[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE FACTORS INFLUENCING THE HIGH
COST OF INSURANCE FOR CONSUMERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON HOUSING
AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 2, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-53
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-022 PDF WASHINGTON : 2024
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas, Vice EMANUEL CLEAVER, Missouri
Chairman JIM A. HIMES, Connecticut
TOM EMMER, Minnesota BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
ANDREW GARBARINO, New York SYLVIA GARCIA, Texas
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on Housing and Insurance
WARREN DAVIDSON, Ohio, Chairman
BILL POSEY, Florida EMANUEL CLEAVER, Missouri, Ranking
BLAINE LUETKEMEYER, Missouri Member
RALPH NORMAN, South Carolina NYDIA M. VELAZQUEZ, New York
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York RITCHIE TORRES, New York
MIKE FLOOD, Nebraska AYANNA PRESSLEY, Massachusetts
MIKE LAWLER, New York SYLVIA GARCIA, Texas
MONICA DE LA CRUZ, Texas, Vice NIKEMA WILLIAMS, Georgia
Chairwoman STEVEN HORSFORD, Nevada
ERIN HOUCHIN, Indiana BRITTANY PETTERSEN, Colorado
C O N T E N T S
----------
Page
Hearing held on:
November 2, 2023............................................. 1
Appendix:
November 2, 2023............................................. 41
WITNESSES
Thursday, November 2, 2023
Arnold, Grace, Commissioner, Minnesota Department of Commerce, on
behalf of the National Association of Insurance Commissioners
(NAIC)......................................................... 4
Gordon, Robert, Senior Vice President, American Property Casualty
Insurance Association (APCIA).................................. 6
Lewis, Sharon, Executive Director, Connecticut Coalition for
Economic and Environmental Justice............................. 12
Nutter, Franklin W., President, Reinsurance Association of
America (RAA).................................................. 7
Petrelli, Joseph, President and Co-Founder, Demotech, Inc........ 9
Webel, Baird, Specialist in Financial Economics, Congressional
Research Service (CRS)......................................... 10
APPENDIX
Prepared statements:
Arnold, Grace................................................ 42
Gordon, Robert............................................... 50
Lewis, Sharon................................................ 78
Nutter, Franklin W........................................... 83
Petrelli, Joseph............................................. 104
Webel, Baird................................................. 106
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the Affordable Housing Tax Credit
Coalition.................................................. 114
Written statement of the Consumer Federation of America...... 117
Written statement of Carolyn Kousky, Associate Vice
President, Economics and Policy, Environmental Defense Fund 137
Written statement of Lincoln Avenue Communities.............. 149
Written statement of the National Multifamily Housing Council
and the National Apartment Association..................... 152
June 2023 report of the National Multifamily Housing Council,
``State of Multifamily Risk''.............................. 167
ndp analytics report, ``Increased Insurance Costs for
Affordable Housing Providers,'' dated October 2023......... 217
Written statement of Ishita Sen, Assistant Professor of
Finance, Harvard Business School........................... 242
Arnold, Grace:
Written responses to questions for the record from
Representative Donalds..................................... 256
Gordon, Robert:
Written responses to questions for the record from
Representative Gonzalez.................................... 260
Webel, Baird:
Written responses to questions for the record from
Representative Gonzalez.................................... 264
THE FACTORS INFLUENCING THE HIGH
COST OF INSURANCE FOR CONSUMERS
----------
Thursday, November 2, 2023
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. Warren Davidson
[chairman of the subcommittee] presiding.
Members present: Representatives Davidson, Posey,
Luetkemeyer, Fitzgerald, Flood, Lawler, De La Cruz, Houchin;
Cleaver, Velazquez, Tlaib, Garcia, Williams of Georgia,
Horsford, and Pettersen.
Ex officio present: Representative Waters.
Also present: Representatives Kim and Gonzalez.
Chairman Davidson. The Subcommittee on Housing and
Insurance will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
This long-awaited, much-anticipated hearing is entitled,
``The Factors Influencing the High Cost of Insurance for
Consumers.''
I now recognize myself for 5 minutes to give an opening
statement.
Today, the subcommittee will hold a hearing to discuss the
factors influencing the high cost of insurance for consumers
across the country. It is, unfortunately, a topic that both
families and businesses are grappling with on top of the
already-steep cost of inflation and interest rate increases.
We welcome today the testimony of our distinguished panel
of witnesses, each of whom can address the cost and
availability of insurance from several different perspectives.
Specifically, I would like to welcome Mr. Joseph Petrelli,
who runs Demotech, Incorporated, which is an independent
insurance rating agency out of Dublin, Ohio. Given his decades
of experience in the insurance industry, Joe has a unique
perspective on the challenges facing the insurance markets at
this time.
I look forward to hearing the insights of Joe and the rest
of our witnesses. And this hearing comes at a critical time, as
consumers are facing record-high property and casualty
insurance bills. Homeowners' insurance costs are surging in
many areas, with Americans paying between $1,500 and $2,500 a
year on average, but many communities outside of this range
have seen premiums increase by multiples of what they had paid
in previous years. In addition, this year, the price of
commercial property premiums experienced the largest single-
year increase in over 20 years. Such costs are untenable for
many, forcing homeowners to move to areas with less-expensive
coverage, pushing up prices for rent and commercial properties
at a time when housing costs are at record highs.
Meanwhile, losses for insurers are going up. Companies are
paying out 104 percent in claims for every premium dollar they
have taken in thus far in 2023, which would be 4 percent more
than what they are bringing in. Add to that the growing market
risk stemming from widespread lawsuit abuse from trial
attorneys who are now spending hundreds of thousands of dollars
each month on paid keyword search results. Those results are
designed to target recent disaster victims and other insurance
claimants and trick them into filing frivolous lawsuits.
More and more, it seems that the insurance industry is at a
tipping point where the risks of providing insurance are making
the cost of insurance unsustainable even in the best regulatory
environments, and shaping our development, which is why it is
so problematic when you have officials who ought to know better
making bad and politically-motivated decisions that add costs
and decrease availability for insurance.
We have seen that often in the California market, for
example, as discussed in committee hearings in the last year,
where the imposition of environmental, social, and governance
(ESG) mandates have prevented insurers from charging
actuarially-sound rates or using modern modeling tools to
manage wildfire risk.
We have also seen problems with the Federal Insurance
Office (FIO), a Federal nonregulatory entity that is supposed
to monitor the industry to help actual regulators make better
choices. Instead, we have seen the Biden Administration abuse
the FIO and turn it into a politically-charged advocate for the
Biden Administration's social agenda. The FIO is attempting to
bypass State insurance commissioners and add massive new costs
onto policyholders' bills through an unprecedented mandatory
climate data call.
In fact, this week, the FIO has made clear that they are
moving forward with this misguided effort. Despite widespread
blowback, as I said in a March letter to FIO, that is not just
wrong; it also raises real questions about FIO's continued
mission creep, leading to multiple bills being introduced to
rein in this spiraling-out-of-control office, all of which
brings us to the fundamental point here. Insurance is, has
been, and should remain a State-regulated product, free from
the involvement and clutches of meddling Federal bureaucrats.
Support for the longstanding principles of the McCarran-
Ferguson Act is something that every member of this committee
should stand by and affirm as the best way to protect
policyholders and create healthy functioning markets that
represent the differences in our diverse States.
I hope everyone here will show support for that ideal
today. I yield back the balance of my time.
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. If I could ask the
subcommittee's indulgence for a minute, I wanted to mention
that Mr. Frank Nutter, who was been in front of this committee
many, many times--I have been on the committee for almost 19
years, and over that 19-year period, he has been here like,
every other Thursday--is going to retire just because he wants
to be happy and selfish. He just wants to enjoy himself, and I
just wanted to use this opportunity to say thank you for all
the times you appeared before this committee. Thank you very
much.
[applause]
Mr. Cleaver. Like most Americans, the people in my
congressional district want to go to work, build meaningful
wealth, and provide for the safety and security of their
families. Access to affordable insurance is central to that.
Americans look to insurance to protect their homes,
automobiles, businesses, and communities, and for the security
of knowing that, if worst comes to worst, the losses will not
be crippling. But more and more Americans are opening their
mailboxes and checking their emails only to learn that this
protection is being restricted, becoming significantly more
costly, or that major insurance companies are leaving
altogether.
Since January 2022, an astounding 31 States have witnessed
double-digit rate increases. For lower-income homeowners and
those on fixed incomes, rising rates can just about wipe them
out of their homes. It increases the rental costs or forces
people to drop insurance altogether, which might otherwise be
their sole source of funds to rebuild. And it is often the case
that people in low- and moderate-income communities may both
need insurance the most and have the least ability to pay the
increasing cost of higher insurance premiums.
Affordable housing providers and residents are among the
hardest hit by insurance premium hikes, and those who cannot
afford insurance sometimes go without. When Hurricane Harvey
dumped approximately 4 feet of rain on Houston, Texas, in 2017,
8 out of 10 homeowners whose properties flooded did not have
flood insurance. And in 2022, insurance covered only 60 percent
of $165 billion in total economic loss for climate-related
disasters affecting millions of Americans.
It is my hope that during this hearing, we can get an
answer to how the people in this room are going to work
together to bring down the cost and increase the availability,
not the political legislation put forth for this hearing as to
eliminate the Federal Government's insurance experts, but
serious bipartisan solutions to the crisis.
We know that there are several factors contributing to the
increasing cost and decreasing availability of insurance for
consumers in certain areas. This includes inflation-related
costs, rising asset prices in hazardous areas, increased cost
of risk transfer, reinsurance litigation costs, and others. The
most significant cost increase for property insurance has been
attributed to the rising threat of climate change. As of
October, the U.S. set a record of 24 billion-dollar disaster
events in 2023, totaling $57.6 billion in damages.
Prior to 2025, insurance losses due to climate disaster
never exceeded $50 billion. In response to climate-related
risks, insurers can be expected to adapt their underwriting in
various ways, some of which have adverse implications for the
availability and affordability of insurance coverage in certain
insurance markets. Concerning to me, there is not yet a
systemic nationwide picture of what the climate crisis is doing
to the availability and affordability of insurance.
Let me be clear: Under McCarran-Ferguson, insurance is
correctly regulated at the State level, but it is a national
responsibility to understand, monitor, and supervise the
response to the insurance crisis given the great national
implications. You don't need to look much further than the
National Flood Insurance Program (NFIP), which was created in
1968 following widespread insurer withdrawals from offering
coverage for flooding, to understand that insurers withdrawing
from the markets or rising premiums leads to increased
uninsured losses, and shifts risk to consumers, leading
taxpayers or the government to pick the risks. Congress needs
to advance the long-term reauthorization of the NFIP. Thank
you, Mr. Chairman, for your indulgence.
Chairman Davidson. Thank you. I thank the ranking member.
Today, we welcome the testimony of: Grace Arnold, the
Commissioner of the Minnesota Department of Commerce, here on
behalf of the National Association of Insurance Commissioners;
Robert Gordon, the senior vice president of policy for the
American Property Casualty Insurance Association; Frank Nutter,
the president of the Reinsurance Association of America; Joseph
Petrelli, the president and co-founder of Demotech, Inc., in
Dublin, Ohio; Baird Webel, a Specialist in Financial Economics
at the Congressional Research Service; and Sharon Lewis, the
executive director of the Connecticut Coalition for Economic
and Environmental Justice.
We thank each of you for taking the time to be here. You
will each be recognized for 5 minutes for an oral presentation
of your testimony, and without objection, your written
statements will be made a part of the record.
Commissioner Arnold, you are now recognized for 5 minutes
to give your oral remarks.
STATEMENT OF GRACE ARNOLD, COMMISSIONER, MINNESOTA DEPARTMENT
OF COMMERCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS (NAIC)
Ms. Arnold. Chairman Davidson, Ranking Member Cleaver, and
members of the subcommittee, thank you very much for the
opportunity to testify today. My name is Grace Arnold and I am
the Commissioner of the Minnesota Department of Commerce, which
serves as the State's insurance regulator. And as such, I am a
member of the National Association of Insurance Commissioners
(NAIC), where I am the co-vice chair of the Property and
Casualty Insurance Committee, and I serve on the Climate and
Resiliency Task Force. I appreciate the opportunity to testify
today.
The United States' insurance market is the single-largest
and most-competitive market in the world. State insurance
regulators supervise more than one-third of global premiums.
And as of 2022, property and casualty insurance companies
reported over $874 billion in direct written premiums. The U.S.
property and casualty insurance industry's cash and invested
assets surpassed $2.4 trillion at the end of 2022. State
regulators share a mission to ensure a stable, competitive, and
fair insurance marketplace where U.S. consumers are well-
informed and well-protected. States work hard to strike an
appropriate balance between insurers' solvency and product
availability and affordability. We oversee risk financing that
allows individuals and businesses to thrive, while preserving
the ability of the sector to pay claims and otherwise meet
obligations that result from financing risk.
