With that, we want to begin our testimony, and we welcome
all of the panelists today: Ms. Teresa Miller, Commissioner,
Pennsylvania State Insurance Department, testifying on behalf
of the National Association of Insurance Commissioners; Mr.
Steven Bradshaw, Executive Vice President, Standard Mortgage,
on behalf of the Mortgage Bankers Association; Mr. Brad Kelley,
Executive Director, National Association of Professional
Surplus Lines Offices; and Mr. Birny Birnbaum, Executive
Director, Center for Economic Justice.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection,
your written statements will be made a part of the record. Just
a quick primer on the lighting system: green means go; when you
get to yellow, you have one minute to wrap up; and when it
turns red, I am the one who has the last word. So we will
hopefully stop there shortly thereafter.
With that, I want to recognize the gentleman from
Pennsylvania, Mr. Rothfus, to introduce our first witness.
Mr. Rothfus. Thank you, Mr. Chairman.
It is my privilege to welcome Pennsylvania's Insurance
Commissioner, Teresa Miller, to the Financial Services
Committee today. Commissioner Miller was confirmed to her role
in June of last year. In that capacity, see oversees the fifth
largest insurance market in the country, and the fourteenth
largest in the world in terms of premium volume. This is a
significant and challenging responsibility in our large and
diverse State.
Fortunately, Commissioner Miller brings years of experience
to her new appointment and to our subcommittee today, having
previously served in Oregon's insurance division as well as in
the private sector. She will be speaking to us today not just
as Pennsylvania's Insurance Commissioner, but also as an active
NAIC member.
Commissioner Miller serves on the Federal Advisory
Committee on Insurance (FIO), providing advice and
recommendations to the Federal Insurance Office on issues such
as automobile insurance affordability, and international
insurance developments. Given Pennsylvania's history of
flooding, and ongoing concerns about the impact of flood
insurance policy on its citizens, I expect Commissioner Miller
to provide welcome insight into the future of the NFIP and
impactful reforms for the committee to consider. Thank you
again for coming, Commissioner Miller, and I yield back.
Chairman Luetkemeyer. With that, Ms. Miller, you are
recognized for 5 minutes.
STATEMENT OF TERESA D. MILLER, COMMISSIONER, PENNSYLVANIA STATE
INSURANCE DEPARTMENT, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS (NAIC)
Ms. Miller. Good morning. Thank you, Chairman Luetkemeyer,
and Ranking Member Cleaver. And thank you, Congressman Rothfus,
for your kind introduction. I appreciate the opportunity to
testify today to provide State insurance regulators' views on
issues surrounding the development of a private flood insurance
market. Facilitating increased private sector involvement in
the sale of flood insurance will help promote consumer choice
and spur competition. It will also provide homeowners necessary
coverage, often at greatly reduced costs. In Pennsylvania, we
are finding that in many cases, private carriers are willing to
offer comparable coverage at substantially lower cost than
NFIP. In one instance, a property owner would have paid a
$7,500 annual premium with the NFIP, but found private coverage
for a little over $1,400.
Another homeowner was quoted a $6,000 annual premium by
NFIP, but found a private policy for $900. Like other types of
new coverages, private flood insurance is being developed and
offered first by the surplus lines insurers. These insurers
typically insure unique or otherwise difficult to underwrite
risks that the admitted market is at least initially reluctant
to insure. As detailed in my written testimony, we have
significant authorities to ensure consumers in the surplus
lines market are well-protected. These authorities include
capital, surplus, and eligibility requirements on surplus lines
carriers, as well as the ability to hold both the insurer and
the broker responsible for any misconduct.
As the private flood insurance market grows and more
companies offer coverage, including admitted companies, our
regulation will continue to evolve to meet the size and the
breadth of the market as well as the needs of consumers.
However, more can be done to help facilitate the development of
this market, providing consumers more choices and more
affordable coverage.
One of the objectives of the Biggert-Waters Act was to
create opportunities for the growth of the private market as an
alternative to the NFIP. Unfortunately, the definition of and
the regulatory environment surrounding private flood insurance
is at odds with this objective, making it more difficult for
insurance regulators to protect consumers and ensure
availability. The Flood Insurance Market Parity and
Modernization Act addresses these concerns, which is why I am
here today to support it.
Specifically, we find it troubling that Biggert-Waters
empowered Federal banking and housing regulators and the GSEs
to apply their own requirements related to the financial
solvency strength or claims-paying ability of private insurance
companies from which they will accept private flood insurance.
This is highly problematic as banking and housing regulators
have neither the expertise nor the experience to regulate
insurance companies or markets. Moreover, they have regulatory
objectives that while laudable, are fundamentally different
than insurance consumer protection and fostering competitive
insurance markets.
They are simply ill-suited to regulate insurance, and it is
inappropriate for them to have the authority to substitute
their judgment for those charged under the law with regulating
insurance products and protecting policyholders. To address
this, H.R. 2901 includes important language clarifying that
State insurance regulators have the same authority and
discretion to regulate private flood insurance as they have to
regulate other similar insurance products and markets. We very
much appreciate these clarifications as they are critical for
NAIC's support for this legislation.
Another impediment for entrants into the market is the
vague definition of private flood insurance included in
Biggert-Waters. In order for a private market to evolve,
insurers need flexibility to tailor insurance products to meet
consumer needs. Biggert-Waters does not allow for innovation,
but rather focuses on ensuring policies don't deviate from its
rigid criteria. This is despite the fact that private insurers
may be able to offer additional coverage features or greater
limits at a more affordable price.
H.R. 2901 provides a clearer definition of private flood
insurance by clarifying that State insurance laws solely govern
over the insurance transaction. It will ensure that State
insurance regulators have the flexibility to approve private
flood insurance coverage that is responsive to the needs of
their States and constituents, while complying with their
State's regulatory requirements. These clarifications will
assist in removing the restrictive and confusing language in
current law to help prompt more insurers to enter the market if
they are willing.
In conclusion, State insurance regulators support efforts
to further develop the private market to help provide consumers
with access to additional options for flood insurance products
and coverage at potentially more affordable prices.
We appreciate very much Congressmen Ross and Murphy's
leadership on H.R. 2901, and look forward to continuing to work
together as this bill moves forward. I appreciate very much the
opportunity to be here on behalf of the NAIC. Thank you.
[The prepared statement of Commissioner Miller can be found
on page 129 of the appendix.]
Chairman Luetkemeyer. Thank you, Ms. Miller.
Mr. Bradshaw, you are now recognized for 5 minutes.
STATEMENT OF STEVEN BRADSHAW, EXECUTIVE VICE PRESIDENT,
STANDARD MORTGAGE, ON BEHALF OF THE MORTGAGE BANKERS
ASSOCIATION (MBA)
Mr. Bradshaw. Good morning, Chairman Luetkemeyer, Ranking
Member Cleaver, and members of the subcommittee. My name is
Steve Bradshaw, and I appreciate the opportunity to testify
today on behalf of the Mortgage Bankers Association.
I am currently executive vice president of Standard
Mortgage Corporation, a lender and servicer headquartered in
New Orleans, Louisiana. The company was founded in 1925 and
currently services approximately 28,000 residential mortgage
loans throughout the southeast.
This past August marked the 10th anniversary of one of the
most significant flood events in U.S. history, Hurricane
Katrina. We experienced the massive devastation firsthand.
Approximately 3,500 of our servicing customers sustained
significant flood damage to their homes. And on a more personal
note, nearly two-thirds of our staff lost their homes.
As a result of Hurricane Katrina and two other significant
storms in the fall of 2005, more than one million housing units
were damaged across five States. There is no doubt that the
National Flood Insurance Program was the key component to the
Gulf Coast recovery, just as it has been for other communities
across the country that have sustained major flooding or are
flooding today. But there is also no doubt that the NFIP needs
to be reformed. The program is now $23 billion in debt and is
simply not sustainable as it is. The Federal Government cannot
and should not bear the full burden of post-disaster recovery.
Congress recognized when it passed Biggert-Waters that
private sector flood insurance must be allowed to develop in
order to ensure a stable, sustainable, and affordable market.
Expanding flood insurance options will make it easier for more
homeowners to obtain flood insurance. And a competitive flood
insurance market will expand available insurance options, lower
cost, and increase the number of at-risk properties that are
insured. In other words, we are expanding the pool.
For example, many homes that were destroyed in Katrina were
not located in a special flood hazard area. Homes outside those
zones are not required to have flood insurance. As a result,
mortgage servicers like us were liable for the cost when those
homes were wiped out. The MBA believes that increased private
sector involvement can also serve to shift some of the burden--
not all of the burden--of post-disaster recovery away from the
Federal Government and to the private sector. This will limit
taxpayer exposure to future flood losses.
In light of this, we support H.R. 2901, the Flood Insurance
Market Parity and Modernization Act. The bill provides two
important improvements to the NFIP. First, the bill clarifies
what constitutes an acceptable private flood insurance policy
by providing a clear definition of private flood insurance.
This will make it easier for lenders to accept private policies
to satisfy the mandatory purchase requirement.
Second, H.R. 2901 addresses lenders' concerns regarding
continuous coverage requirements. Under current law, it is
unclear whether someone previously covered under an NFIP policy
who moves to a private sector policy would be eligible to
return to the NFIP policy at their previous rate. We are
pleased that H.R. 2901 eliminates this disincentive for
consumers to choose a private policy. It does so by clarifying
that private flood insurance satisfies the continuous coverage
requirement.
In summary, MBA supports H.R. 2901 as a simple way to
encourage the growth of a competitive private flood insurance
market. Increased private sector involvement will hopefully
expand available insurance options for borrowers, lower cost
for consumers, and reduce taxpayer exposure to flood losses
over time. We are especially grateful for the leadership shown
by Representatives Dennis Ross and Patrick Murphy on this
legislation, and we urge the subcommittee to approve it.
Thank you, again, for the opportunity to testify today. The
MBA commends your efforts to expand the private flood insurance
market, and I look forward to any questions you may have.
[The prepared statement of Mr. Bradshaw can be found on
page 63 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Bradshaw.
Mr. Kelley, you are recognized for 5 minutes.
STATEMENT OF BRADY KELLEY, EXECUTIVE DIRECTOR, NATIONAL
ASSOCIATION OF PROFESSIONAL SURPLUS LINES OFFICES (NAPSLO)
Mr. Kelley. Good morning, Chairman Luetkemeyer, Ranking
Member Cleaver, Chairman Hensarling, and members of the
subcommittee. My name is Brady Kelley. I am the executive
director of the National Association of Professional Surplus
Lines Offices based in Kansas City, Missouri. Thank you for
inviting me here today to testify on H.R. 2901.
Surplus lines is a $40.2 billion market. And NAPSLO members
broker and underwrite a very high proportion of that. Our
market, often referred to as the nonadmitted market, exists to
provide insurance coverage for nonstandard and complex risks,
and to provide cover for risks that exceed what the standard
market is either willing or able to underwrite. It is the
State's approach to regulating that market, which includes
providing what is freedom from rate and form regulation, that
allows it to work as this effective supplement. This
fundamental principle is part and parcel to its effective
operation and regulation.
