[Senate Hearing 118-345]
[From the U.S. Government Publishing Office]
S. Hrg. 118-345
RISKIER BUSINESS: HOW CLIMATE IS ALREADY
CHALLENGING INSURANCE MARKETS
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
June 5, 2024
__________
Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-978 PDF WASHINGTON : 2024
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COMMITTEE ON THE BUDGET
SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia MITT ROMNEY, Utah
JEFF MERKLEY, Oregon ROGER MARSHALL, Kansas
TIM KAINE, Virginia MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico RICK SCOTT, Florida
ALEX PADILLA, California MIKE LEE, Utah
Dan Dudis, Majority Staff Director
Kolan Davis, Republican Staff Director and Chief Counsel
Mallory B. Nersesian, Chief Clerk
Alexander C. Scioscia, Hearing Clerk
C O N T E N T S
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WEDNESDAY, JUNE 5, 2024
OPENING STATEMENTS BY COMMITTEE MEMBERS
Page
Senator Sheldon Whitehouse, Chairman............................. 1
Prepared Statement........................................... 34
Senator Charles E. Grassley...................................... 3
Prepared Statement........................................... 36
STATEMENTS BY COMMITTEE MEMBERS
Senator Tim Kaine................................................ 18
Senator Ron Johnson.............................................. 19
Senator Jeff Merkley............................................. 21
Senator Mitt Romney.............................................. 23
Senator Chris Van Hollen......................................... 26
Senator Ben Ray Lujan............................................ 30
WITNESSES
Mr. Rade Musulin, Principal, Finity Consulting................... 6
Prepared Statement........................................... 39
Dr. Ishita Sen, Assistant Professor of Finance, Harvard Business
School......................................................... 8
Prepared Statement........................................... 56
Ms. Deborah Wood, Florida Resident............................... 9
Prepared Statement........................................... 70
Hon. Glen Mulready, Insurance Commissioner, State of Oklahoma.... 11
Prepared Statement........................................... 72
Dr. EJ Antoni, Research Fellow, Heritage Foundation's Grover
Hermann Center for the Federal Budget.......................... 12
Prepared Statement........................................... 75
APPENDIX
Responses to post-hearing questions for the Record
Mr. Musulin.................................................. 87
Dr. Sen...................................................... 93
Dr. Antoni.................................................. 97
Charts submitted by Chairman Sheldon Whitehouse.................. 100
Statement submitted for the Record by Demotech................... 103
RISKIER BUSINESS:
HOW CLIMATE IS ALREADY
CHALLENGING INSURANCE MARKETS
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WEDNESDAY, JUNE 5, 2024
Committee on the Budget,
U.S. Senate,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:00
a.m., in the Dirksen Senate Office Building, Room SD-608, Hon.
Sheldon Whitehouse, Chairman of the Committee, presiding.
Present: Senators Whitehouse, Merkley, Kaine, Van Hollen,
Lujan, Grassley, Johnson, Romney, and R. Scott.
Also present: Democratic Staff: Dan Dudis, Majority Staff
Director; Kara Allen, Senior Energy and Climate Advisor, Energy
Lead.
Republican Staff: Chris Conlin, Deputy Staff Director;
Krisann Pearce, General Counsel; Ken Acuna, Professional Staff
Member; Jordan Pakula, Professional Staff Member; Ryan Flynn,
Budget Analyst.
Witnesses:
The Honorable Glen Mulready, Insurance Commissioner, State
of Oklahoma
Mr. Rade Musulin, Principal, Finity Consulting
Dr. Ishita Sen, Assistant Professor of Finance, Harvard
Business School
Ms. Deborah Wood, Florida Resident
Dr. EJ Antoni, Research Fellow, Heritage Foundation's
Grover Hermann Center for the Federal Budget
OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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\1\ Prepared statement of Chairman Whitehouse appears in the
appendix on page 34.
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Chairman Whitehouse. Good morning everyone. I will call
this hearing of the Budget Committee to order, and thank our
witnesses for being here, and our Ranking Member of course.
More than a year has passed since our hearing on climate havoc
in the insurance industry upending housing markets, mortgage
markets, and local property tax bases, and spilling out into
the broader economy.
That threat is just one of the systemic risks climate
change poses to our economy and to our financial system. Since
that hearing a year ago, things have gotten worse in insurance
markets, and worse for American families that rely on them.
Press reporting, risk assessments, and further warnings are
piling up. I'd reference in particular the recent cover article
of the Economist magazine.
As we heard in those original hearings, you need insurance
to get a mortgage. Without a mortgage most of our constituents
could not purchase a home. What happens when insurance
companies go bust, or don't renew policies, or pull entirely
out of a state? Families lose insurance. They can't find a
decent policy. They can't afford what's available. Some even
pack up and move away.
Some end up with state backed insurers of last resort,
which may or may not be solvent. Some end up with small
insurers, which may or may not have the resources to pay
claims. This is what we've begun to see in multiple states. One
is Florida. Ten percent of our nation's homeowners live in
Florida. Florida homeowners pay on average over $6,000 for
insurance, the highest in the country, indeed more than 3 times
the national average, which is $1,700.00.