As we look ahead, State regulators are addressing several
evolving dynamics. First, we are monitoring the interplay
between the impact of inflation on pricing and claims, the rise
of interest rates, and the fall of investment returns, and the
impact of climate risk. These are a few of a host of other
macroeconomic and real-world factors at play in our markets.
This is not the first time State regulators have seen such
cyclical growth and contraction in the property insurance
markets, and we have taken action to address the particular
challenges we see nationally and locally. State regulators have
the capacity to respond swiftly and nimbly to market conditions
in each of our markets. Through the NAIC, we are able to share
ideas and coordinate effective responses, though our solutions
do not have to look the same State to State. For example, the
NAIC's Climate Risk and Resiliency Task Force has facilitated
the implementation of climate-related risk disclosures by 85
percent of the insurance market. They have updated solvency
formulas to reflect hurricane, earthquake, and wildfire risks.
They have partnered with FEMA and the Insurance Institute for
Business & Home Safety to create more resilient and sustainable
communities, and established a catastrophe modeling center of
excellence to provide modeling resources. That group is in the
process of a property data call to help better understand
coverages and gaps.
At the State level, recently, Florida implemented changes
to their claims litigation process, while California is in the
process of allowing insurers to consider catastrophe modeling
and reinsurance costs when requesting rate increases. In
Minnesota, we borrowed the idea for a program to help
homeowners improve the exterior of their homes from colleagues
in Alabama and Louisiana, and adapted it to the weather perils
we see in Minnesota. All of these initiatives are responding to
challenges in each State's property insurance market.
We direct your attention to two ways that Congress can help
to improve the resilience of our housing stock and drive down
the cost of insurance: first by reauthorizing the National
Flood Insurance Program (NFIP) on a long-term basis; and
second, by passing the bicameral, bipartisan Disaster
Mitigation and Tax Parity Act of 2023, which would provide fair
tax treatment to State residential mitigation grants.
Another evolving dynamic that State regulators are
addressing is the increased use of technology, Big Data,
artificial intelligence (AI), and predictive analytics to
reshape the insurance marketplace, and the way insurers
approach risk and engage with consumers. These technological
developments have the potential to improve how an insurer does
business and can benefit policyholders. Our written testimony
provides context for these evolving dynamics and some of the
longstanding and new initiatives State regulators are working
on to address these challenges through the open and transparent
NAIC process. I appreciate the subcommittee's leadership and
look forward to answering your questions.
[The prepared statement of Commissioner Arnold can be found
on page 42 of the appendix.]
Chairman Davidson. Thank you. Mr. Gordon, you are now
recognized for 5 minutes to give your oral remarks.
STATEMENT OF ROBERT GORDON, SENIOR VICE PRESIDENT, AMERICAN
PROPERTY CASUALTY INSURANCE ASSOCIATION (APCIA)
Mr. Gordon. Chairman Davidson, Ranking Member Cleaver, and
members of the subcommittee, I am Robert Gordon, senior vice
president of the American Property Casualty Insurance
Association (APCIA), the primary trade association for the
property casualty insurance industry, and thank you for the
opportunity to testify today.
Insurers' core business is protecting people and helping
them recover from catastrophic losses to their homes, cars, and
businesses, and I would like to be here today to tell you that
the insurance industry is extremely strong, stable, and
profitable, but I can't. Ratings agency, AM Best, last month
downgraded the entire homeowners insurance industry from stable
to negative, with a total number of downgrades of homeowners
and car insurers more than doubling in just the first half of
this year.
APCIA reports regular financial operating results for the
industry. Last year, insurance capital plummeted more than $73
billion. Our surplus contracted dramatically. Insurers' net
underwriting losses last year were the worst in over a decade,
and for the first half of this year, for every dollar collected
in premiums, insurers paid $1.43 in claims and expenses. For
this year, overall, S&P predicts that auto insurers are going
to have an 8.7 percent net underwriting loss, and homeowners
insurers a 12.1 percent loss, which will be the worst in over a
decade.
Our challenge is really simple: supply and demand
economics. Insured costs and exposures are rapidly escalating
much faster than regulators are allowing rate increases. An
industry that is losing money is just not going to be able to
attract new investment capital, and as a consequence, there is
not enough of a supply of insurance capital to cover consumers'
increased coverage needs.
The average global natural catastrophe insured losses have
nearly doubled over the last decade, and the United States this
year has experienced a record number of recent disasters, and
those numbers are increasing. The number-one driver of property
losses has been the accumulation of asset values in high-
climate-risk regions that is particularly from a rapid
population growth in coastal areas and the wildland urban
interface, and that is a trend that accelerated with the
pandemic.
Economic inflation is the other top last cost driver.
Inflation has risen 22 percent over the last 5 years, but our
insurance input costs have risen much faster, much higher, and
much worse than inflation. Used cars and trucks, which are the
basis for auto insurance total loss settlements, increased
nearly 40 percent over the last 5 years. Building replacement
values increased 44 percent, more than double the cumulative
inflation rate and far more than the increase in homeowners'
insurance. So, a home in Florida or California that someone
might have bought 5 years ago for $400,000, now costs nearly
$600,000 to replace.
Climate change is another cost driver as is legal system
abuse. They significantly reduce insurance affordability over
time. Swiss Re estimates that U.S. liability claims costs rose
16 percent, on average, for the last 5 years, and that is
fueled in part by some of the secretive third-party litigation
financing.
Insurance is fundamentally a risk pooling and spreading
passthrough mechanism, and in times of high inflation,
regulators want to protect consumers from price increases. But
if insurers are not allowed to pass costs through in a timely
manner, markets are going to rapidly deteriorate, and that is
what is going on right now in several States, causing
deteriorating markets and crises. Our member insurers have
invested billions of dollars developing insurance markets and
relationships with the policyholders, their load, the pullback
from those markets, but you can't keep selling your product at
a loss and remain solvent.
Now, there are solutions that APCIA and our members have
been supporting--dozens of climate mitigation resiliency
programs that can help reduce losses. It can help make
insurance more affordable for consumers over time. The
Insurance Institute for Business & Home Safety (IBHS) has
developed extensive building code improvements, and very
exciting new wildfire safety standards, and we have worked
extensively with the Administration's Wildland Fire Mitigation
and Management Commission, that has recommended a number of
great wildfire management and safety recommendations. And we
are supporting improved vehicle and highway safety standards,
particularly in some of the high-risk neighborhoods, and we
hope policymakers can address inflation and climate change and
legal system abuse.
But ultimately, the markets are only going to stabilize
when the gap between rates and losses is addressed and when
property casualty insurers are allowed to earn a rate of return
sufficient to attract the additional investment capital needed
to cover escalating consumer exposures. Thank you, and I look
forward to your questions.
[The prepared statement of Mr. Gordon can be found on page
50 of the appendix.]
Chairman Davidson. Thank you. Mr. Nutter, you are now
recognized for 5 minutes to give your oral remarks.
STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE
ASSOCIATION OF AMERICA (RAA)
Mr. Nutter. Chairman Davidson, Ranking Member Cleaver, and
members of the subcommittee, thank you for the opportunity to
testify today and, frankly, for the many times over the years
that this committee has honored me with that opportunity.
At its core, insurance is the assessment of risk and a
means to transfer individual property risk to a larger pool of
insurers and capital providers. It has proven to be the most-
efficient means to provide financial recovery for property
owners experiencing losses from natural catastrophes. Property
insurance is at the intersection of extreme weather and
decisions made by individuals and by the communities in which
they live about the features of properties at risk and the
resilience of communities that are, in the words of one
analyst, ``creating disasters by design.'' This is reflected in
the trends in insured property losses from natural catastrophes
reflected in our statement. These trends are due primarily to
increases in the number and value of properties at risk due to
extreme weather; external economic factors, such as inflation,
affecting construction costs; and increased risk vulnerability
and hazard intensification. R Street Analytics assesses that of
the 144 million properties in the United States, fully 1 in 4
are exposed to high risk due to wildfire, wind, and flood.
People are increasingly living in desirable but dangerous
places.
Both the business model of insurance and the State
regulatory system that oversees it are principally
retrospective in nature, utilizing primarily past loss data.
However, there is tension between both retrospective models in
a world of dramatically-increasing natural catastrophe risk and
rising economic factors such as inflation. The past is truly
not prologue in this context. Failing to incorporate future
risk assessment into insurance rates and loss mitigation
strategies dooms communities to solutions that will quickly
become inadequate, subjects consumers to rate shocks as risk-
based rates are implemented, and undermines one of the
principal roles of insurance, which is to communicate risk via
rates.
The rising cost of consumer insurance has been attributed
in part to the cost of reinsurance. And insurers purchase
reinsurance for a variety of reasons: to increase capital to
support its portfolio of insurance in force; to diversify its
risk profile across global and reinsurance markets; and to
transfer the volatility of infrequent, but severe, loss events.
Insurers are not required to purchase reinsurance but do so
because it is a cost-efficient way to manage catastrophe risk.
Reinsurance rates are not the principal driver of the
changing risk landscape; they are a reflection of it.
Reinsurance costs do not translate directly to consumer rates.
Reinsurance contracts cover a portfolio of properties above an
aggregate loss experience and are not passed through cost
directly to individual properties. Reinsurance contract terms
vary by insurer, and rates charged to consumers by those
insurers incorporate many factors. Reinsurance costs, even
where significant, may be a small factor in consumer rates
relative to other factors. Even if an insurer had no
reinsurance, it would still need to set its rates to reflect a
true risk-based rate.
Insurers, reinsurers, and the utilization of reinsurance is
regulated for financial oversight purposes pursuant to State
law. That is understandable, as each State has a unique profile
related to its economy, its legal environment, its exposure to
natural perils, and its philosophy of regulation. Well-meaning
but restrictive insurance regulation is counterproductive to
achieving solutions to property insurance market issues.
Insurance regulation by each State should incorporate risk-
based rates in a more-efficient rate review process, include a
factor for forward-looking risk assessment, and provide
incentives for homeowners and small businesses to mitigate
risk.
We have identified a number of items in our written
testimony about what Congress should do, but let me highlight
four. The first is to reform Federal programs to incentivize
people to live in resilient homes and communities. The second
is increased funding for pre-disaster mitigation grant programs
like FEMA'S Building Resilient Infrastructure and Communities
(BRIC) Program, and for funding for NOAA and NASA to improve
weather and climate risk assessment.
The third is to incentivize governments through Federal
disaster assistance to adopt Statewide building codes and use
forward-looking risk assessment in land use. And the fourth is
to enact tax credits for pre-disaster mitigation, exempt State
and local mitigation grants from Federal income taxation, and
encourage the private sector to invest in obligations of
government at all levels for resilience projects like those
benefiting from the Community Disaster Resilience Zones Act.
We look forward to working with the committee to enhance
community resilience, recovery, and disaster preparedness.
Thank you.
[The prepared statement of Mr. Nutter can be found on page
83 of the appendix.]
Chairman Davidson. Thank you. Mr. Petrelli, you are now
recognized for 5 minutes to give your oral remarks.
STATEMENT OF JOSEPH PETRELLI, PRESIDENT AND CO-FOUNDER,
DEMOTECH, INC.
Mr. Petrelli. Thank you, Chairman Davidson, Ranking Member
Cleaver, and members of the subcommittee. I have been employed
in the insurance industry since 1969, when I entered The
College of Insurance, so I have seen over 50 years of
availability and affordability crises.
The current one that the subcommittee is addressing is
unique in several ways. While all lines of insurance are
subject to fluctuations in price due to claims frequency and
severity, the material damage lines--Farmowners, Homeowners,
Automobile physical damage--are directly impacted by the
inflationary costs on core materials--lumber, tiles, bumpers
and grills, etc.,--the inflationary costs on the salaries,
benefits, and training of the skilled professionals who effect
repairs, and the shortage of the skilled professionals who
effect repairs. The cost of reinsurance to spread the costs is
certainly included in the premium, but then we also, in
catastrophe-prone areas, look at the efficacy and calibration
of catastrophe models and the simulations upon which insurers
base their purchase for reinsurance.
But in addition to these traditional drivers of cost, in
this particular availability and affordability crisis, research
pioneered by Demotech, initiated in March of 2022, and
undertaken by Todd Kozikowski, a seasoned technologist with 25
years of artificial intelligence, machine learning and data
analytics expertise, discovered that opportunists have been
using the capabilities of the internet to initiate and generate
contested claims against insurers. Demotech calls this, ``tech-
enabled claims instigation.'' It is the confluence of
litigation financing, litigation marketing, litigation
platforms, and search engine optimization by opportunists
seeking to secure contested claims. This is a significant
contributor to the availability and affordability crisis that
this subcommittee now faces.