Consider, for example, the impact of catastrophic losses
that cause standard carriers to either withdraw or
significantly curtail underwriting in certain regions of the
country, or in certain lines of business. Exhibit one of our
testimony tries to illustrate that. Market responses to
catastrophic events by measuring the rates at which surplus
lines premium has shifted either up or down over time in
relation to total U.S. property casualty premium. You see
events like the Northridge earthquake, 9/11, and hurricanes in
2005. They were all followed by very clear spikes in surplus
lines premium, spikes that exceed the growth of the overall
property casualty market. And then you see the reverse being
true in years following that where catastrophe losses are lower
or as the standard market re-adjusts. Without this safety net,
consumers would be left without coverage for their commercial
risks and/or their personal assets.
These same fundamentals apply in the case of private flood
insurance. Consumers whose flood risks do not fit within the
terms and limits of the NFIP, or whose risks are declined by
the standard market, will look to our market, surplus lines,
for the solution. It is important to point out that this is not
new. Why might that be? Property exposures may exceed the
$250,000 limit within the NFIP on a residential property, or
the half million dollar limit on a commercial property.
Homeowners may want replacement coverage rather than actual
cash value for their property. They might want to insure
additional structures, or list other properties on one policy.
They might need additional living expense, basement exposure,
and/or business interruption for a commercial entity.
These examples, coupled with communities or zones that are
not eligible for NFIP coverage, mean consumer alternatives are
absolutely essential. Our written testimony includes some facts
and figures about the size of the surplus lines flood insurance
market, and while you will see that they represent a relatively
small proportion of the overall market, without it, consumers
who need it would have no alternative.
This is precisely why we strongly support H.R. 2901.
Although our market is currently allowed to provide private
flood insurance, the 2012 law created uncertainty for lenders
and consumers. Specifically, lenders became uncertain about
accepting surplus lines policies in light of the law's
requirements, and because it authorized Federal banking and
housing regulators to apply their own requirements on private
insurance companies. No regulations have been developed since
that time. And it is prolonging this uncertainty. Uncertainty
is the problem, but H.R. 2901 is the fix. It simply ensures our
market's continued role in solving unique and complex flood
risks that exceed or differ from the options available through
either the NFIP or the standard market.
In addition, H.R. 2901 maintains the authority and primacy
of State Insurance Commissioners in regulating private flood
insurance. Because of their experience, their strong track
record, and their success in regulating the U.S. business, we
obviously strongly support that.
We have also provided written testimony describing how the
States regulate the surplus lines market. I think Commissioner
Miller has already done a pretty thorough job of describing
that. So let me simply reiterate the importance and degree of
each State's authority over both the insurance company and the
surplus lines broker in a surplus lines transaction.
As a result, the 2015 A.M. Best report illustrates an
exemplary solvency record for our market. It is included as
another exhibit in the testimony. H.R. 2901 will solve the
problems and concerns shared by the insurance and banking
industries by preserving our market's ability to offer options
to consumers. Without it, consumers who need it will have no
alternative. Legislators on both sides of the aisle have
expressed a desire to not just extend, but to also improve the
NFIP going forward. And I think the witnesses over the last
couple of days certainly agree with that. We believe H.R. 2901
is a positive step in that direction because it enables the
private market to develop, and it allows the NFIP to focus on
those properties with repetitive losses and their goal of flood
loss mitigation and prevention.
We appreciate Congressmen Ross and Murphy for introducing
the bill. Again, we thank you for the opportunity to be here.
We look forward to working with you as this bill moves forward.
Thank you.
[The prepared statement of Mr. Kelley can be found on page
68 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Kelley.
And Mr. Birnbaum, you are recognized for 5 minutes.
STATEMENT OF BIRNY BIRNBAUM, EXECUTIVE DIRECTOR, CENTER FOR
ECONOMIC JUSTICE
Mr. Birnbaum. Thank you. Chairman Luetkemeyer, Ranking
Member Cleaver, and members of the subcommittee, my name is
Birny Birnbaum. Thank you for the invitation to speak to you
today.
The availability and affordability of flood insurance is a
critical issue for individual and community well-being,
economic development, and a resilient and sustainable future. I
have worked on these issues for over 20 years as an insurance
regulator, consulting economist, and consumer advocate. Your
invitation to testify asked whether the NFIP, as it is
presently constituted, represents an ideal model for the
effective protection of residential and commercial property
owners from damages relating to flooding. The answer to that
question is a resounding ``no'' for a number of reasons. The
primary problem of the NFIP is the multiple and conflicting
goals that Congress has tasked the Program with, and the
constraints and requirements Congress has placed on the
Program. The starting point for Congress and the Federal
Government should be a laser-like focus that Federal
expenditures related to flood promote more resilient and
sustainable homes, businesses, communities, and infrastructure
against the peril of flood.
With this as the clear goal, any proposal regarding the
NFIP can be evaluated by asking, ``Does this change promote
resiliency and sustainability or not?'' The reason why
resiliency and sustainability must be the overarching goal for
restructuring the NFIP is that there is no insurance
mechanism--public, private, or combo--that will be able to
finance increasingly frequent and severe flooding. And a focus
on resiliency and sustainability means Federal expenditures as
investments today to replace disaster relief expenditures
tomorrow.
The way forward: There is a great opportunity for greater
reliance on private insurers and markets to provide flood
insurance, but H.R. 2901 is not the approach to accomplish
this. And certainly, it's not the approach to make the NFIP
more financially sound or achieve greater resiliency and
sustainability. The best approach for Congress to achieve these
goals is to require that flood be covered in standard
residential and commercial property insurance policies, and
subject to the same State-based regulatory framework that
exists for homeowners and commercial property insurance today.
There are four key actions needed by 2017:
One, get the NFIP out of the business of being a flood
insurance company by requiring that residential and commercial
insurance policies sold by private insurers cover the peril of
flood. That requirement turns flood back to the States where
all other property insurance products and markets are
regulated, and back to private insurers, re-insurers, and
catastrophe models who have the capability and capital to
provide flood coverage more comprehensively and efficiently
than the Federal Government.
Two, transition the NFIP from a direct provider of
insurance to a mega-catastrophe re-insurer utilizing the
successful model of the Terrorism Risk Insurance Program.
Three, address the affordability problem of flood insurance
with Federal, State, and local assistance outside of the
insurance system, no-subsidies insurance pricing with an
overwhelming emphasis on assistance for lost mitigation as the
tool to create more affordable premiums.
And four, reauthorize the NFIP during a period of
transition.
As we have seen over the last decade, the congressional
changes to the NFIP have lurched from efforts that longer-term
reform to responses to current crises, with the responses to
current crises often contributing to bigger problems down the
road. H.R. 2901 is a response to a current issue. Federal
agencies have been slow in promulgating rules regarding private
flood insurance and surplus lines insurers see an opportunity
to pick off NFIP policies that are mispriced due to NFIP rating
practices.
H.R. 2901 will not address the longer-term problems of the
NFIP, will not meaningfully promote private market
participation in the sale of flood insurance, and will create
bigger problems in the future when a flood event occurs. H.R.
2901 attempts to encourage private flood by defining private
flood to include surplus lines insurance for residential
properties, and by eliminating Federal oversight, removing
current consumer protection requirements for private flood,
removing the authority of Federal agencies to implement those
requirements, and removing the authority of Government-
Sponsored Enterprises (GSEs) to establish standards for the
claims-paying ability of insurers, which they already do now
for hazard insurance.
Surplus lines or nonadmitted carriers can be distinguished
from admitted insurers in the following ways: Admitted insurers
are licensed by a State insurance department to sell certain
types of insurance. These insurers are subject to regulatory
requirements for the filing and approval of policy forms and
rates, are subject to the State's consumer protection laws
regarding unfair trade practices and unfair competition, and
importantly, participate in the State guaranty fund, which pays
claims in the event the admitted insurers become insolvent.
In contrast, surplus lines insurers are not licensed by
State insurance departments. Rather, the State department
regulates surplus lines agents who are authorized to place
coverage with a surplus line insurer on a list of acceptable
insurers. Surplus lines policy forms and rates are not subject
to regulatory oversight, and surplus lines insurers do not
participate in State guaranty funds.
I understand the theory behind H.R. 2901 is that admitted
insurers are not willing to write private flood, but surplus
lines insurers would be if certain requirements, such as
comparability with the NFIP policy or claims settlement
requirements, were relaxed.
The story continues that once surplus lines insurers are
offering private flood, admitted insurers will be more
comfortable. I have seen no empirical evidence to remotely
suggest admitted carriers will do as suggested. I have seen
surplus lines insurers write business that admitted insurers
would have written, and I have seen personalized business
migrate from the admitted market to surplus lines when
permitted to do so to take advantage of fewer consumer
protection requirements.
The actual results of these changes will be for surplus
lines insurers to cherry-pick NFIP policies that are currently
overpriced due to the NFIP's broad rating scheme and loadings
for contingency and reserves. While the surplus lines insurers
take the profitable low-risk policies, the NFIP will become
even more financially vulnerable as its premium revenue will
decline far faster than its risk exposure. H.R. 2901 will not
only create financial problems for the NFIP in the future, it
will set the table for more problems--
Chairman Luetkemeyer. Mr. Birnbaum, can you wrap this up
quickly? You are over--
Mr. Birnbaum. Yes.
--when a flood occurs. Since the States don't regulate
policy forms, these policies can contain exclusions that a
regulator would never approve, and a policy filed by admitted
insurers.
In summary, flood insurance markets, in particular, are not
competitive. So unleashing unregulated insurers on vulnerable
consumers without Federal oversight and without meaningful
State oversight is a recipe for disaster.
Thank you.
[The prepared statement of Mr. Birnbaum can be found on
page 42 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Birnbaum.
We will begin our questioning. And I will start off. I
recognize myself for 5 minutes.
Ms. Miller, you made a comment a while ago with regards to
the GSEs being able to regulate insurance versus the private
market, which would have to be overseen by you. Can you explain
what you are talking about there a little bit, because I think
it is a key point of what we are looking at this morning with
regards to regulatory oversight.
Ms. Miller. Absolutely. Thank you, Mr. Chairman. Banking
and housing regulators have regulatory objectives that are
simply fundamentally different than insurance consumer
protection, and promoting competitive insurance markets. So,
our view is that they are ill-suited to regulate insurance. And
it is really inappropriate for them to be given the authority
to substitute their judgment for those of us who are charged
under the law with regulating insurance. State regulators have
140 years of regulating and supervising the business of
insurance, and protecting policyholders and really balancing
the availability of coverage with solvency. I think, to put it
very bluntly, banking regulators don't have a mandate of
consumer protection. And State regulators, that is what we do.
That is our charge.
Chairman Luetkemeyer. So basically, what you are saying is
the GSEs are usurping your authority to be able to oversee and
qualify the different policies of the private sector? Is that
what you were just saying?
Ms. Miller. That is correct.
Chairman Luetkemeyer. Okay. Thank you.
Mr. Bradshaw, you talked a little bit about some of the
folks who were not covered by flood insurance, especially in
Katrina. And you sort of alluded to the fact that there is
concern there because flood affects a lot of people beyond the
floodplain. So would you consider--or are you alluding to the
fact that you would like to see everybody required to have
this, or that the lenders have more leeway in requiring people
to have flood insurance, or did I misunderstand what you just
said?
Mr. Bradshaw. With regards to requiring everybody to have
flood insurance, the answer to that is no, that is not the
position of Standard Mortgage. It is certainly not the position
of the Mortgage Bankers Association. With regards to expanding
the options for insurance coverage to be available, we,
Standard Mortgage, are very interested in that.
During Katrina, there were a number of people who were
flooded. Due to the nature of FHA insurance, just as an
example, if someone floods and they are not in a flood zone, so
there is no flood insurance, and if they then abandon their
home, then under the FHA program, it is up to Standard Mortgage
to repair the home in order to file the claim against FHA.
That puts us in the business of insuring FHA. So we believe
with a new type of program that could be developed by private
insurers, that other people may be interested in obtaining
insurance even when they are outside the zone.
Chairman Luetkemeyer. Okay. Thank you.
Mr. Kelley, Mr. Birnbaum made a statement a minute ago that
caught my attention that surplus lines don't belong to the
Guaranty Associations of States. Did I understand that
statement correctly, Mr. Birnbaum? Did you make that statement?
Mr. Birnbaum. Yes.
Chairman Luetkemeyer. Okay. That is a very key point from
the standpoint, I think, that surplus lines are where you look
to be able to provide flood insurance. Is that the case, Mr.
Kelley?
Mr. Kelley. It is the case. Surplus lines insurers do
not--they are not backed by guaranty funds. But there is good
reason for that. If you look at the types of coverages written
in the surplus lines market, there are oftentimes not coverages
that would fall under the general limits of the guaranty that
exists for the standard market. You also have, again, the A.M.
Best report that shows an incredible solvency record for the
surplus lines market: 11 years of no financial impairments,
compared to, I think, 207 impairments in the standard market
over that same time period.
If you look at the ratings of surplus lines carriers, they
are all in the excellent-to-good category compared to ratings
on the standard side that aren't quite as good. So we tend to
believe that coverage is typically inadequate for the size and
limits of commercial policies covered by surplus lines
carriers. We believe they don't incentivize strong corporate
financial operations. And guaranty funds, in our opinion, would
add an unnecessary burden on the surplus lines consumer, given
the stellar financial strength of the industry.
Chairman Luetkemeyer. Okay. Thank you. My time has
expired.
I recognize the ranking member, Mr. Cleaver from Missouri,
for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
Yesterday, I asked our witnesses if any of them believed
that we needed to end the NFIP. And there were no hands raised.
So I am interested in whether this panel sees it the same way.
Do any of you believe that we need to eliminate the NFIP? Just
raise your hand if you--
Mr. Birnbaum. Yes. I think we need to eliminate the NFIP
as a direct provider of insurance and transition it to a mega-
reinsurer along the model of the Terrorism Risk Insurance
program, because the private market is in a much better
position to deliver the coverage of flood in the standard
homeowners and commercial property insurance policies than the
NFIP with a separate flood insurance program.
Mr. Cleaver. But wouldn't the rates be higher for the
consumers than they are right now for the NFIP?
Mr. Birnbaum. I would--no. Certainly for some. But for the
vast majority of consumers, the rates would be less because the
private market could deliver the coverage of flood far more
efficiently. Number one, there are fewer administrative costs
because you eliminate a second insurance policy. Number two,
you eliminate a lot of claim settlement costs because you no
longer have an insurance company and the NFIP both trying to
settle a claim and deciding who is responsible for it. We saw
problems with that after Hurricane Katrina, which is whether
the insurers who are responsible for settling the claims were
trying to say: Well, is it a claim that is wind that we cover,
or is it a flood coverage that the NFIP will pay for? So there
are a lot of reasons why the private market could introduce
efficiencies that the NFIP couldn't.
So for the vast majority of consumers, the actual coverage
for flood would be less expensive than from the NFIP. And, of
course, there still remains the issue that for some consumers,
it is unaffordable. And that still has to be addressed the same
way it does for the NFIP.
Mr. Cleaver. Mr. Kelley, do you agree? And also, do you
think that we would actually have consumers who would pay the
full risk rate in substantial enough numbers to make the
program work?
Mr. Kelley. I don't agree. Sorry. I don't agree that we
need to eliminate the NFIP entirely. We certainly agree it
needs to be reformed. I keep going back to this GAO report and
the note that they made about subsidized properties counting
for the majority of the repetitive loss properties in the
market. And I heard it yesterday during the testimony as well.
One percent of all NFIP policies count for 30 percent of all
claims paid. So I think we have to face it there. That one
percent category of property, no one is attracted in insuring
those properties. And to think that you could come up with an
actuarially sound rate that covers the risk of that property, I
can't imagine a consumer having the ability to afford that.
So we believe there is a need for the NFIP to serve as some
level of backstop. But we think you can focus it down on that
category of risk.
Mr. Cleaver. So a hybrid?
Mr. Kelley. Maybe. I think, again, H.R. 2901 is going to
shift as much business as possible to the private industry. But
let's face it. Private industry is not--they are going to have
trouble insuring that one percent category as well without a
pretty reasonable rate. So if you focus on that one percent
category, maybe focusing NFIP on their mission of mitigating
flood losses, preventing flood losses, that, in our opinion, is
a better focus of a reformed NFIP.
Mr. Cleaver. So, Mr. Bradshaw, do you think if shifting
exposure to the private sector is going to be just too much for
them to bear--we have tried this before. So, we are talking
about shifting more and more exposure to the private sector. Do
you think that would run away private sector participation, or
would they be jumping for joy?
Mr. Bradshaw. We don't know what the private sector is
going to do because they are not in that business on a large
role today. So it is something to us that is worth trying. Of
course, in Louisiana, we have a high concentration of risk. We
are very eager to have as many choices in order to expand
homeownership and to provide an affordable option. And, to me,
there may be something akin to the relationship we have with
the FHA and the GSEs and the Thrifts and everybody that is
serving--
Mr. Cleaver. That is bad for my colleagues here. So use
another--no. Inside. Go ahead.
Mr. Bradshaw. There is a--pardon me for going off. We are
interested in expanding options. We are interested in seeing
flexibility for the consumer.
Mr. Cleaver. Thank you. I will yield back the balance of
my time, Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields back. With
that, I recognize the gentleman from New Mexico, Mr. Pearce,
for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman. I appreciate your
testimony. Ms. Miller, thanks. Your testimony is
extraordinarily clear and precise, especially in the
recommendations.
You recommend that more flexibility is needed under
Biggert-Waters. Could you describe that flexibility just a
little bit? Flesh that out a little bit more? What would it
look like?
Ms. Miller. Congressman, I think what we are looking for
is a clear definition of private flood insurance. That has been
one of the biggest difficulties with the Biggert-Waters Act is
that the definition is just not very clear, and it has
created--
Mr. Pearce. If we were to ask you, would you have a
sentence that would clarify that?
Ms. Miller. I think that's what H.R. 2901 does. It
provides that--
Mr. Pearce. And you think that it completely does that?
Ms. Miller. Right.
Mr. Pearce. Okay. I needed reassurance. For my friend, Mr.
Ross, sometimes has to be at--brand him to make sure. Okay.
And, Mr. Kelley, your testimony seems to hint that there is
not much reason for a private market. But that is pretty much
in contrast to Ms. Miller's. Do you not find the private
market--in other words, she gave three examples. And if three
people can get insurance, then it is almost out there for
everybody. Do you not find examples of that, or is this
something specific to her State?
Mr. Kelley. No. I don't mean to suggest that. I think
there are opportunities. What we have tried to specify and what
we have to go back and reiterate is that the surplus lines
market is generally not the market of first resort. It is a
market that exists to supplement what the standard market isn't
willing to underwrite. They are not approved to write it. They
don't have the--
Mr. Pearce. But you heard her examples. She gave them, and
then they are in her written testimony. This one, this one,
this one, went out and they got it, and they got it cheaper.
Mr. Kelley. Right.
Mr. Pearce. And sitting up here, not knowing a thing about
insurance, except that I pay for it once in a while, usually my
wife does, but not knowing much more than that, it is
confusing. And that is all I am trying to solve. I am not
trying to pick at you or anything like that. So you don't find
the private market as viable as she does? That is all I want to
understand.
Mr. Kelley. I am confusing you. I don't mean to suggest
that. I think her examples are good ones. And there was an
example given yesterday by a Member here. I think it was a
property in Florida where part of the property is in the flood
zone, but the structure itself was way up on the hill. It is
never going to see water. The fact that our market, surplus
lines market, can come in and specifically underwrite that
property, even though it is classified a specific way by the
NFIP, we can say we know that structure is never going to flood
and we can--
Mr. Pearce. Okay. Yes, so that gives me the impression
that it is a specialty market for special circumstances.
And, Ms. Miller, again, is that the case that these three
examples you gave, they weren't just people going out and
shopping off the shelf. These were examples where somebody
specifically went and said: Oh, we will insure that. That is
pretty easy and that is not like the rest of the flood, or was
it kind of a broader market? That is all I am trying to assess.
Ms. Miller. Congressman, it is a good question. And I
don't mean to suggest that this is big market even in
Pennsylvania. We are starting to see increased interest by our
surplus lines carriers in particular. But the examples I gave
you are examples my department is aware of. But I am not trying
to--this is still a very limited market. I am not trying--
Mr. Pearce. Okay.
Ms. Miller. Frankly, from my perspective, I would like to
see if we could grow it and make sure that consumers know
that--
Mr. Pearce. Fair enough. I think many of us would like to
see that same thing.
Mr. Birnbaum, Ms. Miller adequately points out, and she is
talking about making sure that there is viability. Mr. Kelley
has, on page 9 of his report, and I am sure you dissected it as
well as I did. But on page 9, he has the rating agencies. If
you took the time to watch the movie, ``The Big Short,'' and if
you watched the circumstances play out, the financial industry
had all the rating agencies. And, frankly, they were rigging
the game. The triple A's weren't triple A at all. And some
people made a whole lot of money by saying they are going to
fail, and they did.
So if we were to look at the soundness of the ratings
that--the Best ratings I think Mr. Kelley referred to, in your
experience, would that tell us that those ratings are going to
be adequate? Are they--is that game cooked, too, and we just
haven't found it out yet?
Mr. Birnbaum. Well, first note, it is not adequate. If you
look at the way State insurance regulation deals with admitted
carriers, there is extensive oversight of the financial
condition of admitted carriers, which is far more extensive
than over surplus lines carriers, number one. But, number two,
this whole idea that somehow Biggert-Waters gives the GSEs
responsibility for financial regulation of insurance companies
is a real mischaracterization. Saying that they can determine
the claims-paying ability means that they can require that the
insurer have a certain credit rating of say an A.M. Best rating
of B or more, which is precisely what they do now for hazard
insurance.
So Biggert-Waters doesn't give regulatory authority to the
GSEs. It simply says you don't have to take any insurance
policy that comes your way. You can require an insurance policy
with an insurer who has demonstrated a claims-paying ability,
either by a credit rating agency, a rating of B or more or
something along those lines. So that is why it is important to
keep that in Biggert-Waters.
Mr. Pearce. Okay. Thanks. I appreciate it. I yield back,
Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from California, the ranking
member of the full Financial Services Committee, Ms. Waters.
You are recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman, for holding
this hearing. These hearings are very important, because we are
dealing with a rather complicated issue of how to have a
National Flood Insurance Program that serves our public well.
Let me apologize to everybody for Biggert-Waters. I am the
``Waters'' of Biggert-Waters. And I have been apologizing for
many months, and helping everybody to understand the unintended
consequences of Biggert-Waters. And we tried to straighten that
out with the bill that we passed that helped to reduce the cost
of the premiums to our consumers, et cetera, et cetera.
But I want you to know that I am very interested in whether
or not we can have a private/public operation that will do the
best job for our constituents. And I have been working with Mr.
Murphy and Mr. Ross. And I really do commend them for the
attempts that they have made to try and have this a bipartisan
issue, this bill that we are discussing today, H.R. 2901.