A few examples will give you a sense of the scope of this
issue. In the Southeast, a single law firm targeting a single
regional carrier purchased over 100 keywords in an effort to
outrank that carrier for its own claims department phone
number. For successful clicks, the law firm paid over $300,000
per month. In Southern California, 19 law firms in 49 locations
target insurers. Those 19 law firms spend nearly a million
dollars a month in online advertising.
In 2022, when Hurricane Ian approached Florida, and in
2023, when Hurricane Idalia approached Florida, opportunists
set up websites to enable insureds to report claims to them,
not to insurers, 3 to 5 days before the storms were making
landfall; they were still out in the Gulf. And as the Maui
wildfires burned, opportunists were setting up websites for
policyholders to report claims, not to the insurers, but to the
opportunists.
In closing, to paraphrase Allen Kerr, former Commissioner
of Insurance for the State of Arkansas from 2015 to 2020, when
he was informed about our discovery of tech-enabled claims
instigation, ``The threat that has been unearthed has never
been identified at the State or national level until now.''
This is a new determinant in the availability and affordability
that this subcommittee seeks to address.
Thank you for your time. And thank you for your kind
attention.
[The prepared statement of Mr. Petrelli can be found on
page 104 of the appendix.]
Chairman Davidson. Thank you. Mr. Webel, you are now
recognized for 5 minutes to give your oral remarks.
STATEMENT OF BAIRD WEBEL, SPECIALIST IN FINANCIAL ECONOMICS,
CONGRESSIONAL RESEARCH SERVICE (CRS)
Mr. Webel. Mr. Chairman, Ranking Member Cleaver, and
members of the subcommittee, my name is Baird Webel. I am a
Specialist in Financial Economics at the Congressional Research
Service (CRS). And before I go into my testimony, I just want
to make sure, especially for the people listening, that we know
that CRS is a division of the Library of Congress. We are
nonpartisan, and our job is basically to provide research and
analysis to Members of Congress. We do not take positions on
legislation or policy measures before Congress.
To address the hearing topic today, basically, I see three
somewhat interrelated factors that are driving the high prices
of insurance, and many of these have already been addressed.
You have two broad ones in the first. In the macroeconomic
environment, higher inflation, higher interest rates feed
through fairly directly into insurance prices, and even more so
when you have the inflation hitting areas like building costs
and automobile replacement costs that are driving higher than
the top line inflation.
The other broad factor is increasing disaster losses. This
has been going on for several decades, that the level of
catastrophe losses has been increasing across the country, and
it hasn't been just the sort of headline, high-level hurricane
losses that people tend to think about. The losses are also
coming in mid-level storms, and wildfires, which in the
insurance parlance are called, ``secondary perils.''
The third, and more idiosyncratic factor, I would say, is
in some particular States, especially California and Florida,
you have seen factors in the insurance regulatory environment
that have driven market issues and market disruptions, supply
disruptions, which will feed through into prices in those
States. And of course, especially given the size of California
and Florida, if prices go up in those States, you will actually
see an effect in national statistics because of the size of
those markets.
I think that when you look at these factors, though, of
course, what people immediately ask is, what can we do about
it, and for Congress, I think if there is any good news in the
situation, it is that some of these factors are cyclical.
Property casualty markets are prone to what is known as, ``hard
markets,'' where supply contracts, prices go up, and then, the
markets react.
And so especially in terms of inflation, in terms of
interest rates, we are not likely to see a situation where
inflation basically goes from almost zero to 6 or 7 percent
again, and that shock is one of the things that really drives
the problem in an insurance market. Insurance carriers in the
past, in the 1970s, adapted to inflation that was much higher
than what we have today. But when you have a shock where you go
from essentially zero to a higher amount, that drives
disruption in the market.
Equally, I think some of the States, both California and
Florida, have at least started to address some of the problems
in terms of changing some policies and changing some laws. And
that works through the markets, then the markets in those
States may stabilize to some degree, which leads to the third
factor, which is driving higher catastrophe and disaster
losses, and this, frankly, is a much harder thing to deal with.
I think that at one level, what you can do is you need to
do whatever one can to try to drive down those losses through
mitigation, as was mentioned, through grant programs, through
hardening properties, through trying to address the wildfire
issues in terms of forest management, and really, a whole host
of different things that the Federal Government might do.
At the insurance side, in the past, the Federal Government
has addressed sort of supply issues like this in the market in
several different ways. In the National Flood Insurance Program
(NFIP), you see direct Federal provision of insurance when the
market failed. In the Terrorism Risk Insurance Act, you saw a
Federal provision, basically reinsurance, to provide a backstop
to the market as it started to fail. And also in the third, in
the Liability Risk Retention Act in the 1980s, you saw what was
essentially a deregulatory approach to try to increase private
supply in the market.
So, those are probably the only three times that you have
seen fairly deep Federal involvement in these kinds of issues.
It does not happen a lot, but it has happened, and I know that
people are talking about using some models like that
potentially in the future. With that, I will end my testimony,
and I look forward to any questions.
[The prepared statement of Mr. Webel can be found on page
106 of the appendix.]
Chairman Davidson. Thank you. Ms. Lewis, you are now
recognized for 5 minutes to give your oral remarks.
STATEMENT OF SHARON LEWIS, EXECUTIVE DIRECTOR, CONNECTICUT
COALITION FOR ECONOMIC AND ENVIRONMENTAL JUSTICE
Ms. Lewis. Chairman Davidson, Ranking Member Cleaver, and
members of the subcommittee, thank you for this opportunity to
testify today. I have spent more than 2 decades in the
insurance and reinsurance industry. Now, I am the executive
director of the Connecticut Coalition for Economic and
Environmental Justice, where I work with low-income communities
and communities of color, who are facing health challenges due
to disproportionate exposures to pollution where they live,
work, recreate, and pray.
Climate change is an undeniable reality, and consumers are
paying more for less when it comes to insurance while worrying
about their coverage, worrying about whether or not the
coverage will be reduced or canceled entirely. With every
climate-related weather event, I see the same people destroyed
but not being able to recover from the devastating financial
effects. I see people who have managed to accumulate a modicum
of wealth but lose it in an instant as a result of a hurricane,
flood, wildfire, heavy rain, et cetera, because they didn't
have adequate coverage or had no coverage at all, yet they pay
more for, ``insurance,'' than anyone else.
For a community to become uninhabitable, it only needs to
be uninsurable. This has been a historic problem for low-income
communities and communities of color. Think about urban
renewal. Due to a history of government-sanctioned racial
policies such as redlining and restrictive covenants, which led
to the abandonment and underinvestment in these communities,
they now face disproportionate threats from climate disasters
which can leave them traumatized by the devastating
shortcomings of the insurance claims process.
Insurance, by design, is supposed to protect one's assets,
but in communities of color, it has too often eroded their
assets through discriminatory underwriting and claims policies.
Climate change is also revealing an under-insurance crisis as
insurers transfer the risk to their policyholders through ever-
increasing deductibles, low property value assessments, or
policies that only offer actual cash value rather than
replacement costs.
After disasters, insufficient coverage can often force a
housing crisis as well as people tend to start from square one,
creating a vicious cycle of displacement. No insurance means no
mortgage, so it could also create a mortgage crisis. This is
also true for renters who pay higher rental insurance premiums,
if they can get it at all, or pay higher rental costs to cover
the landlord's premiums.
As climate change accelerates an insurance crisis, we need
to pay close attention to the concerning underwriting
practices, like the use of credit scores to determine premiums,
which can force people of color to pay far more for insurance,
regardless of whether they have an undesirable risk or have
even filed claims. There is also a clear double standard in who
pays the costs of climate change. While insurance have been
dropping homeowners' policies, they continue to invest in and
provide insurance for new fossil fuel projects, which will only
increase the threats to people's homes and lives through
climate change. The CEOs of these companies should have to
publicly explain this contradiction to all of us.
Ultimately, the best policy to protect consumers is to
reduce the risk. Congress should work to reduce carbon
emissions and invest in resiliency projects to prevent
communities that contribute the least to climate change from
paying the most.
Finally, Congress should work with impacted communities and
consumer advocates to consider a backstop that could serve as a
reinsurance relief valve. In 2002, you provided relief for Wall
Street for terrorism insurance after 9/11. This time, we need a
safety net for those on Main Street who have been terrorized by
higher premiums, higher deductibles, coverage restrictions, and
market withdrawals. Thank you so much for this opportunity to
speak today.
[The prepared statement of Ms. Lewis can be found on page
78 of the appendix.]
Chairman Davidson. Thank you. I thank all of our witnesses
for your oral remarks, and I look forward to the questions. We
will now turn to Member questions, and I recognize myself for 5
minutes of questions.
Mr. Petrelli, the company you founded with your wife,
Sharon, Demotech, Incorporated, independently reviews and rates
450 insurers operating in every State. In addition to the
traditional drivers of insurance costs, you have recently done
a lot of work on a new and troubling expense category that you
just highlighted in your remarks, tech-enabled claims
instigation, which is exploding costs, particularly in places
where we see more-frequent natural disasters. Could you tell us
how they work together and how this phenomenon is contributing
to higher premiums?
Mr. Petrelli. Chairman Davidson, Ranking Member Cleaver,
yes, thank you. What we have seen is the turmoil associated
with a natural disaster, whether it is flood, hail, tornado,
earthquake, hurricane, or whatever it may be, that turmoil
serves as sort of ground cover and camouflage for the efforts.
And it creates an opportunity for opportunists to utilize
technology to secure contested claims when there might not have
been a contested claim.
We had a situation recently in Louisiana with McClenny
Moseley & Associates, where there were almost 1,000 people who
were represented by counsel, who did not know they were
represented by counsel. And it winds up with what is called in
the insurance industry, first notice of loss, becomes a lawsuit
as opposed to an inquiry from your insured as to what the claim
might be. And what we are seeing is we have always had
litigation in the insurance business, but we now have another
layer of litigation that is being imposed through tech-enabled
claims instigation. If there is a follow-up question, I would
be glad to take it.
Chairman Davidson. No. I thank you for highlighting that,
and I look forward to research, and I hope my colleagues will
pay attention to that, and frankly, that our State-based
regulators will pay attention to that, because it is just
another predatory practice people are adapting to the times,
and instead of just distributing risks, it is actually
concentrating it. It kind of works at odds with the point of
insurance.
Shifting gears, earlier this year, the NAIC put forward a
proposal to expand the reach of its own Securities Valuation
Office (SVO). The proposal would give the SVO the power to
overrule the rating agencies' determination when the SVO
decides that it disagrees with the agency's ratings. This SVO
expansion would essentially make the NAIC an unregulated, de
facto nationally-recognized statistical rating organization,
and create a conflict of interest between its role as a trade
association representing State-based insurance regulators and
an asset evaluator setting capital charge rules for insurance
companies. That is why earlier this year, I and seven of my
colleagues on the committee sent the NAIC a letter expressing
serious concerns with their proposal. We are concerned that
this SVO overreach would lead to less transparency and more
ambiguity for insurance companies, and actual damage to market
efficiencies, which would drive up costs for consumers.
Mr. Gordon, do you see how this could be a conflict of
interest, given the NAIC's dual role as a trade association for
all State insurance regulators and an evaluator of investment
decisions of its member insurance companies?
Mr. Gordon. Yes, Mr. Chairman, we would agree with that.
The Securities Valuation Office has continually tried to assert
more control over securities ratings, including giving itself
discretion, for a fee, to evaluate some of these products, but
there is no provision for appropriate supervision by State
regulators, as you know, very limited transparency, no right to
appeal to an independent third party, and no opportunity for
insurers and rating agencies to present their data. We have
objected to the proposal, and I think it needs a lot more
transparency and due process before it is further considered.
Chairman Davidson. Thank you for your testimony. I just
want to quickly turn to the Federal Insurance Office (FIO).
Back in March, I sent a letter to the FIO regarding its
politically-motivated effort to collect climate change data. It
is expansive beyond its actual scope. Instead of working
directly with State insurance regulators, it is going straight
to the companies and basically trying to extract data. One of
our colleagues, Mr. Fitzgerald, has a bill, H.R. 5535, the
Insurance Data Protection Act, which would strip the FIO of
subpoena power that it is actually abusing. Does anyone on this
panel think getting rid of that power would compromise the
original intended purpose of the FIO?
Mr. Gordon. We would strongly support that, Mr. Chairman.
It is an incredibly unusual, unique subpoena power for a
nonregulatory agency.
Chairman Davidson. Thank you. Anyone else?
[No response.]
Chairman Davidson. I think, as my time rapidly winds down,
the ability to distribute risk is an underappreciated essential
component of market function, and it frankly preserves capital
if it is done properly, so I think it is great that you all
could be here.
My time has expired, and I now recognize the gentlewoman
from New York, Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman. Commissioner
Arnold, I am concerned about the rapidly-increasing insurance
costs for multifamily housing properties serving low-income New
Yorkers. Some affordable housing properties cannot get an
insurance quote at all, with fewer carriers willing to bid on
properties that serve rent-subsidized tenants, and some
outright refusing. What can be done to ensure affordable
housing properties have access to property insurance at
affordable and reasonable rates?
Ms. Arnold. Thank you for the question, Representative
Velazquez. The market looks a little different in each State.
For the most part, our insurance markets are competitive. There
are a lot of carriers. We have seen that when folks shop
around, that is a way to get better coverage or a reduced cost.
I talked to a gentleman recently who saved $800 a year, which I
was quite surprised at, so it is also something that we are
looking at, and we are thinking about the ways that we can
ensure that there is access to coverage, and we do that through
our regulatory process.
Ms. Velazquez. And this question is for the panel. In
September, not only did Republican brinkmanship here in the
House bring us to the verge of a government shutdown, but it
also brought us precariously close to an expiration of the
National Flood Insurance Program. This was on the same day we
were experiencing a massive rainstorm and significant flooding
in New York City. By a show of hands, how many of you think it
will be a terrible idea to allow the NFIP to expire?
[Hands raised.]
Ms. Velazquez. Thank you. Similarly, by a show of hands,
how many of you think we should stop lurching from deadline to
deadline with the NFIP and instead pass a long-term reform and
reauthorization bill?
[Hands raised.]
Ms. Velazquez. Thank you.
Mr. Nutter and Mr. Gordon, both of your organizations have
closely tracked the impact of Risk Rating 2.0. In each of your
views, has Risk Rating 2.0 worked to lower rates nationwide?
What about in low- and moderate-income (LMI) communities and
communities of color in high-risk areas?
Mr. Nutter?
Mr. Nutter. Yes. Thank you for the question. We do believe
that Risk Rating 2.0 will bring more equity into the rating for
flood insurance policies. It needs to be understood that the
former program, let's call it Risk Rating 1.0, and Risk Rating
2.0 were both required by Congress to meet a certain rate
adequacy level, so they are both on that track. What Risk
Rating 2.0 does is it eliminates this cross-subsidy of people
at low risk of flood, of people who are high risk of flood, and
it does bring equity into that by looking at property specific.
Our analysis would suggest that a significant portion of the
properties that, in fact, are covered under the policy are
going to receive lower rates, and many of them are going to
receive basically the kind of rates that would have been
happening under Risk Rating 1.0 anyway.
Ms. Velazquez. Do you foresee any positive impact on
underserved communities and communities of color?
Mr. Nutter. Absolutely. I think what Risk Rating 2.0 is
going to do, is to bring more equitable rates to communities of
color and communities that are socially and economically
vulnerable.
Ms. Velazquez. Mr. Gordon?
Mr. Gordon. I generally agree with my colleague, Mr.
Nutter. I would note that when the Federal Government creates
subsidies for the environment, it can mask not only what the
true cost is, but it can also, in essence, mask the
environmental signals that we are not recognizing those
environmental risks, and that is what is going on.
If Congress wants to address the very important concerns
that you have raised, perhaps some sort of a very transparent
means testing program to help those people, as well as the
right kind of mitigation investments in those communities that
can help them withstand the flood, is probably a much better
alternative than trying to mask those very important
environmental risk signals.
Ms. Velazquez. Thank you. Mr. Chairman, I yield back.
Chairman Davidson. The gentlelady yields back. The
gentleman from Florida, Mr. Posey, is now recognized for 5
minutes.
Mr. Posey. Thank you, Mr. Chairman. Ms. Arnold, given the
commitment to the State primacy for insurance regulation in the
McCarran-Ferguson Act and the success of the NAIC in meeting
the needs of interstate commerce through coordination among the
States, what, if any, is the role of the Federal Government on
insurance?
Ms. Arnold. Thanks for the question. The State regulators,
as you have noted, are the insurance regulators within the
country. We have the authorities to oversee the financial
solvency, to approve policies that are sold, and to do data
collection. As you noted, we are the regulators of the
industry. Certainly, we are in conversations with the Federal
Insurance Office about the activities that they are working on,
and I think we have, as everyone here does, a shared interest
in consumer protection and the solvency and health of the
industry. But at the end of the day, we are the State
regulators. We are the regulators.
Mr. Posey. Mr. Gordon, same question.
Mr. Gordon. When the FIO and the State regulators are
working together, particularly internationally, it can help
support our international voice. But when we have the FIO
starting to set arbitrary thresholds for domestic insurance
affordability, it becomes more problematic when they second-
guess the regulators. We have particularly strong concerns
about FIO's unnecessary data calls that we discussed earlier.
It's incredibly unusual for a nonregulator to have that kind of
expansive subpoena authority.
We really hope that the FIO can work with the State
insurance commissioners, who are the primary regulators, and
both of them can coordinate with each other, and conduct any
data calls through existing State reporting systems and the
statistical aggregators. And hopefully, Congress can help
encourage that communication, but we need the States as our
primary regulators without being second-guessed.
Mr. Posey. Mr. Gordon, one of the reasons given for the
spiraling insurance costs in Florida has been the structure of
litigation, for example, the assignment of benefits. I think
that is what Mr. Petrelli was talking about, the leeches and
parasites, bottom feeders or whatever didn't inject themselves
into this process. What reforms and litigation processes would
you recommend to help tame the increases in their premiums and
make insurance more affordable?
Mr. Gordon. Great question, Congressman, and Florida's
leadership over the last year has adopted very historic,
significant, legal system abuse reforms trying to rein in one
way attorney fees, fan of damages, and assignment of benefits.
One giant stone left unturned is third-party litigation
financing. We have billions of dollars pouring into funding
U.S. lawsuits from unidentified parties, oftentimes, even
unidentified foreign sovereign wealth funds, and some of the
civil defendants and courts don't even know when it is
happening.
A related challenge is third-party medical financing, where
you have unknown third parties who are essentially in cahoots
with the medical providers to maximize the medical services and
costs, while trying to force insurance to pick up the bill.
Fees charged are often far in excess of normal rates, and we
have no transparency in this area. We have very little
regulation to protect the consumers. We really need some more
transparency in this third-party funding to stop the
fraudulent, usurious activities. In any legislation, or
oversight investigation, transparency can be very helpful.
Mr. Posey. Thank you. Mr. Webel, the Government
Accountability Office (GAO) has written many times over the
years that the Federal Government should not purchase insurance
but should self-insure. Some of this is apparently based on the
fact that the Federal Government has little reason for the same
risk adversity as private entities. Can you please explain and
expand on GAO's persistent position on this matter?
Mr. Webel. I would assume, essentially, when you look at it
from an economic perspective, insurance is typically something
you buy for a risk that you cannot cover. If you are purchasing
insurance, I would typically recommend someone get as high a
deductible as possible to minimize the cost to themselves for
what they are buying. If you look at the Federal Government and
the Federal Government's resources to cover what insurance
might cover, at least as we have been able to borrow, the kind
of rates that Treasury has borrowed at and the like, it
doesn't, from a purely financial perspective and most things,
make much sense to purchase insurance.
Mr. Posey. Okay. My time has expired, Mr. Chairman. Thank
you. I yield back.
Chairman Davidson. I thank the gentleman. The Chair now
recognizes the ranking member of the full Financial Services
Committee, the gentlewoman from California, Ms. Waters, for 5
minutes.
Ms. Waters. Thank you very much, Mr. Chairman, for this
hearing. I have been listening to our witnesses here today and,
of course, thinking a lot about my State of California, where
we have had insurance companies exit the market or change in
some way because of the powers and the catastrophes we have
had. With the fact that the States basically are the regulators
of insurance, why are we here today?
To whom can I ask this question? Let's see, we have a lot
of experts out here. What are you recommending as responses to
the fact that insurance companies believe that the premiums
that people pay do not cover the costs of the catastrophe when
it takes place? And while you are answering this question, I
would like to know, what role does climate change play in all
of this, and if you have any recommendations, or you have some
special information, what would that be? Who would like to
start off with this? Ms. Lewis, can you help us out?
Ms. Lewis. I will try to help you out a little bit. You
don't need to be a climate scientist or a Congressperson to see
how climate change is impacting people, including in my
community in Hartford, Connecticut, and around the United
States. Of course, climate change is a main factor in
influencing recent insurance price increases. Of course,
climate change is a main factor in influencing the exiting of
insurance companies from entire States. Of course, climate
change plays a major factor in the increase in premiums. I have
provided written testimony which will further explain why I
feel so strongly about this, and I would like for you to refer
to that, if you don't mind?
Ms. Waters. Thank you very much. We have some other
witnesses here that I would like to hear from based on
recommendations, based on what we know is happening in the
industry. Let's see, Mr. Robert Gordon, you are the senior vice
president of the American Property Casualty Insurance
Association, so you must know a lot. What do you know about
what the Federal Government should be doing and could be doing
at this time?
Mr. Gordon. I may know a lot, but my kids remind me every
day, nowhere near as much as is they do. But one thing we do
know is that according to the NAIC's most-recent report on
profitability, insurers in California had a 6-percent net
underwriting loss over the last decade. In California,
homeowners' insurance claims were more than 13 percent higher
than the premiums, and the wildfires in 2017 and 2018 wiped out
more than 30 years of underwriting profit, so there have been
enormous losses. There have been bad rate delays for insurers
to try and catch rates up to these losses where, often, it
takes a year to get filings approved.
I will say, though, that to their credit, the California
Governor and the California Insurance Commissioner both
committed to making significant reforms in those markets,
including allowing forward-looking modeling to take climate
change into account, to improve the rate filing process, and to
address the intervener process to allow reinsurance costs to be
factored in. So, there is a recognition that the California
market is rapidly deteriorating, and it needs to be fixed.
And I think that is best summed up by the California
Insurance Commissioner, who said that insurance companies will
not write insurance, especially in high-risk areas, unless they
are able to ensure they have the capital and reserves to meet
all of the claims submitted by consumers, cover their expenses,
and earn a fair rate of return. We are committed to work----
Ms. Waters. If I may interrupt you for a moment? I want to
know if anywhere in that testimony, you are recommending high
premiums to cover the costs of these losses?
Mr. Gordon. Yes. Ultimately, insurers will need to make
enough in premiums to be able to pay losses long term.
Ms. Waters. That is exactly what I do not want to hear.
Thank you. I yield back.
Chairman Davidson. I thank the gentlelady. The gentleman
from Missouri, Mr. Luetkemeyer, who is also the Chair of our
Subcommittee on National Security and Illicit Finance, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. It was a
breathtaking comment a minute ago about how you can pay your
expenses without any income. I don't know how that works.
Insurance companies, like any other business, as far as I
understand, as far as I know your business model, you take in
premiums to be able to pay the losses that you incur, and if
you are taking in less premium, you have less ability to pay
that. Would that not be the case, Mr. Gordon?
Mr. Gordon. That is absolutely right.
Mr. Luetkemeyer. And the losses that you are talking about
here: autos, 8 percent; and homeowners, 12 percent. I guess the
question I have is with regards to frequency or numbers of
occurrences. Is the frequency roughly the same as it has been
in inflation as additional cost of the loss here, or is it
increasing frequency, increasing numbers of losses as well as
inflation and a cost to be able to make people whole?
Mr. Gordon. It is inflation. It is people moving into the
higher-risk areas. There are things, for example, much more
frequent, severe convective storms, thunderstorms, although
that is generally understood by the industry not to be impacted
by climate change. There are things like increasing droughts
and wildfires that are more impactful. But inflation and the
demographic shifts are the top cost drivers at the moment.
Mr. Luetkemeyer. People like to live in certain places, but
it also means that they are living in places where you actually
have more losses or they are more susceptible to sustaining a
loss. Would that be correct?
Mr. Gordon. That is correct.
Mr. Luetkemeyer. Very good. Mr. Nutter, thank you for your
service and for many years of being able to appear in front of
this committee. I am sure you have some stories to tell, but we
will leave that for another day. I wish you well on your
retirement. Quick question for you, a few years ago, I chaired
this subcommittee, and we were working on flood insurance. I
have been an advocate for a long, long time of reinsurance to
be able to minimize the taxpayers' exposure on flood insurance.
They now have some, but in my view, not nearly enough. Would
you like to explain to us the benefits of reinsurance for the
National Flood Insurance Program, so you can minimize the
taxpayers' risk?
Mr. Nutter. Thank you, Representative Luetkemeyer. The
reinsurance that the National Flood Insurance Program purchases
has, in fact, been a valuable way to insulate the taxpayer,
largely through the borrowing from Treasury, by calling upon
private-sector resources, reinsurance, if they aren't willing
to pay claims. The first year of the Program, which I think was
2017, the Federal Government collected from the industry over a
billion dollars in losses just like an insurance company would
for losses that it has. So, I do think it is an effective
program, and, frankly, it is a way for the insurance sector to
understand better the flood risk with a view toward developing
more of a private flood insurance market.