But I recognize there are some concerns. And I think that,
Mr. Birnbaum, you have identified some of the same concerns
that I have. But I want to know from you, do you think it is
possible to have more private participation and involvement in
the ways that Mr. Ross and Mr. Murphy would have it? And do you
think we can work this out?
Mr. Birnbaum. I think yes, absolutely, we can get more
private market involvement in flood insurance. But with
respect, I don't think H.R. 2901 is the way to go with that.
One of the problems with the NFIP is the various and
conflicting requirements. Make insurance affordable, but not
only have premiums that are sufficient to pay claims, but pay
back all of the claims in the past that were far in excess of
the revenues. When you have those conflicting things, how do
you address that? So what would happen with H.R. 2901 is that
the surplus lines insurers would cherry-pick certain policies.
Right now, the NFIP looks at a special flood hazard area and
has 30 different levels of risk, with 1 being the highest
elevation and the lowest risks, and 30 being the lowest
elevation and the highest risk. They then average the claim
cost for that, for everyone in that. Surplus lines insurers are
going to come in and pick off everyone from 1 to 14, leaving
the NFIP with everyone in 15 to 30, with the result that the
NFIP is stuck with the worst and most risky claims, but no more
revenue, per se, to deal with that. So you are going to create
more financial problems for the NFIP down the road.
The proposal that we put forth fully gives the private
market not only the responsibility, but the tools to price the
product and utilize all of their means, whether that is
catastrophe modeling, catastrophe reinsurance, all of the
pricing tools that they can to get flood insurance right.
Ms. Waters. Would you just briefly describe your proposal?
Mr. Birnbaum. The proposal is that Congress, or the
States, require that flood be part of the homeowners and
commercial property insurance policy. Remember, these are
private insurers that are already providing property insurance.
So you are just asking them to add the peril of flood. What
that would mean is you would have the far more efficient
delivery of the coverage of flood, because you wouldn't have to
have a second policy. You would have all of the skills and
tools of the private insurers who, in pricing, access the
catastrophe modelers to get the pricing right. And you would
have all of the catastrophe reinsurance and catastrophe bonds
and all the alternative capital available to support that.
You would then transition the NFIP to a mega-reinsurer the
same way the Terrorism Risk Insurance program works. That has
been a successful model. This would accomplish so many things.
Not only would it deliver the cost of flood more efficiently,
but it would expand flood coverage. It would give consumers the
coverage that they expect at the time of an event instead of
surprising them with, ``There is a flood, and, oh, I am not
covered.'' Or more importantly, how many times have we seen
flood in areas that aren't special flood hazard areas?
This would mean that everybody is covered, even if they
happen to be outside a special flood hazard area. This will
transform Federal expenditures from massive disaster relief to
investments in loss mitigation and reduce disaster relief
expenditures down the road. This is really the only long-term
solution.
Ms. Waters. If I may, what you are indicating is mandatory
insurance for everybody to participate? I agree with you. First
of all, the debt that Biggert-Waters attempted to address was
just impossible. We could never pay that down or take care of
that. So what would you say about constituents who would say,
``I don't live in a flood zone. I shouldn't be responsible for
those people who decide they want to live in places where they
know they are at risk.'' What would you say to a politician
about that?
Mr. Birnbaum. The beauty of having the flood as part of
the private market, private flood or the homeowners or the
commercial property, is that insurers would price the coverage
of flood according to the peril. So for consumers who lived in
areas that didn't have a high exposure to flood, they would pay
little or next to nothing for it. For consumers who lived in a
high-flood-risk area, they would pay a lot more. But the
private market would reflect these risks a lot more
responsively than the NFIP because the NFIP is required to go
through this lengthy process with the flood maps. So imagine if
that same process were required for wind coverage the way
homeowner's insurance is sold today. That would be a disaster
for providing wind coverage.
So by turning this over to the market, everyone pays their
fair share instead of the system today, which is a bunch of
hidden subsidies. Taxpayers are basically--there are some
taxpayers who live in areas without much flood who end up
paying for flood because the Federal Government has lent $24
billion to an NFIP that still isn't financially sound.
So there are subsidies not only from one set of NFIP
policyholders to others, but there are subsidies from taxpayers
to other taxpayers.
Mr. Ross [presiding]. Mr. Birnbaum, I am going to need you
to wrap it up. A little--
Mr. Birnbaum. Okay. So by moving this to the private
market, you would introduce a lot more equity in the price of
flood insurance. And you would make it a lot more transparent.
Ms. Waters. Thank you very much. I appreciate that. And I
am hopeful that you can work with us as we try and figure out
what we are going to do to reform the National Flood Insurance
Program and have some private involvement in it.
Thank you, Mr. Chairman.
Mr. Ross. Thank you. The gentlelady's time has expired.
Ms. Waters. I yield back.
Mr. Ross. The Chair now recognizes the gentleman from
Florida, Mr. Posey, for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman. And, again, I would
like to express my appreciation to Chairman Luetkemeyer for
holding these hearings and for his efforts to help us get ahead
of this issue a little bit.
The National Flood Insurance Program is currently $23
billion in debt. That is about the clearest indication we can
ever have that it is not working in its present form. And from
the hearings that we have held so far, I am encouraged that at
least every Member seems to be able to agree on that.
At one time, an HO-3 was said to have been the broadest,
most inclusive form of insurance ever written. HO-3 standard
homeowners insurance policy not only covered a lot of perils
such as fire and wind at one time, it had liability coverage in
it if your kid shot the neighbor with a bow and arrow, and
theft provisions, and pretty broad. I don't know if that is
still the case, still is considered to be the broadest. But the
question I have is a historical one, if any of you could answer
it, and that is, if flood was ever included in a standard
property insurance policy before, homeowners or otherwise? Can
any of you answer that question?
Ms. Miller. Not to my knowledge.
Mr. Birnbaum. I'm sorry. Could you repeat the question? I
didn't--
Mr. Posey. Yes. Was the peril of flood ever before covered
by, say, an HO-3 policy in the standard homeowners insurance
policy, was it ever covered? And, of course, the next question
is, when did it cease to be covered?
Mr. Birnbaum. Okay. Basically, Congress created the NFIP
in 1968. And that is when private industry came forward and
said, ``We are not willing to cover flood because the risk is
concentrated in certain areas, and we can't diversify it, and
we have a hard time identifying the risk because of the flood
maps.''
Mr. Posey. So, at one time, it was covered?
Mr. Birnbaum. Yes.
Mr. Posey. Do they cover earthquakes in California? Is
that a standard covered peril?
Mr. Birnbaum. No.
Mr. Posey. No. Okay. What do you think would happen if
there was a small sentence added to legislation which said,
``If you cover any property which has a mortgage insured by the
Federal Government, you shall not exclude the peril of flood
from the coverage,'' what do you think would happen?
Mr. Birnbaum. I think what would happen is that private
insurers would start offering the coverage of peril of flood in
their homeowners policies. And if they didn't, then State
residual markets would be providing that. So, for example, in
Florida, just as, right now, if a company isn't willing to
write wind coverage, the consumer would go to Florida Citizens.
So if a company wasn't willing to write flood in the policy,
then the consumer would go to Florida Citizens. But the ability
for companies to write flood today is completely different than
it was 40, 45 years ago. Companies have access to catastrophe
models. They have access to very distinct and clear and
detailed itemization of risk. There is access to reinsurance
and alternative capital that didn't exist 45 years ago. So the
opportunities are there. There just needs to be a nudge from
the government to do so. And that nudge would be a requirement
that they include it.
Mr. Posey. I am not opposed to that concept for sure. But
I must say that Citizens puts Florida taxpayers on the hook
greater than any other risk ever known to those citizens of
Florida. Had Citizens had as broad of coverage pre-2004 and
2005 hurricane seasons as it does now, Florida would probably
be in as bad a financial state as Detroit. That is definitely
not a real clear answer to have a government-owned insurance
company being the largest one in the State with never enough
reserves when you live on a hurricane-prone peninsula to cover
innumerable losses. Fortunately, our States cannot just print
more money and go into debt. They have to actually--they have a
constitutional requirement to balance their budget. And they
can't pull the escapades that the Federal Government can. So,
anyway, I see my time has expired.
Mr. Chairman, thank you very much.
Mr. Ross. Thank you.
The gentleman's time has expired.
The Chair now recognizes the gentlewoman from Ohio, Mrs.
Beatty, for 5 minutes.
Mrs. Beatty. Thank you so much, Mr. Chairman, and to our
ranking member and to our witnesses today. First, let me say
that I support what Ranking Waters said in relationship to
wanting to be able to look at a public-private operation. So I
am going to try to get through two quick questions, one to you,
Mr. Birnbaum, and one to you, Mr. Bradshaw, as it relates to
the National Flood Insurance Program and privatization.
To you, Mr. Birnbaum, we have certainly heard some
interesting testimony here today. And I have had an opportunity
to look through your written statement. And one of the concerns
I have is the area of moving away from the National Flood
Insurance Program to privatization. I am concerned, I am sure
my colleagues on both sides of the aisle are concerned or
should be concerned, and I know FEMA is also concerned when you
look at the $23 billion in debt. And so I guess my question is
if we talk about, as you stated, Mr. Birnbaum, that we move
away from privatization and move away from the way it is now to
privatization, what happens to the $23 billion in debt? Because
certainly one would not expect FEMA or the taxpayers to be left
holding the bag. And when you recommend that the National Flood
Insurance Program get out of the business of being a flood
insurance provider and do its transition, I don't think I saw
anywhere in there where you addressed what happens to the $23
billion in debt. Did I miss that? Or is there something there
that you can share with us?
Mr. Birnbaum. No. The short answer to your question is
that the same thing is going to happen, would happen, as is
going to happen right now, which is taxpayers are on the hook
for the $23 billion. Right now, there is this belief that
somehow the NFIP is going to generate funds into the future
sufficient to pay back that $23 billion. Given that you are
continuing to allow or require the NFIP to subsidize rates--
and, with H.R. 2901, you are going to put the NFIP in a
position of being even more financially vulnerable--you are not
only never going to pay back the $23 billion through the NFIP,
you are going to create an even larger requirement for the NFIP
to borrow from Treasury. So the answer to the question is that
$23 billion is there; cut your losses and move to a system of
sustainability.
Mrs. Beatty. When you say, ``cut your losses,'' that makes
it go away?
Mr. Birnbaum. It doesn't make it go away. But Congress is
going to have to pay that $23 billion because there is no way
that the NFIP is going to be able to repay back over time, even
under the current requirements, let alone under the
requirements of H.R. 2901.
Mrs. Beatty. So I guess what I am hearing--and certainly
you are the expert--is that if Congress is going to have to pay
it for it to be privatized, and Congress is going to have to
pay it to leave it the way it is, where is the in-between of
public and private in sharing in that cost?
Mr. Birnbaum. By moving to flood as part of the standard
homeowners and commercial property insurance, what happens then
is that the Federal Government stops being on the hook for
flood insurance losses. It means that the private market is
responsible for accepting the exposures, pricing them
appropriately, and paying the claims. The bleeding stops. And
that is what is necessary at this point in time. So you
accomplish several things by putting it with the private market
along the proposal we have made. You not only stop the
hemorrhaging of Federal money, number one. But, number two, you
get better pricing, you get more comprehensive coverage, and
you get better opportunities for loss mitigation. You get
private insurers now incentivized to get involved in loss
mitigation for flood in a way that they currently have no
interest in doing right now.