Mr. Luetkemeyer. Do you think it would be a good idea for
us as legislators to look at doing this in other areas of
government, where we could pass off some of the risk to the
private sector versus having taxpayers take on all this risk?
Mr. Nutter. There are some existing programs that do just
exactly that. Fannie Mae and Freddie Mac purchase risk transfer
products from the private reinsurance sector. The EXIM Bank
does the same thing. The one area that is poised for that
opportunity is the banking sector, and under the Basel III
Endgame, the banks are permitted, in fact, encouraged to buy
reinsurance as part of their risk transfer. That is not yet
true in the United States, but given that the Federal Reserve,
the OCC, and the FDIC are considering new bank capital
standards, we have advanced a proposal that they should do as
some of these other Federal agencies have done, that permit
banks to get diversification for their capital base.
Mr. Luetkemeyer. Mr. Webel, would you like to join in?
Mr. Webel. Yes. I would just add one other thing, that I
think, in the context of the NFIP, the reinsurance by
purchasing it now basically has the effect of drawing future
losses to the present. The way the NFIP was designed before
this essentially was, if you had the same policyholders, it
would be fine. But when you have a policyholder who has a house
and then they sell it, and then to the next person, the first
policyholder who held it for 10 years and didn't have a claim
essentially was getting what amounted to a subsidized rate
because they weren't paying the same look-forward that you
would in a normal insurance context. And buying the reinsurance
now essentially brings some of those future losses to the
current.
Mr. Luetkemeyer. Okay. Mr. Petrelli, very quickly--my time
is running out here--you talked about the tech-enabled folks
who are actually trying to rip off the insurance companies. I
hadn't heard that there was an orchestrated effort out there.
There seems to be a cottage industry of ambulance chasers out
there, but you have taken it to a whole other level with what
you were describing. Would you like to elaborate on this a
little bit? We have groups of attorneys out there who use
algorithms to go out and put together claims against companies?
Mr. Petrelli. Yes, sir. It is Moneyball. It is litigation
platforms, litigation funding. The money that comes into the
litigation, financing area, Bloomberg in 2022----
Mr. Luetkemeyer. My time is up. Really very quickly, what
is the additional cost on an average insurance policy? Does it
go up 2 percent, or 10 percent, as a result of this activity?
Mr. Petrelli. I would guess, based on the frequency, it
might be as much as 30 percent or 40 percent.
Mr. Luetkemeyer. Oh, my gosh. Thank you very much.
Chairman Davidson. The gentleman's time has expired. The
ranking member of the subcommittee, the gentleman from
Missouri, Mr. Cleaver, is now recognized for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. I am not sure, I
think Mr. Gordon mentioned means testing, and I want to connect
the means testing user with some other issues. Primarily, we
have had congressional hearings on the issue of nonprofit
organizations and insurance. And there are a number of
nonprofits which are struggling with this, most especially
those who work with animals, and children, and senior citizens,
and the disabled, as well as churches, synagogues, mosques, and
temples, and they are now really struggling to get the
insurance they need to survive.
And when you think about the fact that there more than 60
nonprofits in my congressional district, including the United
Way of Greater Kansas City, the Veterans Community Project, and
Goodwill of Western Missouri and Eastern Kansas, and the
members receive liability insurance from the nonprofit
insurance alliance, but they are saying that they are still
challenged. Mr. Gordon, I am interested in what I can tell them
about their struggles and what we can do to repair it?
Mr. Gordon. Actually, a member of ours, and certainly
Congress has looked at these issues in the past when there were
hard markets and liability to find solutions. Now, we are
seeing some hard markets on the property side, although it
doesn't appear to be a capacity issue at this point; it is
really more of a market rate freedom issue. So if we can get
the right rates, we can provide the additional coverages. I
think that there may be some groups where those coverages
become less affordable. And that is where policymakers need to
decide whether it is a transparent means testing or whether it
is providing very targeted mitigation resiliency. Certainly, it
is better to try and reduce the loss cost to which those groups
would be exposed.
Mr. Cleaver. Ms. Arnold?
Ms. Arnold. Thank you for the question. I think making sure
that there is insurance, particularly for the entities that are
providing really critical services to our constituents, is
something that all insurance commissioners take very seriously.
There have been a number of solutions that have been proposed.
Generally speaking, we are the regulators, and we generally
oppose any time there is a Federal solution to a place where
there is a State solution in place. And this is one of those
cases.
I will say that we have a data call that is going out to
try to understand this challenge a little bit better. We
certainly want to make sure that there is access for some of
these critical services. We will be looking at the data that
comes in, and we will perhaps be following up, but maybe we
will get a better understanding of the particular challenges
and where we need to be thinking as State regulators to see
whether there are any policies that we need to be looking at,
or any changes to the way that we do business.
Mr. Cleaver. To all of you, the more difficult the problems
they are trying to address, the greater their insurance needs.
And people who are doing the Lord's work--I am not just talking
about religious institutions, but dealing with tough situations
with human beings, and that reward is you have to pay. The
insurance is going to skyrocket on you, and I don't think this
is a partisan issue. I think it is a serious issue that we
really need some direction on. Would anyone else like to
address this?
Mr. Petrelli. If I may, on the issue of the tech-enabled
claims instigation, to give you a sense of the growth of their
problem, according to a National Law Journal article from
November of 2021, there were 800 professionals using a
particular litigation platform. Fifteen months later, there was
a press release on that same litigation platform. It had 45,000
professionals using it in 15 months, from 800 to 45,000. I
would respectfully submit that your constituencies are being
targeted, sir.
Mr. Cleaver. Thank you very much, sir. I wasn't actually
doing it either, but thank you very much. I appreciate the
additional time, Mr. Chairman.
Chairman Davidson. I thank the gentleman. The gentleman
from Wisconsin, Mr. Fitzgerald, is now recognized for 5
minutes.
Mr. Fitzgerald. Thank you, Mr. Chairman. For about 150
years, State insurance regulators and laws have regulated
insurance companies. I know in my own State of Wisconsin, where
I was a member of the Wisconsin Center for 25 years, we always
had a great relationship with our insurance commissioner. The
market and the corporations that operate and function, whether
it is property and casualty, or health or life, whatever it
might be, they do a fantastic job. But what we have here is,
once again, something that most State legislators really
bristle at, and that is a Federal overreach.
The FIO has grown increasingly aggressive, as has been
discussed by the chairman, and as a consequence of that, we are
offering legislation. The collecting of data, and most
recently, issuing a revised proposed data collection for
climate-related financial risk just puts us in a position of
once again trying to push back. So, not only has the FIO been
unclear on what they are going to do with this information and
the data that they have collected, but any effort by Treasury
or the FIO to sidestep State insurance regulators just
blatantly undermines the congressional intent in this area. As
the chairman said, that is why we have introduced the Insurance
Data Protection Act to repeal the FIO's subpoena power.
Mr. Gordon, I know you have already commented on this, but
could you maybe take it a step further in the way you view the
subpoena power and how it is being abused right now?
Mr. Gordon. Yes. We are very appreciative of your
leadership on this issue, Congressman, and we have not found
one single other example of a nonregulator having such
expansive subpoena authority. And there is no reason for them
to get into this, because majority of the States have already
been conducting climate data calls.
As Ms. Arnold noted in her testimony, for 85 percent of the
marketplace, analyzing weather is already the primary
competency of the insurance industry, which has been doing it
for hundreds of years, investing money and analyzing and
managing weather risks. So, this is something that is not
related to insurance. It is second-guessing the regulators. We
are working with the regulators very extensively on this. They
are spending a lot of time. There is an enormous amount of
climate-related insurance data already available to the public
and we are working with our State regulators to make sure there
are no gaps in that.
Mr. Fitzgerald. I would further comment that I think some
of the data calls are so broad that you start to worry about
whether or not they are adequately protecting this information
once it has been gathered. What kind of assurance do you think
that FIO could give to anybody saying, don't worry about the
State, it has all been guarded in and safely capped?
Mr. Gordon. We are always nervous. The more parties that
have information, the more potential problems there are. We
have encouraged the FIO in past efforts to gather information,
to work with the NAIC to have the data done through existing
portals, to be aggregated, to protect against the kind of
dangers that you are talking about. So, there are ways to do
it, again, most importantly, involving cooperation with the
State regulators.
Mr. Fitzgerald. Thank you. Mr. Chairman, I would just say,
this is once again a classic Federal overreach for data that is
absolutely not needed. I yield back.
Chairman Davidson. I thank the gentleman, and I appreciate
his work on this bill in particular. The gentlewoman from
Texas, Ms. Garcia, is now recognized for 5 minutes.
Ms. Garcia. Thank you, Mr. Chairman, and thank you to all
the witnesses who are with us here today. This is, again, a
very important topic, especially to someone like me who is from
Houston. I know that the ranking member has already mentioned
some of the disasters and flooding that we have suffered. In
fact, in 2019, Hurricane Harvey left much of my district
underwater and created major, major damages throughout the
Houston area. Now, years later, many households in Houston have
dropped their flood insurance for the reasons that the ranking
member mentioned, largely due to lack of affordability. Harris
County, which is home to Houston, is projected to see a 75-
percent increase in the average flood insurance premium.
Ms. Lewis, I want to start with you. Given the increasing
intensity of weather events resulting from climate change, can
you speak to the importance of not only reauthorizing the
National Flood Insurance Program, which you all raised your
hand and said you were in favor of, but what more could we do
than just reauthorizing it to make it more affordable? You
mentioned the safety net that we have to worry about. Someone
mentioned the means test. What is it that we need to do to make
sure that when we reauthorize it, it is also actually
affordable, so that we can make sure it is accessible to
everyone who needs it?
Ms. Lewis. Thank you so much for that question. As you can
probably glean from my testimony, I am very concerned about
discriminatory practices by the insurance companies. And to me,
making something affordable or more affordable is making
something fair, making sure that the underwriting practices do
not penalize people because of what their color is or where
they live. It is very important to understand that the
underwriting process, since the very beginning of insurance,
has always been discriminatory. It has always been these people
who live in this certain part of town are going to pay more.
So, it is really critical that everything be fair across-the-
board, and that you and I should pay the same, if we live in
the same area, for flood insurance.
Ms. Garcia. Is there anything that we can do in terms of
ensuring that people who sell the insurance can do it on
payment plans or any kind of working with the individual based
on their income and then based on the value of their home
rather than just, this is what it costs, this is what you have
to pay?
Ms. Lewis. I agree, because one of my concerns is that
there is no transparency when it comes to the rating structure
of insurance. I don't know if anybody here can tell me how
their insurance premium was promulgated? Can you tell me how
they came up with $600 per month or $6,000 per year? I can't
think of any other industry where they give you a bill, but you
don't know how that bill was determined.
Ms. Garcia. We don't even know if there are any hidden fees
there.
Ms. Lewis. Absolutely, because underwriting has always been
subjective, and underwriters will determine whether or not you
get debit or credit based upon what they perceive as a risk.
And it is something that we should all consider nationally, to
make insurance fair, and get rid of the subjectiveness. I used
to sit next to underwriters, and we would have the same risk,
but different prices. Why is that so?
Ms. Garcia. Thank you. Ms. Arnold, I recognize that the
National Flood Insurance Program we are talking about is a
Federal program, but I have concerns similar to that of Ms.
Waters from California. And Texas has an insurance board. It
regulates a lot of what the insurance companies do in our
State, much like I am sure in your State. What is the role of
the State in making sure that insurance is affordable?
Ms. Arnold. Thanks for the question. Our primary role as
State regulators, our first consumer protection is to make sure
that companies can pay claims when you make a claim, and that
involves making sure that there is sufficient capital, and that
rates are adequate and not excessive. We also look at policies
to make sure that they comply with State law.
Ms. Garcia. No, but my question was specifically to make it
affordable. I know all of you have a lot of regulations.
Ms. Arnold. Right, yes. And we are also looking to make
sure that the markets are competitive, which helps with
affordability because carriers are competing for your business,
so that is sort of the base of what we do for affordability.
The other things that we have been working on, particularly
just some of the concerns that you have raised, are pre-
disaster mitigation. That is making sure that your home or, in
some cases, your community, is more resilient to the particular
perils that are in that community.
Chairman Davidson. The gentlelady's time has expired.
Ms. Garcia. Mr. Chairman, I also would like to, at the
appropriate time--there is a report of some sort, but there is
no explanation of where it came from. Did everybody get this?
Chairman Davidson. We will get an answer for you on that.
Ms. Garcia. It is basically a point of inquiry, if someone
would explain what this is.
Chairman Davidson. We will get you an answer on that. The
gentleman from Nebraska, Mr. Flood, is now recognized for 5
minutes.
Mr. Flood. Thank you, Mr. Chairman. I would like to start
by highlighting some of the work done by insurance regulators
in the great State of Nebraska. Nebraska is one of the nation's
top States for insurance, with domiciles like Berkshire
Hathaway, Pacific Life, and Mutual of Omaha. They are a leader
in this space, and a big part of that reputation is the
experience of the Nebraska Department of Insurance. I know
firsthand, from my time in the legislature, that we work hard
to make policy that keeps premiums affordable in Nebraska. Some
other States have seen higher premiums, at least in part
because of the restrictions they have put on pricing.
Mr. Gordon, can you speak to the challenges that can be
associated with States that use preapproval filing systems for
insurance? How does that affect things for property casualty
insurers in that State?
Mr. Gordon. Sometimes, it varies by State. You can have
good States or bad States in either case, but when you have the
preapprovals, it can often create great delays. For example, in
California, the State went for over 30 months without approving
a single private passenger auto rate increase, over 30 months
in a time of record inflation. You can imagine the kind of
devastating losses that causes in the marketplace. You also
have, particularly in California, a very antiquated, broken,
35-year-old system that the Governor and the Commissioner are
now trying to address.
Every State allows forward-looking catastrophe modeling and
rate filings except California. Every State allows reinsurance
costs to be included in rate filings except California. Every
State allows consumers the choice to use telematics based on
actual driving behavior, except California. When you have these
factors that essentially constrain innovation, and create long
delays, you are going to create a lot more market dysfunction.
That is actually why the Florida market originally deteriorated
so badly. It used to be filled with national carriers. After
Hurricane Andrew, there was a horrible rate suppression, and
the number of national carriers in the State plummeted
dramatically. We have seen some of that in Louisiana, and very
much now in California.
Mr. Flood. Can you speak, Mr. Gordon, to the challenges
presented for insurers that have their hands tied regarding
what metrics they can use for underwriting and setting rates?
Specifically, I would like you to touch on restrictions related
to credit rating and location. We are starting to see State
legislatures wade into this credit rating business, and I would
like you to just comment on that.
Mr. Gordon. Yes. We actually have a couple of studies that
we published, one that shows there used to be an enormous
number of drivers in the State residual markets who weren't
able to get regular insurance. But with the advent of credit
scores, suddenly there was an easy, very affordable tool to get
that insurance and those residual market populations plummeted
dramatically; people got insurance.
We also have studies published recently that show a direct
connection between credit scores and actual hard braking, hard
acceleration driving behavior. And we have done recent studies,
especially some of our partners at LexisNexis and elsewhere,
looking at credit scores, showing that they are, in fact, not
discriminatory, they are not a proxy for race, and they are
highly predictive.
Mr. Flood. I am going to switch gears for just a moment
here. In October, really just a few days ago, we had Insurtech
on the Silicon Prairie, a summit in my home State. The summit
had a great turnout with over 400 attendees from 44 States, and
3 foreign countries.
Mr. Nutter, could you speak, and maybe others on the panel
if so inclined, to the importance of insurance technology and
innovation in terms of putting downward pressure on premiums
going forward?
Mr. Nutter. There is no question that the incorporation and
assimilation by the insurance industry of more technology will
advance the efficiency, if you will, of rate setting, for both
insurance regulators and the industry. It is the broad trend,
particularly with artificial intelligence, that will make the
underwriting more precise, and then, the rating more equitable.
Mr. Flood. Would any of the other panelists like to comment
on that?
[No response.]
Mr. Flood. Seeing none, I guess I have one final question
here. In August of this year, the NAIC released a draft
bulletin on artificial intelligence and predictive models. Ms.
Arnold, could you just comment on your initial reaction to that
bulletin?
Ms. Arnold. Thanks for the question. The NAIC has done a
number of things to look at how AI is getting used within the
insurance industry. We have an AI principles document that came
out a couple of years ago that sort of laid out the frameworks.
We have also created, which is a letter committee--if you are
around the NAIC, we name things by letters--our Big Data,
Artificial Intelligence, and Technology Committee. That
Committee's entire umbrella is looking at the various issues
that arise when there are huge kinds of technologies.
Mr. Flood. Thank you.
Ms. Arnold. So, we are looking at it, and----
Mr. Flood. Unfortunately, I am out of time, so I will yield
back.
Ms. Arnold. We appreciate it.
Mr. Flood. I appreciate you, and I yield back.
Chairman Davidson. The gentleman's time has expired. In
answer to the gentlewoman from Texas, Ms. Garcia's, inquiry,
the slide that was referenced was part of the written testimony
submitted by Mr. Nutter, and it is referenced in the top left
corner with the appropriate agency, the reinsurance group that
he is part of. So, that is the slide. It is customized for each
Member's district.
The gentlewoman from Georgia, Ms. Williams, is now
recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Chairman Davidson, and
Ranking Member Cleaver, and thank you to our witnesses for
joining us today.
Yes, we are once again rapidly approaching a potential
government shutdown, and it seems like every month in this
Republican-controlled House, we are faced with yet another
preventable crisis after another, putting our national security
and our economy at risk. Keeping with the theme of my
Republican colleagues avoiding problems and, too, they are
actively harming our constituents, let's talk about climate
change. Let's talk about how it is contributing to the rising
cost of insurance today. Republicans can't even consistently
agree that humans are impacting our climate, let alone say the
words, ``climate change,'' but you all live in the real world,
and I believe in science, and I know that climate change is
real and has a real impact on our constituents and on our
economy.
Ms. Lewis, this hearing is entitled, ``The Factors
Influencing the High Cost of Insurance for Consumers.'' And as
you stated, of course, climate change is a major factor
influencing recent insurance price increases that are burdening
consumers, but unfortunately, the Republican memo for this
hearing doesn't even use the phrase, ``climate change,''
anywhere. Ms. Lewis, do you think it is constructive to have a
conversation about increasing insurance costs without even
acknowledging climate change?
Ms. Lewis. Absolutely not. You must acknowledge the reality
of climate change.
Ms. Williams of Georgia. These are policy decisions, and
while my Republican colleagues can act like climate change is
not real, people in marginalized communities, myself included,
don't have that luxury. This past July, I shared with you all
that State Farm decided not to renew my homeowners' insurance
policy because I filed a claim after a hailstorm that damaged
the roofs throughout my entire neighborhood in southwest
Atlanta. That was just in March of this year. And even though I
can't control the weather and you can't either, I am now
considered a high risk and have a much more difficult time
finding insurance that I can afford, and this is impacting all
of my neighbors. Low-income Americans are more likely to suffer
from the consequences of flooding, tropical storms, and other
extreme weather due to inadequate infrastructure in our
neighborhoods and lack of proper insurance.
This summer when this committee decided to launch a full-
scale attack against ESG, I submitted questions for the record
to several of our witnesses. Jerry Theodorou, from the R
Institute, was kind enough to submit formal responses and let
me know that a long-term reauthorization of the National Flood
Insurance Program and some key reforms will contribute
stability and affordability to the flood insurance market. The
multiple short-term extensions of the Program have been a
source of destabilizing uncertainty to the market. Now more
than ever, with climate change causing more frequent and more
damaging flooding, Congress and this committee should be
working to reauthorize and strengthen the NFIP.
Mr. Webel, can you speak to the consumer benefits of a
long-term NFIP reauthorization?
Mr. Webel. In general, the insurance markets work better
when they are long-term products. People's houses are long-term
products, so I don't think there is any question that markets
work better.
Ms. Williams of Georgia. Thank you. Can you also explain to
us in detail what the impact of a government shutdown would be
on marginalized communities that rely on the NFIP?
Mr. Webel. The shutdown, basically, kind of does two things
in the sense that what has happened is the authorization of the
NFIP is technically legally separate from a shutdown, but the
authorization has been riding on the appropriations bills. So,
if an appropriations bill or some other bill that reauthorizes
the NFIP is not passed by November 17th, what you have is the
authority to issue new flood insurance would go away, and the
borrowing limit would decrease from more than $30 billion to $1
billion. What that largely means is that people who need to get
new flood insurance contracts, who are buying new houses and
the like, would not be able to get it from the NFIP. They would
have to go to the private market.
Ms. Williams of Georgia. Thank you, Mr. Webel. And as if a
lapse in the NFIP brought on by a government shutdown wasn't
enough, my Republican colleagues are also trying to eliminate
the Federal Insurance Office, which, among other duties, is
tasked with identifying gaps in insurance regulation that pose
systemic risk to the market, and monitoring the availability of
affordable insurance for marginalized communities. In fact, the
Financial Services and General Government Appropriations bill
that we are going to be considering on the House Floor just
next week, zeros out funding for the FIO entirely. I have
submitted an amendment to reinstate funding for the FIO
because, personally, I believe we should be identifying the
systemic risk to the insurance market posed by climate change
and ensuring that marginalized communities have access to
affordable insurance.
Mr. Webel, can you explain some of the impacts of
eliminating the FIO? I think I am out of time, but I would love
to have answers to that in writing for the record.
Chairman Davidson. The gentlewoman's time has, in fact,
expired. The gentleman from New York, Mr. Lawler, is now
recognized for 5 minutes.
Mr. Lawler. Thank you, Mr. Chairman. I am glad my colleague
got all of her talking points in. The only thing she forgot to
mention was Trump guns, and abortion, and maybe some anti-
Israel bigotry for good measure.
Historic storms outside of the 100- and 500-year timelines
have rocked communities across the country. Earlier this year,
my district experienced devastating floods in the Hudson
Valley. Communities hit by natural disasters, like hurricanes,
wildfires and floods, and climate change, are also confronted
by the skyrocketing costs of repairs and rehabilitation for
properties. And this is only compounded by the day-to-day
inflation spurred by the reckless spending policies of the
Biden Administration and the hangover of the COVID economy. Can
you describe the challenges that disaster-prone communities
face in rebuilding such-I'm sorry, excuse me, it is my time.
Thank you so much.
Chairman Davidson. We will have order. It is the gentleman
from New York's time. The gentleman is recognized.
Mr. Lawler. Thank you. Can you describe the challenges that
disaster-prone communities face in rebuilding, such as the
demand for materials and labor as part of the construction
supply chain, and how do you factor these into premiums paid by
consumers? This is to the panel.
Mr. Gordon. Congressman, I will just note that while there
is some variation among States because of higher taxes, in some
States, cost of living, but the insurance cost inflation inputs
of repairing cars, buildings, and people have escalated very
significantly. For example, from the beginning of 2020 through
the first half of this year, construction materials have
increased 35.5 percent, construction trade services have
increased 30 percent, and the overall building replacement
costs have increased nearly 45 percent over the last 5 years,
so there have been very, very significant increases in
rebuilding costs.
Mr. Lawler. So, inflation has a tremendous impact on
premiums?
Mr. Gordon. That is correct. It is a primary cost driver.
Mr. Lawler. Following up on that, as you know, the National
Flood Insurance Program faces authorization hurdles at least
once every year. Mr. Gordon, your members serve as Write-Your-
Owns with the National Flood Insurance Program. How does this
uncertainty impact your business, given the prep work needed to
halt and restart a business?
Mr. Gordon. All of the starts and stops are very
problematic and trying to retroactively fix everything. Every
time there is a short-term lapse, it always creates additional
costs, and additional uncertainty, so we would support the
long-term reauthorization of the Program.
Mr. Lawler. Mr. Gordon, many cities in America are facing
spikes in crime driven by a number of factors, including the
COVID-19 pandemic and prolonged lockdowns, deep policing
efforts and the lax prosecution of certain crimes, permissive
drug use policies and an increase in drug abuse, and the empty
streets created by employees not returning to their offices.
According to the Council on Criminal Justice, there were 33.4
percent more motor vehicle thefts during the first half of
2023, compared to the same period last year. Property thefts
also saw a marked increase last year after declining for
decades.
Mr. Gordon, do new policies that encourage more crime in
our nation's cities make property insurance more or less
expensive?
Mr. Gordon. Motor vehicle theft and, in particular,
catalytic converter theft, have been skyrocketing, and that is
very much another cost driver for auto insurance. On the
commercial side, increasing retail theft and crime is creating
coverage friction. We had a lot of discussions with our members
earlier this year about some of the commercial insurance
trends. We don't see an availability problem at this time, but
the coverages have gotten tighter and more expensive.
And there is concern not only about the theft losses, and
there is a little disagreement over the intensity of that, but
the accompanying risk of violence can trigger much more
expensive liability lawsuits when people get injured. This is a
potential trouble spot we are concerned about and are
monitoring, and if there is not adequate insurance, not only
are some of the businesses going to be put at risk, but some of
them will have a hard time obtaining financing, which is
already a problem for commercial real estate.