Mrs. Beatty. For the sake of time, I am going to move on
quickly to you, Mr. Bradshaw. Can you tell me the value of the
flood plain maps as it benefits lower- and middle-income
Americans and first-time home buyers?
Mr. Bradshaw. Certainly the value of the flood plain maps
are significantly improved today as compared to when I started
in the business in 1971, when we received this big box roll of
maps and our objective was or our assignment was to locate all
of the properties on the map. So the digitization of the maps
helped to improve significantly, we believe, the underwriting
of the flood insurance risk.
All that being said, there are several places with the
mapping that are incorrect and that the private market will be
able to identify those from using different approaches. And
then the hope is that provides more choices, that provides more
opportunities for our consumers to afford the flood insurance,
particularly the lower income and the new home buyer.
Mrs. Beatty. Okay.
Thank you.
Mr. Ross. Thank you.
The gentlelady's time has expired.
I now recognize myself for 5 minutes.
Ms. Miller, you spoke in your testimony about some of the
obstacles of Biggert-Waters that are preventing you from being
able to authorize private flood insurance in the State of
Pennsylvania. Are you seeing an influx of interest from the
private market to want to write to flood insurance in
Pennsylvania?
Ms. Miller. Mr. Chairman, we are not seeing an influx of
interest. It is still a very limited market. We are seeing some
increased interest. We are seeing more surplus lines policies.
But it is still a very limited market.
Mr. Ross. And if H.R. 2901 were to pass, do you think that
would change things and allow for the presentation of more
private capital to come in and take the risk in Pennsylvania?
Ms. Miller. That is my hope. That is why I am here
supporting it because I would like to see the private market
grow. And I would like to see consumers have more options.
Mr. Ross. And if the private market does grow and they are
assessing the risk based on their models and based on what they
believe is appropriate in risk-based analysis, do you feel that
there may also be an opportunity then that these private
carriers may not only offer flood but also want to include it
in an all-perils since they have--managing the risk?
Ms. Miller. I think that is right.
Mr. Ross. And would that not lead to an opportunity where
we may have even more people, assuming other Insurance
Commissioners across the country feel as you do, to include
more people to want to participate in flood insurance because
the private carrier can offer it to them at a lower price?
Ms. Miller. That is the hope.
Mr. Ross. And would that not lead to an opportunity, as
Mr. Birnbaum says, where you would see more and more policies
include in their all-perils flood? But to keep it the way it is
now where we bifurcate NFIP against an all-perils policy is not
going to help the situation. Would you agree?
Ms. Miller. Yes.
Mr. Ross. I have enjoyed listening to Mr. Birnbaum. I
agree with him. And I think you will too that--when he states
in his testimony, ``consumer protections provided by the States
are far greater than those that exist for NFIP insurance,''
would you agree?
Ms. Miller. Yes.
Mr. Ross. And have you had any problems, well, let me put
it this way, do you feel comfortable continuing to allow
surplus lines carriers to write flood insurance in the State of
Pennsylvania?
Ms. Miller. Absolutely.
Mr. Ross. Thank you.
Mr. Kelly, surplus lines, they just don't just write flood
insurance, do they?
Mr. Kelley. They just don't write flood insurance. I
appreciate that question. We have heard here that surplus lines
are not regulated. We have heard that they are not licensed.
That is--
Mr. Ross. Correct. And if you would discuss those.
Mr. Kelley. --simply incorrect. Every surplus lines
insurer is licensed in a State. It may not be licensed in every
State. But in order to be eligible to write surplus lines
insurance, as Commissioner Miller described, you have to be
licensed in your State of domicile. So the regulation of that
insurer from a financial solvency, from a market conduct
perspective, none of that varies between the standard market
and the surplus lines market.
Mr. Ross. And surplus lines are currently writing flood
insurance policies now?
Mr. Kelley. Absolutely. And here is why, not just because
of the Biggert-Waters Act, but because for decades, you have
had consumers whose problems weren't solved by the limits of
the NFIP or who didn't have a standard market option.
Mr. Ross. So under the law, surplus lines carriers can
write policies? And is the number of policies growing over time
in flood insurance? I doubt it is significantly. But is it
growing?
Mr. Kelley. It is not significant. You have seen the stats
in my testimony. And I will just recap them here. We have about
six States, some of the biggest States, that capture flood
insurance data. And those 6 States, which represent about 50
percent of our surplus lines market, wrote $134.1 million in
flood premium in 2014.
Mr. Ross. And then because my time is limited, would H.R.
2901 assist and facilitate in the increase of policies
available and being purchased by consumers for flood?
Mr. Kelley. Yes, it would.
Mr. Ross. Thank you.
We talked about mitigation yesterday. And I think the
overall goal of a flood insurance policy, as in any insurance
policy, is to have the minimization of risk with the benefit of
an affordable policy because if you don't focus on that, then
what you are providing is nothing but relief. And relief is not
where we want to go because that creates FEMA and then that
creates greater problems without any control. So what benefit
is there in making sure that we allow for incentives to
mitigate the risk? And what benefit is being provided or
incentives being provided right now by NFIP for that
mitigation? Would anybody like to take a stab at that?
Mr. Birnbaum. Sure. So the key incentive for loss
mitigation is proper pricing of the insurance product.
Mr. Ross. Correct, Mr. Birnbaum. And I apologize because
you are on something I want to talk about, and I only have a
couple of seconds. Would not the consumers benefit greater for
having more assessment of risk done in a granular fashion if
the private carriers were involved to make sure that they are
protecting their investment on that risk to the benefit of the
consumers so that we would have a more affordable market with
less risk of loss to the consumer?
Mr. Birnbaum. The answer to that is, yes, if it were
comprehensively done by the private market. If you do just
selective with the cherry-picking of H.R. 2901, then you have
some consumers who get that and the majority of consumers
don't.
Mr. Ross. My time is running out.
Clearly, then, I would suggest that H.R. 2901 offers that
transition to create the NFIP to be the market of last resort,
which I think is what the panelists would like to see in the
overall equation.
Thank you. My time has expired.
I now recognize Mr. Rothfus from Pennsylvania for 5
minutes.
Mr. Rothfus. Thank you.
Ms. Miller, I am going to talk a little bit about the
surplus lines insurers. You mentioned in your testimony that
there is a growing appetite in the surplus lines market to
provide private flood insurance coverage and that Pennsylvania
has had some success with surplus lines carriers offering flood
insurance. Taking a national perspective, do you feel
comfortable with surplus lines carriers writing private flood
policies?
Ms. Miller. Congressman, I do.
And, in fact, in Pennsylvania, one of the things we are
trying to do as a department right now is figure out how we can
do a better job of letting consumers know that this option
exists. That is now comfortable I am with surplus lines
policies.
Mr. Rothfus. Can you talk a little bit about the
regulation of the surplus lines insurers? How do State
insurance regulators monitor the financial health of surplus
lines insurers?
Ms. Miller. Absolutely. As Mr. Kelley indicated, surplus
lines carriers are licensed in the State of their domicile. So
in that State, they are meeting the capital and surplus
requirements that the admitted carriers are meeting. And so
even though we talked about earlier the fact that the guaranty
fund doesn't apply to surplus lines, there is financial
monitoring of surplus lines carriers. And even in
nondomiciliary States, there are capital and surplus
requirements on surplus lines carriers, as well as carriers who
are not domiciled in the United States. So I am comfortable we
have a lot of financial regulation protection. But also we
have, in a State like Pennsylvania, if we have a surplus lines
carrier that is not domiciled in Pennsylvania, we still have
authority over the placement of that insurance with the surplus
lines broker and the opportunity to go after that broker if
there is misconduct. But we also have I think--
Mr. Rothfus. What kind of misconduct are you talking
about?
Ms. Miller. For example, in Pennsylvania, we have a
requirement that they notify policyholders that, for example,
the guaranty fund doesn't apply if they misrepresent the policy
somehow. Or if they place the policy with a non-admitted or a
non-eligible surplus lines carrier, we can go after that
broker.
Mr. Rothfus. These are basic consumer protection items
that you are talking about?
Ms. Miller. Exactly. We also enforce the requirements
related to the eligibility of surplus lines carriers to operate
and sell policies in our State. So if we have concerns about
the financial soundness of a surplus lines carrier, if they are
not paying claims timely or if they are willfully violating our
laws, we can declare them ineligible to sell policies in our
State. Additionally, in Pennsylvania, we have what is called
the Unfair Insurance Practices Act. I think States have similar
laws that are probably titled a little bit differently. And
these, again, are consumer protection statutes. They make sure
that claims are paid appropriately and that the insurer and the
broker are not misrepresenting policies and what is covered.
And this Act applies to surplus lines carriers just like it
applies to admitted carriers.
Mr. Rothfus. Great.
Mr. Birnbaum, you expressed concerns in your written
testimony about the level of regulation and policyholder
protection for surplus lines that are not admitted insurers. In
fact, on page 21 of your testimony, you state that Ross-Murphy
``sets the table for more problems for consumers who have
purchased the surplus lines policies when and if that occurs.''
I would point out that Commissioner Miller, from my home State,
reports at least 5 surplus lines carriers have sold flood
insurance in Pennsylvania, writing around 1,000 policies, and
that the State closely monitors surplus lines business. What
evidence do you have to show that State Insurance Commissioners
or State regulators have not protected consumers, particularly
with policies sold through non-admitted carriers via surplus
lines?
Mr. Birnbaum. Sure. So with admitted carriers--
Mr. Rothfus. What evidence? I am looking for what evidence
that you have where you can show me where this has been an
issue.
Mr. Birnbaum. The evidence is that regulators don't have
authority to approve forms or rates. Commissioner Miller in the
last few weeks has issued a bulletin on price optimization,
telling insurers that they can't use a consumer's willingness
to pay to determine the price that they charge the consumer.
She has no authority to do the same thing for surplus line
insurers. And it is the same thing with rate issues and other
policy form issues. A surplus lines insurer could include a
provision in the policy--
Mr. Rothfus. You are saying, ``could, could, could.'' I am
looking for specific examples where it has actually happened.
What evidence? That is what I am looking for from you.
Mr. Birnbaum. The evidence--I will give you evidence from
the force-placed insurance market. The largest writers of
private flood insurance today are force-placed flood insurers.
And the largest of those are admitted carriers. So private
flood insurance can be written by an admitted carrier. But
there have been issues where those private flood insurers, when
they were using surplus lines, were charging exorbitant rates
that were far in excess of the reasonable cost of providing
insurance. So that has been reined in, in part because the
Federal Housing Finance Authority and some State regulators
have said: You need to move that force-placed flood from
surplus lines to the admitted market.
Mr. Rothfus. But State regulators would have the authority
to go after them. Would State regulators have the authority
under existing--
Mr. Birnbaum. They have authority basically for financial
condition. But they don't have the same authority as they do
over admitted carriers for things like policy forms and rates.
If there is such great consumer protection in the surplus
lines, why doesn't Pennsylvania or every other State allow all
personal auto and all homeowners to be written in the surplus
lines market? Why do they require that to be written in the
admitted market? Because there are more consumer protections in
those markets.
Mr. Rothfus. Ms. Miller, would you care to respond to
that?
Ms. Miller. Sure. So surplus lines, the way it works is
surplus lines are for unique risks. That is why we have
admitted carriers that write the rest of personal lines
policies because we have laws in all the States about diligent
search requirements. And if you can buy a policy through the
admitted market, then that is what you do. Really, surplus
lines are for those unique risks that aren't being written by
the admitted market.
Mr. Rothfus. I yield back, Mr. Chairman.