Mr. Lawler. Have you seen a lack of willingness to insure
commercial properties in high-crime urban areas?
Mr. Gordon. Again, we haven't seen availability concerns,
but there is some tightening of the coverage, and it is getting
more expensive.
Mr. Lawler. And what is the impact of crime on investment
and development in our cities if properties become uninsurable?
Mr. Gordon. It is going to put a lot of businesses at risk,
and, again, it is going to undermine the ability of those
businesses to get financing, so it is a critical need.
Chairman Davidson. The gentleman's time has expired. The
gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5
minutes.
Ms. Tlaib. Thank you, Mr. Chairman. Just to be clear, we
are talking about the cost of insurance going up. Is that auto,
flood, property? I just want to clear up what this is?
Chairman Davidson. The focus of the hearing is on property
and casualty insurance, but to be fair, one of the underlying
factors to that is flood. It has been referenced multiple
times.
Ms. Tlaib. Okay. Thank you, Mr. Chairman. And thank you all
so much for being here. One of the things I was hoping to talk
to Mr. Webel about specifically is the fact that some of the
factors that the insurance industry uses, to me, are sometimes
factors I am not sure what they are taking. Usually, it is the
cost of the property, right? The value of it, maybe some of the
other circumstances, it could be theft and things like that.
And some of the factors, for instance, what my residents tell
me about home insurance is, they ask things that people are
confused about, like the use of credit scores to calculate
insurance. Is that a practice that is increasing within the
insurance industry, that is raising the cost of insurance on
people who might be working class?
Mr. Webel. I don't know that credit score use is
increasing. Mr. Gordon might know whether the companies are
using them more or less, but that is a factor that is used.
That is a factor that generally is overseen by the State
regulators that need to approve the factors that are being
used.
Ms. Tlaib. No, I see it in the auto industry a lot where
non-driving factors, like marital status and education level
and people's credit scores, are weighed on top of it, and I
will give you an example. The University of Michigan did a
study showing specifically that somebody with a DUI, driving
under the influence, was paying 3 times less in auto insurance
rate, his insurance rate, versus somebody who had no DUI but
had a lower credit score and was paying 3 times more, even
though the other person has a DUI. I am looking at Mr. Gordon.
Do you have something to say about that?
Mr. Gordon. Yes. Congresswoman, we have some studies we did
recently that we would be happy to provide you, which show
there is actually a very direct correlation between credit
score and driving behavior.
Ms. Tlaib. So, somebody who is poor is not a great driver?
Mr. Gordon. No. People who are poor do not necessarily have
lower credit scores.
Ms. Tlaib. They don't have access to credit. They pay more.
Mr. Gordon. No. There are lots of poor people who have good
credit scores.
Ms. Tlaib. So, what is the correlation between somebody
with a lower credit score? And listen, this impacts all of our
districts, somebody with a lower credit score, how is that a
factor in how much their car is valued, how far they drive, and
in what type of car? I am being serious here. Why does a credit
score have to be weighed towards the cost of insurance?
Mr. Gordon. Those are very good questions, and, again, we
are happy to give you some of our recent studies showing that
now that we have telematics, we are actually monitoring direct
individual driving behavior, and there is a very high
correlation between people who have lower credit scores, and
there are lots of people who are wealthy with bad credit
scores, and poor people with good ones.
Ms. Tlaib. Yes, but the person with the higher credit score
is paying 3 times less.
Mr. Gordon. There's a very strong correlation between lower
credit scores and hard braking and hard acceleration, which are
shown by telematics to cause more-frequent accidents.
Ms. Tlaib. Mr. Gordon, you talked about scrap. Let me tell
you, we looked at the scrap metal industry, which a lot of my
colleagues actually benefit from. They are a special interest
group, very strong in each State. If we got rid of cash
transactions with catalytic converters in the scrap industry,
because it is really hard for our law enforcement and others to
track them down, why aren't we moving towards getting rid of
direct cash transactions in the scrap metal industry?
Mr. Gordon. I don't know the details on that, but I will
tell you this is an area for optimism, that a lot of the States
are making changes on catalytic converters.
Ms. Tlaib. I was trying to get my State to do it.
Mr. Gordon. Yes. It is making a big difference, and we
encourage the States to do more. We are finally seeing some
light at the end of the tunnel in slowing down that catalytic
converter theft.
Ms. Tlaib. Yes. Ms. Lewis, it has been something of a huge
issue in the State of Michigan, where I saw in my district
alone, in Western Wayne, in particular, Dearborn and some other
areas, where there are high amounts of flooding, there is
sewage just coming out of people's basements, and it is because
we had record rainfall. And my local mayors, these folks are
different political backgrounds, are saying we should start
looking at some of those risks and looking at how we support
communities, especially working-class communities, that
literally cannot subsidize for the climate risk that again, the
climate crisis that we are living in. Can you talk about the
fact that climate risk----
Ms. Lewis. Definitely, I was a personal victim of that in
December of 2022. My basement was flooded with 5 feet of sewage
and untreated stormwater due to rain, not a flood, but rain. My
insurance company declined the coverage because I didn't have
sewage backup coverage, which I didn't know I needed. I was
technically homeless for 7 months.
Ms. Tlaib. I am so sorry you went through that, but this
has a real-life impact. And Mr. Chairman, I would love to have
more conversations about the use of various factors, like
marital status, education level, and credit score, in the
calculation of insurance rates in our country.
Chairman Davidson. The gentlewoman from Texas, Ms. De La
Cruz, is now recognized for 5 minutes.
Ms. De La Cruz. Thank you, Mr. Chairman, for holding
today's hearing. Insurance and financial services is something
near and dear to my heart, as I have spent over 20 years in
this industry. I actually understand, because I have worked in
that industry and owned an insurance agency, how marital status
and credit reporting do affect and can be a factor in what
people pay for their insurance costs. That being said, in the
county of Hidalgo, where it is 90-percent Hispanic, we see
varied rates, insurance prices based on risk, and let's just go
to the mere definition of, ``insurance.''
Mr. Gordon, what is the definition of, ``insurance?''
Mr. Gordon. Insurance is, again, ultimately providing
protection for individuals, protecting them from risk.
Ms. De La Cruz. So if there is a higher risk, that means
there is a higher premium, correct?
Mr. Gordon. That is correct, and, in fact, every single
State prohibits insurance from being, ``unfairly
discriminatory,'' and insurers are closely examined on that.
And what, ``unfairly discriminatory,'' has always meant is when
you don't charge based on the risk, so insurers are required
to, based on individual risk.
Ms. De La Cruz. So, it is not based on your ethnicity? It
is based on your risk?
Mr. Gordon. Correct.
Ms. De La Cruz. Okay. What we keep hearing over and over
again that has been alluded to was that it is based on
ethnicity. If you are of a minority, in my case, 90 percent
Hispanic, then you just have higher premiums. Would that be a
correct statement?
Mr. Gordon. No, and the regulators would never allow that.
We have actually published very extensive studies that we have
presented to the regulators on this, examining years of data on
auto insurance, showing that there is no unfair discrimination.
In fact, it really boils down to place, not race. When you have
urban areas with high traffic density, you have more accidents.
There may be some historical racism that has led to
minority groups disproportionately living in those urban areas,
but when you control for the vehicle density in the urban
areas, most of that disappears. And again, we are heavily
regulated by the States on this issue and we have reams of data
showing that those neighborhoods are not being charged more for
their risk. It is not a racial issue. We are not allowed to use
race as a rating factor.
Ms. De La Cruz. Wow. What I am hearing is that ethnicity
has nothing to do with the rates, that it is about place, not
race?
Mr. Gordon. Correct.
Ms. De La Cruz. And what I would like to know is, because
it is about place, not race, that means if you live in an area
where there are high uninsured vehicles, then you are probably
going to pay more for your car insurance than in a place that
is different?
Mr. Gordon. Correct.
Ms. De La Cruz. In Hidalgo County, we are, again, 90-
percent Hispanic, and we have a large population of automobile
owners who come from Mexico and do not have insurance. Thus, it
is not because we are Hispanic that we pay more. It is because
there are a high number of vehicles on the roads that do not
have insurance. Would that be a fair assessment?
Mr. Gordon. Yes, that is fair. It is accurate. And also, I
would note that Texas regulators are also very, very robust
regulators, and keeping an eye on that.
Ms. De La Cruz. State-level regulators, correct? And would
you say that the State regulators take pride in their job and
do a thorough job?
Ms. Arnold. Yes.
Ms. De La Cruz. So, they take pride in making sure that the
State laws are being followed?
Ms. Arnold. Yes.
Ms. De La Cruz. And those same State regulators would make
sure that insurance was based on risk and not ethnicity?
Ms. Arnold. Correct.
Ms. De La Cruz. Thank you. I yield back.
Mr. Gordon. Congresswoman, if I may, this is something the
State regulators are working on extensively with us. I think
Commissioner Arnold noted they are working on guidance on AI.
We have been having extensive conversations as an industry with
the regulators on testing, so there is a lot of oversight and
work in this area.
Chairman Davidson. The gentlewoman's time has been yielded
back. The gentlewoman from Colorado, Ms. Pettersen, is now
recognized for 5 minutes.
Ms. Pettersen. Thank you, Mr. Chairman, and thank you all
for being here today. I really appreciate your time and
expertise.
Ms. Lewis, I wanted to know if you would like to add
anything to the previous line of questioning? I know you have a
lot of experience around underwriting and that process around
race as a factor in premium costs.
Ms. Lewis. Yes, I would like to add that I have never seen
a situation nor have I had my friends who were underwriters not
talk about race being a factor when it comes to insurance. And
I am just very, very concerned with anyone who would think that
race is not a factor, because we all know that race is a
factor. In the insurance industry, you have underwriters, you
have loss control people who are the inspectors, and these
people go out and openly talk about those people and how they
are not going to be insured or how they are going to pay more.
The underwriter subjectively debits and increases the cost of
their insurance just because of who they are.
I am also very concerned about credit being used to
determine insurance rates because that is not a factor. Credit
doesn't determine whether or not I am going to get into an
accident. Credit doesn't determine how I drive. What does
determine a lot in urban areas is those people who live in the
suburbs, who drive to the city every single day to come to
work. Nobody thinks about those statistics. And I would like to
have someone tell me, provide a study about all those cars that
come into the urban areas, because even though people do drive
cars in urban areas, most people in urban areas take public
transit. Thank you.
Ms. Pettersen. Thank you for highlighting that today. I had
no idea that this was a factor in actually being insured, so I
really appreciate that, and I look forward to following up on
that.
This is a very important hearing for my State, and a
critical issue for Colorado. We don't even have a wildfire
``season'' anymore; with the changing climate, we are
constantly under threat of wildfires. In communities throughout
my district, I have people who are reaching out that,
unfortunately, are unable to buy homes because they can't prove
that they are able to be insured. We have insurance companies
pulling out of markets because the risk is so unpredictable.
And I guess, more broadly, when I met with people representing
insurance companies recently, they talked about how, right now,
we are facing kind of a perfect storm.
We went through the pandemic. We had the economic fallout
because of the pandemic and because the supply chain was
decimated. We had inflation, rising costs, and one of the
biggest factors in that is our workforce and inability to hire,
which of course, affects all of us, especially in the
construction industry. Everywhere that I go, no matter who I am
talking to, even if it is insurance representatives, we talk
about legal pathways and how critical that is to addressing the
workforce shortage for our current needs and the future needs
of our country. We are also facing increased risk because of
the climate crisis, and that absolutely affects Colorado. And I
think not only about how complicated our current situation is,
but what is going to be happening in the future if we don't
work together to address and help support communities like
mine.
I just want to broadly talk about what we should be
thinking about in Congress--and I am almost out of time
already--about how to address this issue, how to use AI to
build more sustainable, resilient communities and development
recommendations, and how we work together to take what we have
learned around flood insurance, to bring wildfire insurance to
help support communities, but also learning from the lessons of
things that have gone wrong there. I know I am almost out of
time, but if anyone would like to comment?
Mr. Gordon. Congresswoman, if I may, just because you
touched on one of my favorite passions, which is how important
AI is going to be to help us solve some of those workforce
constraints you are talking about, with fewer and fewer people
in the workforce trending over time, the only solution for our
industry is to use AI, for example, drones after disaster hits,
to more efficiently and quickly find out where the damages have
occurred.
Now, with a lot of companies, you can use your iPhone to
take a picture of your auto accident and send that in, and the
AI will quickly determine which group of humans needs to make a
final decision, but it helps triage that. We are not going to
have enough labor in the future for our insurance needs if we
don't leverage AI, with appropriate regulator supervision, of
course.
Ms. Pettersen. Great. I look forward to a longer
conversation soon.
Chairman Davidson. The gentlewoman from Indiana, Mrs.
Houchin, is now recognized for 5 minutes.
Mrs. Houchin. Thank you, Chairman Davidson, and Ranking
Member Cleaver. And thanks to the witnesses for your testimony.
As you are all well aware, the insurance industry impacts
all Americans regardless of income, location, or stage in life.
From first-time homebuyers who want to feel secure in their
purchase, to empty nesters saving for retirement, to retirees
themselves, Americans want options that provide the protection
they need while also being affordable and within their means.
Under recent stresses in the rise of inflation, it has
become significantly more difficult throughout the country,
including in my district. Recent surveys have found that
employers and workers have seen health insurance costs jump 7
percent in the last year, car insurance costs jump an average
of 17 percent nationwide, and homeowners insurance jump 21
percent. With inflation taking a toll on Americans' pocketbooks
in all sectors, increases in insurance costs have become
particularly extreme. So, thank you for coming to talk to us
today about this topic.
We know the problem. I would like to focus my limited time
on what Congress can do or specifically should not do in
response to rising costs.
Mr. Gordon, you have emphasized the importance of better
land use planning as a way to reduce the risk and impact of
natural disasters such as floods, wildfires, hurricanes, and
earthquakes on the property and casualty insurance industry. I
also understand the current land use planning practices in the
United States are often inadequate, inconsistent, and
ineffective, and have led my constituents in Indiana to
effectively subsidize those who build dangerously on the coast.
Could you expand on why land use planning is so crucial for the
resilience and sustainability of the insurance sector and the
communities it serves? And could you explain why we have gotten
it so wrong up until this point?
Mr. Gordon. What we have now seen is the number-one cost
driver for the insurance rates has been people moving into
high-climate-risk regions, and sometimes, some of the
government policies not only subsidize that, but ultimately,
they mask the true environmental costs. I think my colleague,
Mr. Nutter, mentioned that we have seen roughly an annual 5
percent to 7 percent annual increase in natural disaster
losses, largely because of those movements.
We are not taking into account when people buy a home, what
is the long-term cost going to be of insurance living in a
coastal area, or living in the wildland urban interface. And
then, we are not doing the land use management, things like
controlled burns, like we used to do as a society to make sure
we don't have more and more wildfires. And we are just now
developing--and this is really one of the most exciting parts
of the industry--some very new fire safety standards, how you
build defensive space around your house, and you need
communities to do that to protect each other. There is a lot of
work in this area, and there is a lot of opportunity for
policymakers to get better building codes, get better land use
management, and get better mitigation into society.
Mrs. Houchin. Thank you. And I want to focus specifically
on subsidies as a means to address the issue of rising
insurance costs. You discussed in your written testimony the
death spiral that subsidies can create in markets. Do subsidies
cause rates to increase to rate payers? Could that, in turn,
result in more individuals needing to access a subsidy until a
private market is replaced almost entirely by a public or
largely subsidized market at a higher and higher cost to other
rate payers? Is this the death spiral that you discussed?
Mr. Gordon. That is exactly the death spiral, and, in fact,
we saw this in Florida after Hurricane Andrew. They tried rate
suppression, and you went from the vast majority, 94 percent,
of the homeowners' policies written by national insurers, to,
after several years, only 18 percent. Think of how many
national carriers abandoned Florida because of the rate
suppression.
That is what we are seeing in California. California also
has a residual market that says all those people who aren't
getting coverage in the admitted market, go to the residual
market, but the excess losses have to get paid back by the
insurers with no recourse. So, it is like musical chairs, where
there are fewer and fewer insurers left holding a bigger and
bigger bag of exposures.
Mrs. Houchin. Thank you. And, Mr. Nutter, you talked about
what Congress should not do. I appreciate that you clearly
state Congress should not create a new Federal property
reinsurance program to displace the role of States. I agree.
Can you discuss why it is so important that Congress not create
a new program?
Mr. Nutter. Thank you for the question. Effectively, it
would put Congress in the business of regulating or managing
property markets at the State level where, in fact, you have
such different State perils, legal environments, and regulatory
philosophies, that it really is going to be counterproductive,
if you will, and concentrates risk such that taxpayers across
the country will subsidize high-risk people from low-risk
areas.
Mrs. Houchin. Thank you. I yield back.
Chairman Davidson. Thank you. The gentleman from Nevada,
Mr. Horsford, is now recognized for 5 minutes.
Mr. Horsford. Thank you. Good afternoon, and thank you to
the chairman and the ranking member. I am glad that we are
finally getting back to work here in the House, and I
appreciate our witnesses for taking the time to be here.
We are here to discuss an issue that is undoubtedly
important, and I certainly agree that we should take a serious
look at solutions to mitigate the alarming increases recently
in insurance costs. However, based on the legislation notice
for this hearing, I believe that we should be focused on
dealing with the concurrent and interconnected crises that face
our Congress today instead of spending our time debating the
existence of the Federal Insurance Office. My constituents
deserve to have a Congress that works for them, and right now,
they are desperate for solutions to the affordable housing
crisis that is gripping our State and the nation.
During a time of continued elevated housing costs, with the
average household spending over 30 percent of their income on
mortgage or rent, and a shortage of nearly 6.5 million homes,
the ability to make ends meet and keep a roof over their heads
is slipping away from countless families across the country.
And yet, we cannot advance any meaningful housing policy
because we still have had zero hearings on affordable housing
in this committee this Congress. Now that the House Floor has
finally been reopened for legislative business and we are
finally able to get back to doing the people's work, I hope
that this subcommittee, the Subcommittee on Housing, will adopt
a renewed focus on how we can promote sustainable and
affordable housing for everyone.
All of this chaos must be considered within context, and,
unfortunately, due to the complete paralysis that this House
found itself in, we now have only 15 days to avert a needless
government shutdown. Given what we face as a nation, a shutdown
at this time should not even be an option, and we are quickly
running out of time to avert yet another crisis.
We have continued to see depressed home sales volume this
year, and my colleagues' inability to provide long-term funding
for our government agencies will only exacerbate this issue in
the communities that cannot afford to lose financing or pay
fees to push back their closing. If we want to examine factors
in the high cost of insurance, then we must seriously consider
that in the event of a shutdown, property owners could be
subject to force-placed insurance policies by their mortgage
servicers, which has historically been even more costly than
insurance obtained in the marketplace.
Ms. Lewis, unfortunately, we know that these impacts will
not be borne equitably across socioeconomic lines and that
communities of color will inevitably be hit the hardest. Could
you explain briefly the longer-term impacts that even a short-
term shutdown could have on low- and moderate-income
communities that depend on the National Flood Insurance
Program?
Ms. Lewis. I will try to explain. I am sorry for my
hoarseness. Even a short-term delay would affect low-income
communities and communities of color because they don't have
the reserves to sustain them if they don't get immediate
relief, and that is a serious problem that is pervasive
throughout the entire community.
Mr. Horsford. Thank you. Not only the impacts of a
catastrophic lapse, but also the underlying cost will not fall
on all of our communities equally. This, unfortunately, remains
true for the challenges associated with the ever-present
effects of climate change. While this may be difficult for some
of my colleagues to admit, we can no longer ignore the
increasing frequency and severity of natural disasters. As you
may have heard, in a normal year, between 1980 to 2022, the
United States was expected to face approximately 8 disasters
with losses exceeding $1 billion. We have already been struck
by 24 such disasters thus far in 2023 alone, totaling over $67
billion of combined losses.
Ms. Lewis, as we continue to see rising insurance rates in
light of the increased risk of natural disaster events, Federal
programs focused on mitigation are also important. Can you
explain the impact to constituents in this regard?
Ms. Lewis. Oh definitely, it is important. I think at the
end of the day, the first thing we should do is eliminate the
risk. Stop constructing houses and schools in flood zones. Make
sure that building codes are up to the standards where they can
withstand hurricanes and floods. We aren't doing that, and we
need to do that.
Chairman Davidson. The gentleman's time has expired.
Mr. Horsford. Thank you for your response. I yield back.
Chairman Davidson. The gentlewoman from California, Mrs.
Kim, is now recognized for 5 minutes.
Mrs. Kim. Thank you, Chairman Davidson, for letting me
waive on to this very timely and important hearing, and I want
to thank our witnesses for being with us today. I represent
California, and unfortunately, in my home State of California,
there are misguided policies from Sacramento and the State's
insurance commissioners. Those policies have recently forced
major insurers to exit the California insurance market. As a
result, my office has received numerous phone calls and
messages saying that the cost of insuring homes is simply
unbearable and unaffordable. Less competition and less players
in the insurance market is pushing premiums up and forcing
people into California's FAIR Plan, which is more costly than
private plans and does not provide comprehensive coverage.
Mr. Gordon, I want to ask you about California Insurance
Commissioner Lara. He said recently that he will continue to
partner with all those who want to work toward real solutions.
Can you update the committee on any new agreements made between
the State of California and stakeholders since Mr. Lara's
announcement regarding policy changes to State insurance
policy?
Mr. Gordon. There is a very strong effort by the California
legislature to create some fixes, which fell apart at the last
minute due to their effort to add more mandates and
prohibitions on nonrenewals. A lot of the problems, frankly,
are created at the regulatory levels. I mentioned going 30
months without approving a single private passenger auto rate
increase at a time of record inflation. So, I think the
Governor and the Commissioner now recognize that there needs to
be fixes. They have both committed to doing it, although some
of those fixes are going to take a while. They are targeting
the end of 2024 to get some of those new and improved
regulations in place, meaning they would take effect in 2025.
That is a long time in a deteriorating marketplace to get fixes
in place.
Mrs. Kim. Yes. You are talking about the 35-year-old
regulatory framework, right? And obviously, we agree it needs
to be acted upon and upgraded because my fear is that, since it
is taking too long, even though Commissioner Lara is saying all
these policy recommendations, the next insurance commissioner
could rescind policy changes. So, we do agree that there needs
to be a legislative fix.
But another problem that we are seeing in the State of
California is the broken FAIR Plan, which, as you mentioned in
your testimony, already has a large deficit. Can you describe
the FAIR Plan's assessment process and how it ultimately
increases prices for households who buy insurance in the
private market?
Mr. Gordon. Yes. The FAIR Plan is horribly underfunded, as
most government programs ultimately tend to be, particularly
for insurance. And for any excess losses that the FAIR Plan
has, there is a whole layer of assessments that go to private
insurers and they are not allowed any mechanism to recoup that.
That was something in the legislative process they knew needs
to be fixed. So, if there is a big wildfire in California, most
high-risk areas are areas with a disproportionate concentration
of FAIR Plan policyholders, which means the private insurers
who haven't withdrawn from the market are going to get left
with a bigger and bigger tab.
And that is spreading those costs because insurers have to
make sure they are collecting enough money to cover all of
those additional expected liabilities and exposures, so those
who are staying in California have to collect more and more for
that exposure. That is a ticking time bomb that I know the
legislature and the commissioner are hoping to fix.
Mrs. Kim. Thank you for mentioning that because again, I
represent a community that is very wildfire-prone, and we need
to do something about it. Obviously, California needs to do
something more to mitigate those wildfires with the active
management tools, so thank you for mentioning that.
Mr. Nutter, you said something very interesting in your
oral statement, that insurers are not required to buy
reinsurance, yet they do it. So why do they do it, and how is
California's Prop 103 impacting the reinsurance market that we
talked about?
Mr. Nutter. Yes. Thank you for the question. They buy
reinsurance largely to manage where they have a significant
concentration of upheaval, in your case wildfires, or where the
capital support for the company is enhanced by the role that
reinsurance plays. The issue that I would highlight for Prop
103 that you are referring to is largely that it has caused the
Insurance Department not to take into consideration the future
risk associated with that and to look at solutions, perhaps
community-based solutions, that would find both mitigation and
financial recovery as part of that.
Mrs. Kim. Thank you. My time is up.
Chairman Davidson. The time has expired. Since it is
probably his last appearance before our committee, I did want
to take a moment to acknowledge that Frank Nutter will be
retiring from RAA on December 31st, after 32 years as
president. During his tenure, RAA has grown into the leading
voice for the reinsurance industry in the United States, and
that is quite an accomplishment for anyone, particularly for
someone from his humble beginnings in West Virginia. But it is
not even his most important contribution. Before he came to
RAA, Frank was also an officer in the United States Navy, and
served in Vietnam. Thank you, sir. We applaud you for your
service to our country and for your leadership at RAA. We wish
you well in your well-earned retirement.
Mr. Nutter. Mr. Chairman, thank you so much for that. It
has always been an honor to appear before the committee today
and so many other times, and an honor to represent this
industry. Thank you.
Chairman Davidson. Thank you. I would like to thank all of
our witnesses for their testimony today.
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.
This hearing is now adjourned.
[Whereupon, at 4:11 p.m., the hearing was adjourned.]
A P P E N D I X
November 2, 2023
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