Mr. Ross. The gentleman's time has expired.
The Chair recognizes the gentleman from Kentucky, Mr. Barr,
for 5 minutes.
Mr. Barr. I thank Mr. Ross for his leadership on trying to
tackle this complex issue.
Mr. Murphy, I thank you as well for your efforts in trying
to deal with what is clearly a very complicated issue and a
huge potential liability for the taxpayers and an affordability
issue, frankly, for a lot of my constituents in rural central
and eastern Kentucky. I appreciate what H.R. 2901 is trying to
do in terms of clarifying that State insurance regulators have
the authority to regulate private flood insurance, clarifying
the definition of private flood insurance. But I want to have
Ms. Miller, Mr. Bradshaw--Mr. Kelley actually address a point
that Mr. Birnbaum is making, which I think is a pretty
interesting and good point. And that is that there is this
impediment to private insurance offering flood coverage based
on just the simple fact that they have to compete with the
subsidized rates of the NFIP. Even if H.R. 2901 does move us in
the right direction in these areas, what do we do about this
fundamental problem, about the competition with subsidized
rates?
Ms. Miller. I think that is a challenge. And I think in
terms of the future of NFIP, at the NAIC, we will be embarking
this year--I know the reauthorization is coming up next year.
And it sounds like there is a lot of interest in talking about
ways we can modify that program. We have not had conversations
at NAIC yet about potential recommendations for changes to that
program. But it was just announced that I am Chair of the
Property and Casualty NAIC Committee. And I can tell you that
this is on our agenda for this year. We are going to be looking
at this and putting together kind of our recommendations for
ways that perhaps NFIP could be modified going forward. From my
perspective today, I am here because I just want to see
consumers have more options. And I believe H.R. 2901 will
provide for more private market options for folks. And I think
that will be a good thing for consumers.
Mr. Barr. Mr. Bradshaw?
Mr. Bradshaw. With regards to the affordability of the
program, however this comes out, is that we are very interested
in making sure that the consumers can afford the product. We
believe that competition will bear that true. We have a unique
position in Louisiana where we have such a high concentration
of flood risk, very much of it is required. Many of our
customers are required to have flood insurance. So the impact
by NFIP and a huge change in the premium not only affects our
consumers but the property values, which we have a high level
of interest in because at the end of the day, we are the guys
who are protecting the investors. So we are very interested in
that. We would see it that it is somewhat like the relationship
with FHA in the general market of lenders and of guarantors in
the mortgage business is that FHA has a role. Looking back to
the late 1980s of the oil bust, FHA was the only program in
town. So the NFIP does serve a significant and a long-term
benefit.
Mr. Barr. Thank you.
And as we move to Mr. Kelley, Mr. Kelley, if you could
answer just two specific questions as we--in response to Mr.
Birnbaum's testimony. In your view, as an advocate of H.R.
2901, what is preferable about Ross-Murphy to the TRIA model
that Mr. Birnbaum is advocating? What is preferable to the
surplus lines solution to the TRIA model that Mr. Birnbaum is
advocating? And, secondly, could you respond to Mr. Birnbaum's
contention that H.R. 2901 would give surplus lines insurers the
ability to cherry-pick NFIP policies that are overpriced and
low risk, making the NFIP more financially vulnerable? I am
really interested to hear your thoughts on that.
Mr. Kelley. Thank you for that question. With respect to
the TRIA model concept, H.R. 2901 does a very different job of
pushing this coverage to the private market. TRIA mandated that
the private market offer terrorism coverage. This is giving the
private market the opportunity to get in and figure it out,
invest in underwriting processes, and get the experience to
develop products. Many standard companies, I think over time,
will probably add flood to the standard homeowners policy like
we have talked about here. It is just going to take time. I
think it will happen. It is just going to take time. And much
of that experience will transpire out of what the surplus lines
market is able to do.
What was the second question?
Mr. Barr. The issue of cherry-picking.
Mr. Kelley. The issue of cherry-picking, the issues you
are trying to balance here are affordability, availability, and
financial stability of flood insurance. Terms like ``cherry-
picking'' and ``adverse selection'' obviously have very
negative bias when referring to private companies and their
business decisions based on sound financial models, actuarial
data, capacity, risk appetite, and experience. The private
market's financial stability is in all of our, especially the
consumer's, best interest. Making decisions about the types of
risk to write, regions to write in, capacity to allocate to
those regions, those are essential elements to maintaining a
solvent, viable marketplace. So regardless of which risk you
transfer from the public to private balance sheet, it starts to
transfer some of them and reduces the long-term exposure to the
subsidized Federal Government.
Mr. Barr. Thank you.
I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we will go to the gentleman from Texas, Mr.
Williams.
Mr. Williams. Thank you, Mr. Chairman.
And I thank all of the witnesses for your participation
today.
Mr. Birnbaum, you heard I am from Texas. In your testimony,
you specifically state that private insurers can offer flood
insurance and can do so more efficiently and effectively than
the NFIP. I am going to agree with you 100 percent on that. And
I believe the Federal Government has gotten way over its head
on this issue like it does with a lot of things.
But you also state that H.R. 2901, of which I am a
cosponsor and proud to be one, will not address the longer term
problems with the NFIP, will not promote private market
participation in the sale of flood insurance, will create
bigger problems in the future when flood events occur, and will
eliminate State regulatory oversight. So three questions.
Number one, how can H.R. 2901 totally eliminate State
regulatory oversight?
Mr. Birnbaum. Okay. H.R. 2901 removes from Biggert-Waters
the limitation that private flood insurance can be written by
surplus lines for commercial policies. It opens the door to
surplus lines for residential flood insurance. By doing so, it
means that private flood insurance basically moves out of the
admitted market where there are far more consumer protections
than in the surplus lines market. So, that is the basis for
that assertion.
Mr. Williams. Number two, what is your assessment of the
State regulatory system in light of your statement on page 19,
meaning do you have a lack of faith in the State regulatory
process?
Mr. Birnbaum. No. I am a strong supporter of State-based
regulation. It hasn't been an unqualified success over the
years. But I am a strong supporter of it. And I demonstrate
that strong support by saying that flood, by being part of the
standard homeowners and commercial property insurance, then
becomes the responsibility of State insurance regulators. What
H.R. 2901 does is it creates this, continues this Rube Goldberg
apparatus of constricting the NFIP, giving them all sorts of
requirements and constraints, giving the private, the State-
based regulators certain responsibilities. But the overall
thing makes no sense. If you want to get to a sustainable
future, then you utilize the private market but give them the
full responsibility overseen by State-based regulation. Don't
include this NFIP that is required to provide sort of
subsidized insurance, which gives the private sector then the
opportunity to say: Well, we are only going to take this most
profitable business; we are going to leave the more risky and
the less profitable business to the Federal Government.
So you are privatizing profit and socializing the risk.
That is exactly the thing that is outraging people all over the
country. It is the type of crony capitalism that basically
says: Look, we are going to give one group of people the
government advantage, instead of trying to create a level
playing field for everyone.
Mr. Williams. How would the State regulation of flood
insurance differ from the State regulatory process for
homeowners insurance or other insurance lines?
Mr. Birnbaum. Right now, for surplus lines, what
Commissioner Miller and others have said is they regulate the
financial condition of the surplus lines insurer, and they have
some ability to regulate sort of marketplace misconduct.
But they don't have the ability to ensure that policy forms
are not misleading or deceptive. They don't have the ability to
ensure that rates are not unfairly discriminatory. And, more
important, they don't have the ability to make sure that the
NFIP meets its goals. So you have Federal requirements for
flood insurance, and you are essentially delegating part of the
responsibility for insuring that to the State-based regulators.
And while I am a big supporter of State-based regulation,
there have been some notable failures. If we look at private
mortgage insurers, we saw that in the financial collapse,
private mortgage insurers failed. Those were under the purview
of State-based insurance regulators. So we are not talking
about a pristine record here.
But I have faith in State-based insurance regulation if you
give them the comprehensive tools to do it, not the piecemeal
approach of H.R. 2901.
Mr. Williams. I am a private-sector guy. I am in the
retail business. And I can tell you, in the counties I
represent in Texas, we have had a lot of flood problems, and
the way to get it right is turn it over to the private sector.
Let the private sector compete. Let the consumer drive the
industry, not the Federal Government. And I think you will see
prices will be right, and service will be better.
And I am happy to be on H.R. 2901.
Mr. Chairman, I yield back my time.
Chairman Luetkemeyer. The gentleman yields back.
With that, the gentlelady from New York, Ms. Velazquez, is
recognized for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
I am sorry I wasn't here to listen to your testimony, but I
was in a markup in the Small Business Committee. We just
finished. But I want to thank you all for being here.
And I have just one question, to Mr. Bradshaw.
My district in New York City, which encompasses communities
on New York City's Lower East Side and Red Hook, was especially
hard hit by Superstorm Sandy.
In a January 2014 report published by the GAO, some
stakeholders noted that the rate increases associated with
private-sector flood insurance could lower a home's market
value. Some stakeholders also expressed concern that whole
communities with a high risk of flooding, like those in my
district, could become economically unviable if the increase in
premium rates makes flood insurance unaffordable for too many
residents.
Mr. Bradshaw, how do we ensure premium rates on flood
insurance do not rise to such a level that it causes
homeownership rates to decline, particularly in vulnerable
communities?
Mr. Bradshaw. Certainly, we have had some similar
experiences with Hurricane Katrina, and our part of the country
and the Gulf Coast is very much at risk, just as you, and,
certainly, taking nothing away from the flooding that has taken
place on the Mississippi River in Missouri right now, as well.
People are in harm's way.
We look to committees such as this to make sure that those
folks who need help in order to maintain their property values,
in order to continue to make a living, to continue to have
access to homeownership--and that, from that perspective, there
seems to me to be a parallel between what FHA does in the home
mortgage business and what NFIP does for the flood business.
In our part of the country, Port Fourchon is one example,
which carries 25 to 35 percent of the petrochemical business
from the Gulf up to the mainland. There are reasons that has to
be there. People have to work there. So that very well may
require some subsidization of premiums for people in that area.
It is very important.
I am not sure that I know how to do that. I know that what
we have right now has created $23 billion in debt and that if
we fail to plan for the next event, if there is an event, then
we will merely re-experience what we have today.
So we are very eager to help protect the consumer. We are
very eager to be very interested and verbal to help protect the
consumer. Because without them, our business goes away.
Ms. Velazquez. Thank you.
Chairman Luetkemeyer. The gentlelady yields back.
I now recognize the gentleman from Texas, Mr. Green.
Mr. Green. Thank you very much, Mr. Chairman.
And I thank the witnesses.
And, of course, I always thank the ranking member for her
leadership on these issues.
I lived through Katrina. And it is inappropriate to say I
lived through it because I wasn't actually there--
[Phone rings.]
Mr. Green. Excuse me. This may be the President calling.
I wasn't actually there.
It is not the President. Okay. So, I won't take the call.
I wasn't actually there. But I arrived shortly thereafter,
and I saw the tragedy that was left behind. I went to Sri Lanka
after the tsunami. I was in the Philippines after Haiyan. And I
know what this looks like, the aftermath, and it is not a
pleasant sight, to say the very least. And I am being quite
euphemistic.
Here is the question that I have for you, dear friends: Are
you indicating that, if we had this system in place pursuant to
H.R. 2901, that we would not have expended the billions of
dollars that we had to expend after Katrina, that this would
eliminate the necessity for the Federal Government to step in?
This is an important question for me and my constituents.
Yes, sir, if you would?
Mr. Birnbaum. So the answer to that is H.R. 2901 would not
have prevented any of the problems that you just described,
because H.R. 2901 would continue to leave the NFIP with those
policies in high-risk areas, it would continue to have the NFIP
charging inadequate rates, it would continue to have subsidies
for people who don't need them.
So you would still have the same problem you would today.
And, as a matter of fact, it would be worse, because the NFIP,
instead of broadly averaging its rates and getting revenue for
policies in lower-risk areas, it wouldn't even have had that
revenue. So the situation would be worse today if H.R. 2901 had
been in place.
If our proposal of having the private sector provide the
flood insurance, then the $23 billion would not be there today
if our system had been in place.
Mr. Green. On the question of the billions that we
currently find ourselves indebted to, I suppose the Treasury,
would we still have that $23 billion debt if we had H.R. 2901
in place?
Mr. Birnbaum. Well, yes. The $23 billion is not going to
go away under the existing situation. And it is certainly not
going to go away under H.R. 2901. It is going to get worse
under H.R. 2901.
Because the private sector is going to take the most
profitable of the policies--remember, I told you earlier that
the NFIP puts things into 30 risk categories, with 1 being the
lowest risk, and 30 being the highest, and then averages that.
The private sector is going to come in and take 1 through 14,
leaving the NFIP with 15 through 30, the most risk. So the NFIP
is going to have almost the same risk but much less revenue. So
the situation is going to get worse for the NFIP. It is going
to let the private sector cherry-pick the most profitable
policies that are out there.
What is needed is to give the private sector the
responsibility to handle the entire problem, which is price all
of the policies. There is always going to be an issue with
affordability, right? There is just no way around it. But you
can't have affordability addressed through the insurance
pricing system. When you underprice insurance, you create
incentives for people to invest badly. You invest in areas
where it is not sustainable. It is critical to have risk-based
pricing.
It is also critical to have financial assistance delivered
in the form of loss mitigation. Instead of giving people a
grant to pay for the insurance, give them money to mitigate
their homes so that they are less exposed to flood. Reduce the
cost of flood insurance by reducing the exposure. That is where
the target of Federal expenditure should be. The delivery of
the insurance should be in the private sector.
Mr. Green. Thank you.
I will yield back the balance of my time.
Chairman Luetkemeyer. The gentleman yields back.
With that, I recognize the gentleman from Florida, Mr.
Murphy, for 5 minutes.
Mr. Murphy. Thank you, Mr. Chairman, and thank you,
Ranking Member Cleaver, for today's hearing.
And Ranking Member Waters, thank you for your leadership on
this.
And, Mr. Ross, who has now left, I thank him as well for
his cooperation, working in a bipartisan manner to make some
progress here.
And I very much appreciate the input of all the panelists
today, the witnesses, for this important discussion, hearing
all your comments, all your thoughts.
The bottom line is, how can we provide more affordable
flood insurance options for people all across the country? This
legislation that we are discussing, the Flood Insurance Market
Parity and Modernization Act, which I have sponsored with my
good friend and fellow Floridian, Mr. Ross, aims to do just
that.
This Act would provide more choice, greater competition,
and less cost in the flood insurance market. It would
accelerate the development of more flood insurance options by
allowing policies accepted by the State to satisfy mandatory
coverage requirements under the NFIP.
Now, when Congress passed the National Flood Insurance Act,
its intention was that insurance companies would provide flood
insurance coverage for the American people. And when the
legislation that was recently updated under the Biggert-Waters
Flood Insurance Reform Act of 2012, that intention was, in
fact, reaffirmed.
However, due to the, I would say, lack of legal clarity on
the particulars of the insurance policies allowed into the
program, most lenders have not accepted private flood insurance
to meet mandatory coverage requirements.
This bill would solve this problem by providing a simple
and clear definition of private flood insurance accepted for
the mandatory coverage under the program, consistent with the
successful regulation of other forms of insurance in the
marketplace--that which is issued by an insurance company
licensed, admitted, or otherwise approved to engage in the
business of insurance in the State in which the property is
located.
I believe there will always be a need for the NFIP, but
there is more than enough flood risk out there that can be
written right now by the private insurers that are willing to
do so, whose capability will only continue to advance with the
growth of new technology and modeling.
Ensuring access to private flood insurance choices will
help reduce the risks to which taxpayers are exposed under the
Federal program. And especially because flood insurance
coverage is mandatory in many areas, customers need more
competition and options in the flood market to make it more
affordable.
So I ask that my colleagues on both sides of the aisle
support this legislation to give our people, our constituents
more choice, greater competition, and ultimately less costs
when it comes to flood insurance.
I came to Congress, as did most of us here, to work with
everyone, no matter what the party affiliation, and to solve
problems. I think this legislation is one example of an area we
can actually make some progress in this last year of this
Administration, and I urge my colleagues to do so.
In my remaining time, a question for Mr. Kelley: One topic
of discussion that we had in this conversation, writing this
legislation dealt with surplus lines and their role in this.
Approximately how many surplus lines, if you know off the top
of your head, flood insurance policies, in Florida have been
accepted for the purposes of NFIP mandatory purchase?
Mr. Kelley. I have the Florida data here somewhere. I have
it combined with six States, actually.
In 2014, $134.1 million worth of flood insurance premium
written in those six big States: Florida, California, Texas,
New York. $32.9 million of that, 24 percent of that, covers
residential property. And of that category, only about 29
percent represents primary coverage, the balance being excess
coverage on a personal residence.
So it is still a relatively small share of the overall
surplus lines market. It is less than 1 percent of the $40
billion market nationwide.
Mr. Murphy. Okay.
Mr. Birnbaum, in your opinion, how does this differ from
homeowners insurance? Both seem to be intended for the same
thing, where that is protecting the loan in an event of a
disaster. How do you see the difference?
Mr. Birnbaum. I don't. That is why our proposal is to
require that the homeowners insurance policy cover the peril of
flood. That would deliver that coverage far more efficiently
than through the requirement of a second policy. It would mean
that everybody gets the coverage that they expect and pay their
fair share for that coverage than under the current system.
And private flood is already being provided by the admitted
market to a greater extent than the surplus lines market. As I
mentioned earlier, force-placed flood--there is more force-
placed flood written by admitted carriers than the surplus
lines numbers that Mr. Kelley described.
So it is not as if it is unfeasible for admitted carriers
to write flood. It is feasible. The question is, what is the
best way to nudge the private market into this? And, in my
view, the best way is to require the coverage of flood in those
homeowners and commercial property policies, because that
accomplishes a variety of things, including problems with the
NFIP as well as fairness issues and promoting loss mitigation.
The problem with H.R. 2901 is it addresses a very narrow
issue but can create problems in other areas of the flood
program.
Mr. Murphy. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
We are going to go for a second round. I think everybody
has maybe just one or two questions, so it shouldn't be too
long. We do have votes coming up here shortly.
So, with that, we will go to the gentleman from Kentucky,
Mr. Barr. You are recognized for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Just to follow up on an issue, there is a pretty good
consensus here that we need to incentivize more private
participation in flood insurance, obviously. But beyond the
Ross-Murphy approach to bring in more surplus lines, companies
that write NFIP policies currently have to sign this noncompete
clause, which pushes these companies to the sidelines in terms
of developing and offering private flood insurance policies.
For any of the witnesses who are interested in this, would
you support language in H.R. 2901 or other legislation that
would eliminate this noncompete clause that is currently
required by FEMA?
Mr. Birnbaum. The answer to the question is, you can't
eliminate the noncompete clause without doing anything else.
Because if you eliminate the noncompete clause, then you have a
situation where the company is selling policies for FEMA and
also selling its own flood policies.
So what the company will do is it will make its evaluation
of what the riskiest policies are and give those to FEMA, and
keep the most profitable ones or the least risky ones. So what
you have is essentially adverse selection. So there is a reason
why there is a noncompete clause.
That is an example of, well, we will try to address one
narrow issue without looking at the broader problem. You really
need a comprehensive approach. And the comprehensive approach
is the private market provides flood as part of the residential
and commercial property insurance, subject to the standard
State-based regulation; the NFIP transforms to a catastrophic
reinsurer role.
And that enables all of the players to participate--private
markets, the State-based regulators, alternative capital. And
it puts the Federal Government in a role of focusing on loss
mitigation, which is the long-term solution to addressing flood
problems.
Mr. Barr. I would love Mr. Kelley to respond. But it seems
like, in advocating the TRIA model, you are avoiding this
adverse selection, cherry-picking issue, but you still have a
Federal backstop in either model. And I am just wondering which
is the better model?
Mr. Kelley, do you want to weigh in on that?
Mr. Kelley. Just to respond to the write-your-own
prohibition, I agree with your point, Congressman. I think that
is one barrier that we are seeing to the standard market
stepping in. If they are already involved in the write-your-own
program, they can't offer their own standalone program.
We haven't taken an association position on that. That has
not been an issue we have really focused on. But it clearly is
a barrier that I think would get more standard carriers
involved if it weren't there.
Mr. Barr. Ms. Miller, do you have any thoughts?
Ms. Miller. Congressman, we also are in the same position.
The NAIC hasn't taken a look at this issue. I think it is one
of the issues that, as we look at the NFIP and potential
recommendations we would make to modify that program, this
would be one of the things we would look at.
But I do think it is a very interesting issue to look at. I
think, from our perspective, H.R. 2901 would be a great first
step. And if we could do that quickly, then I think having the
conversation about changes to NFIP would make a lot of sense,
as well.
Mr. Barr. Let me just follow up with one final question.
Mr. Birnbaum is making the argument that the Ross-Murphy bill
would actually exacerbate the financial solvency problems of
the NFIP.
I think we all agree that we don't want to get the NFIP in
more financial distress than it already is. So, as advocates of
the Ross-Murphy approach, do any of you all--Ms. Miller, Mr.
Bradshaw, Mr. Kelley--want to address that issue?
Ms. Miller. I would be happy to.
I think the issue of cherry-picking is certainly a concern
and something that we would recommend monitoring going forward.
But, right now, as I have said a few times, this market is
very small. There is just too little data, I think, at this
point, to know how the market is going to react going forward.
So, from our perspective, if this bill were enacted sooner
rather than later, I think it would give us a chance to get
more data and really observe how this market is going to
perform going forward.
And I think that does a couple of things. I think, one, it
gives us--and all of us who are going to be looking at the
NFIP, it will give us more information to inform potential
changes to that program. But, also, from a State regulators
perspective, I think if we had more data, it will help us as we
look forward and think about ways we might need to change our
regulation to address this evolving market.
But I think, from our perspective, I certainly wouldn't
want concerns about cherry-picking to get in the way of us
providing more options for consumers in this market.
Mr. Barr. Mr. Kelley?
Mr. Kelley. And I think back to that 1-percent category of
properties. We have to admit, no one is lining up to write
those right away. And the thought of actually adding those
types of coverages, add a flood peril to that general
homeowners policy, that is going to price them out of their
home, in our opinion.
So if we can focus on at least shifting some of the burden
out of the Program, you at least reduce the overall risk. That
leaves you with, then, the category of the highest-risk
properties that perhaps a residual market is there to figure
out. And it, in our mind, would allow the NFIP then to focus on
what do you do about mitigating that risk, what do you do about
preventing flood damage in those areas.
Mr. Birnbaum. I just need to jump in quickly and say it is
absolutely crystal clear that this bill would allow surplus
lines and encourage surplus lines insurers to cherry-pick. It
is as obvious as the nose on your face. The only policies that
the surplus lines writers would do are the ones that they view
as profitable.
The NFIP has a variety of policies, ranging from less
profitable to more profitable, and what will happen is they
will be left with the less profitable policies, the highest-
risk policies, and less revenue to do it.
There is no question this bill will lead to greater
financial problems for the NFIP. And I am really surprised that
the other panelists are not acknowledging that.
Mr. Barr. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we will go to the ranking member, the gentleman
from Missouri, Mr. Cleaver, for some follow-ups.
Mr. Cleaver. Thank you, Mr. Chairman. And, again, before
we close out, I want to thank you for the vision of trying to
get this done much earlier than we normally try to get critical
legislation through.
I just have one question. My son is in school outside of
Los Angeles, and I go out and I see all of these houses built
on cliffs. That's like saying, ``I dare you to rain and wash my
house down the cliff.'' And because I am on this subcommittee,
I am always angry, driving through there, and saying little
words as I drive.
But those are usually wealthy people. The chairman and I
and Ms. Waters, we were in the Ninth Ward just a few months
ago, and Ranking Member Waters and I were there just a few
weeks after Katrina. I had a son in college down there at the
time. And it was just decimated. And the actor from Missouri,
Brad Pitt, raised a lot of money, and they rebuilt the Ninth
Ward. Most of the houses are now on stilts. But the people are
still there. And these are not rich people; these are poor
people. That ward was and still remains a low-income ward,
although the people go to work every day.
So would any of you believe that it is practical to expect
that poor residents, low-income residents, could actually pay
the full risk rate for private insurance? Or do they get left
out?
Mr. Birnbaum. The answer to that is they can't pay the
full risk rate if there is no loss mitigation. If they are in a
high-risk area and they are paying the full risk rate, then,
no, they are not going to be able to afford it. But they
wouldn't be able to afford a surplus lines policy either.
But the question is then, where do you want to spend your
Federal dollars? Do you spend your Federal dollars to subsidize
that policy, or do you spend your Federal dollars on loss
mitigation that reduces the exposure for that homeowner and
thereby reduces the premium?
If you just simply subsidize the rate, then you set the
table for future claims, repetitive claims. If you spend the
Federal dollars instead as an investment in loss mitigation,
then you reduce that exposure, reduce the claims down the road,
you reduce the disaster relief.
So the model has to be: Let's spend Federal dollars on loss
mitigation as a way to make the insurance more affordable
instead of subsidizing the rates. That is not a long-term
solution. Subsidy is not a long-term solution. Loss mitigation
investments are.
Mr. Cleaver. Yes, that would be a FEMA issue and not
necessarily one that we would have to deal with, the mitigation
issue.
Mr. Birnbaum. They go together, Congressman. You can't
tell the NFIP to offer subsidized rates and then say, invest in
loss mitigation.
Mr. Cleaver. They do in the real world. But this isn't the
real world. I would like for it to be, but that is just not the
way it is. I understand exactly what you are saying, and I
agree with what you are saying, if we were in the real world.
Mr. Birnbaum. You have the power to create that real
world.
Mr. Cleaver. Thank you.
Mr. Bradshaw?
Mr. Bradshaw. Just very quickly, as you know, Congressman,
there has been a huge investment in the levee system in New
Orleans, which we appreciate significantly. There was a huge
modernization of the levee system in New Orleans. So when you
live behind a dam, you have to be always conscious and always
vigilant if the dam starts leaking.
So the National Flood Insurance Program is a very important
program in order to help those folks who do need help to
maintain affordable housing. We are very much in favor of that.
Mr. Cleaver. Thank you.
Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentleman yields back.
With that, I have just a couple of follow-ups.
Mr. Kelley, during the course of the discussion, you
indicated that we have 1 percent of the policyholders who
create 30 percent of the loss. Mr. Birnbaum has been talking
about those guys and how do you adequately rate those folks,
how do you fund them, how do you not fund them. His suggestion
is you, through mitigation, take that 1 percent and reduce it
down as much as you can, I guess.
So my question is, do you believe--because today we are
talking about how we can shift from what we have now to a more
private market solution. Do you believe that if you take that 1
percent out, the other 99 percent of the policies can
actuarially be structured so that those 99 percent can afford
the coverage and take care of that other 70 percent of the
risk?
Mr. Kelley. I wish I could answer that question. I am not
the actuary in the room. I think there is a large percent of it
that you can. What percentage, I can't quote you.
Chairman Luetkemeyer. Because it would seem to me that
would be a key point. Because if you have 1 percent causing 30
percent of the problems, that is the group that is causing your
headaches. That is where your risk is. So if you can take the
other 70 percent of the risk and divide it among the 99 percent
of the policyholders, you would appear to me to be able to find
a way to fund this that would be affordable.
So my next question would be, as someone who represents the
industry and sees opportunity, how long do you think it would
take for the market to transition from where we are to where
they would be willing to take this 99 percent of the
policyholder risk on?
Mr. Kelley. Let me start by saying it is going to take
that transition to figure out how much of the 99 percent can
transition. But that is going to take some time--
Chairman Luetkemeyer. We have a transition period, but how
long do you think it would take?
Number one, is there a willingness within your companies
and the capacity to take this on in a 2-year, 5-year, 10-year,
20-year window? What would you anticipate being something that
would be reasonable for the companies to be able to do their
due diligence, get their mapping correct, get their modeling
correct so that they could see where they could come in, make
it a part of the homeowners policy, as Mr. Birnbaum suggested,
which I, quite frankly, like? How long do you think it would
take?
Because one of the concerns that we have as a committee is,
if we are going to try to go from here to there, we need to
have an idea time-wise. And the testimony today is very
important to us to be able to do that. And I am not going to
hold you to it, but it certainly gives us a guideline to begin
discussions.
Mr. Kelley. I would say that there is capacity already
there. As the Commissioner already testified, most of what we
are seeing transition out of NFIP is to surplus lines carriers
now. So there is capital there. There is a lot of capital in
surplus lines.
But, long term, our model--we wouldn't expect that business
would stay in surplus lines for a very long time. Many types of
coverages evolve out of surplus lines into the standard market.
That is how the model works. That is how the market should
work.
Chairman Luetkemeyer. What you are saying is eventually it
would go into Mr. Birnbaum's model of being a part of the
homeowners policy itself?
Mr. Kelley. I think you are. Eventually, as the standard
market does their own investment in technology and modeling and
expertise with the risk, I think you will see many of them
start to add that peril to their standard homeowners policies.
It is that time between now and then that our market acts as
the residual market.
Chairman Luetkemeyer. Okay. Thank you.
Let me yield to the gentleman from New Jersey, Mr. Garrett,
for 5 minutes.
Mr. Garrett. Thank you. And I won't use the whole time.
I thank the panel. We have been following some of your
testimony back in the office. So just to play off of your
points, I guess I will throw it out to Mr. Kelley, and I know
it is in some sense putting you on the spot as trying to be the
actuary in the room. And what do they say about actuaries?
Those are the people who found being a CPA was just too
exciting? Something like that.
So, in any event, the question that you posited is what? If
you did it what a 1 percent, 99 percent, what would the
situation look like, and your answer was that you couldn't
exactly say for sure. But I am guessing that if you did it that
way, that for the 99 percent--and anybody else can chime in on
this--it would be a more favorable rating structure for them
than it is right now, right?
So, in New Jersey, if I am in, I am not, but if I am in
that 99 percent right now after the last go-around with the
maps and what have you, I am seeing my rates go so high that I
am having to sell my place, is what--not me, but the people
back in Jersey are finding that. If you went to this 1 to 99
situation, theoretically my premiums might be more reasonable.
Do you want to--
Mr. Birnbaum. Yes, I don't think so.
Mr. Garrett. Mr. Birnbaum, too.
Mr. Birnbaum. I don't think that--
Mr. Garrett. Is that true or not?
Mr. Birnbaum. Here are the facts. There are 5.2 million
NIFP policies, and there is well over a million that are
subsidized. And the exact number isn't known because there are
a bunch of policies that not only are Pre-FIRM subsidized but
also grandfathered--
Mr. Garrett. Right.
Mr. Birnbaum. --subsidized.
Mr. Garrett. Good point.
Mr. Birnbaum. So you are talking about 20 to who-knows-
what percent of the policies are subsidized. So to suggest that
if we take out the 1 percent somehow that all of a sudden it
has become affordable for the 20 or the 30 percent where it is
currently subsidized, that is just not going to happen.
So you cannot create affordability strictly through the
insurance pricing mechanism.
Mr. Garrett. So--
Mr. Birnbaum. There is always going to be a situation
where some consumers can't afford a risk-based price. And you
need some assistance from outside the system. We don't--for
example--
Mr. Garrett. That gets to the second point of the
question. Because I get that, but then perhaps some of those
people are living in areas that maybe are just not a risky or
an overly risky place to be. And that has to be taken into
consideration as well.
Does anyone think that there would be a difference if you
go to that direction, either 100 percent or 1 to 99 percent, as
far as the mitigation? And I heard some of the talk before as
the necessity for mitigation, would there be a change in the
mitigation processes on the private sector versus the public
way that we do it right now?
Mr. Birnbaum. Oh, absolutely, Congressman. If--
Mr. Garrett. For the better?
Mr. Birnbaum. Yes. If the private sector were responsible
for flood insurance as part of the homeowners policy, they
would have an incentive for loss mitigation that they simply
don't have right now.
Mr. Garrett. Okay.
Mr. Birnbaum. So you would see things like partnerships
for loss mitigation. You might see multiyear homeowners
policies where the loss mitigation is financed with a loan that
is paid for from the discounts.
Mr. Garrett. Okay.
Mr. Birnbaum. There are opportunities for innovation that
simply aren't going to occur by saying, let's hope the private
sector gets involved if the surplus lines puts its toes in the
water.
Mr. Garrett. With that, I am going to yield back. I see I
am over time.
Chairman Luetkemeyer. Mr. Bradshaw would like to respond.
Mr. Garrett. Oh, sure.
Chairman Luetkemeyer. Go ahead.
Mr. Bradshaw. Just a really quick response. Of course we
now experience 5 percent named storm deductibles in hazard
insurance in our particular marketplace. And so we continue to
have that risk. And as a lender then we accept part of that
risk. And that is typically what we are seeing unless you buy
down to a 2 percent named storm.
Now, that is not flood insurance, but that is the hazard
insurance. And there is not much loss mitigation on hurricanes.
Mr. Garrett. I thank the Chair.
Chairman Luetkemeyer. Just as a follow-up comment to Mr.
Birnbaum's point, I think if you wind up with the private
insurers trying to figure out what to do with the 1 percent and
say you can incentivize that group for mitigation by saying if
you do these things, we will drop your premium, and therefore
you can have an impact in that way, I believe, as well.
So, it is a fantastic and a fascinating conversation we
have had this morning. And I certainly want to thank all of the
witnesses. You have answered a lot of the questions that we
have had. You have given us a lot of food for thought. You have
kind of broadened our scope of what we are trying to find here
and trying to look to do.
Trying to see once how we restructure the program, what we
can do, what the private sector is willing to do, how different
innovations can be a part of this. Regulatory-wise how this can
be overseen to make sure that the consumers are protected yet
there is adequate provisions in policies that--to provide
coverages that are real and meaningful. So, I thank all of you.
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, the hearing is adjourned.
[Whereupon, at 11:26 a.m., the hearing was adjourned.]
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