Florida's average premium has doubled between 2020 and
2023, and the trajectory is that it's going to get worse. This
has put a strain on many Florida residents. They install
hurricane windows and doors to reduce risk, but premiums
continue their upward march. They put off retirement, or skip
vacations. For some, such as Deb Wood and her husband, it is
simply too much. In Florida, insured losses grew by 206 percent
between 2003 and 2018. 2022 saw Florida residents file over
678,000 personal and commercial insurance claims. Over 40
percent were hurricane related.
The National Oceanic and Atmospheric Administration (NOAA)
predicts an 85 percent chance of an above normal 2024 hurricane
season, with 17 to 25 total named storms, and 4 to 7 major
hurricanes. In 2022 and 2023, more than a dozen insurance
companies left the Florida residential market, including
national insurers like Farmers. Residents fled to Citizens
Property Insurance, the state backed insurer of last resort,
which ballooned from a 4 percent market share in 2019 to as
much as 17 percent last year.
If it has to pay out claims that exceed its reserves,
Citizens can levy a surcharge on Florida insurance
policyholders across the state. Good luck with that,
particularly if the surcharge grows to hundreds or even
thousands of dollars. To depopulate its books, Citizens has let
private insurers cherry pick out its least risk policies.
Those private insurers may have problems of their own, as
we will hear today. This all looks like an insurance market
that is swirling the drain. As one of our witnesses put it, and
I quote, ``unreliable insurance could result in a situation
where large climate shocks may cause property damage at the
exact time that the property insurer becomes insolvent,
increasing household default incentives, and losses given
default.''
What will the collision of increasingly unreliable
insurance and greater mortgage defaults mean? Who will be left
holding the bag? The federal budget takes a hit because these
insurers and their policies are accepted by Freddie Mac and
Fannie Mae, who are either own, or guarantee a large part of
our $12 trillion mortgage market.
This all sounds eerily reminiscent of the run-up to the
mortgage meltdown of 2008, including a role of potentially
captive, or not fully responsible rating agencies. Florida is
far from alone. A New York Times investigation found that the
insurance industry lost money on homeowner's coverage in 18
states last year, and the states may surprise you. The list
includes Illinois, Michigan, Utah, Washington, and Iowa.
Insurers in Iowa lost money each of the last 4 years. This
is a signal that hurricanes and earthquakes, once the most
prevalent perils, are being rivaled by hail, windstorms, and
wildfires. Last year the U.S. experienced 28 separate billion-
dollar extreme weather events. Over the past decade 28 states
have been hit by such events more than twice in a year--I
should say twice or more in a year.
38 states were hit in back to back years, and losses are
expected to climb. So too will premiums, that is where insurers
are even willing to stay. In one example, the premium on a
$250,000 home for a 40-year-old couple with a combined good
credit rating and clean claims history, would increase by as
much as 63 percent in Louisiana, and 61 percent in Nebraska.
To borrow from the Times article, ``the question facing
insurance companies around the country, and the homeowners who
rely on them is which state might be heading in the same
direction as Florida? The answer from our reporting, it could
be any of them.''
Or as a former State Insurance Commissioner said, ``we're
marching toward an uninsurable future.'' This isn't all that
complicated. Climate risk makes things uninsurable. No
insurance makes things unmortgageable. No mortgages crashes the
property markets. Crashed property markets trash the economy.
It all begins with climate risk, and a major party pretending
that climate risk isn't real, imperils our federal budget and
millions of Americans all across the country.
I'll just add in closing that the scale of the exposure
that we're talking about today, and the paucity of our
response, and the numerosity and severity of the warnings we
have heard from responsible people, and the role of
underinsurance and potentially unreliable ratings from rating
agencies is really ringing a lot of alarm bells with me of what
we looked like going into 2008. And with that, I'll turn to my
distinguished Ranking Member, Senator Grassley.
OPENING STATEMENT OF SENATOR GRASSLEY \2\
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\2\ Prepared statement of Senator Grassley appears in the appendix
on page 36.
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Senator Grassley. Thank you, Mr. Chairman. Welcome to our
panel of experts. If the Federal Government is going to remain
ready to respond to the natural disasters and national
emergencies, we have to have the capability of doing that, and
it seems to me that begs to put the nation's fiscal house in
order.
Yet, even with interest on our national debt, and that is
set to surpass defense spending this year, the majority refuses
to write a budget, or work together to curb reckless Washington
spending. This week is more of the same, with our 19th hearing
on climate change. President Biden and the majority would like
us all to ignore our exploding $34 trillion debt.
The majority hopes that we stop discussing how unchecked
deficit spending has fueled inflation, hammering hard-working
Americans, and I will say shortly, has something to do with
driving up the cost of insurance. Families now face prices that
are 20 percent higher than when President Biden took office. 65
percent of Americans report that entrenched inflation has made
their financial situation worse off under the Biden
administration, and that's not Chuck Grassley, that's according
to the Federal Reserve.
Moreover, recent high interest rates have contributed to
Americans struggling to pay record high credit. That means
their credit card bills or home mortgage. As Federal Reserve
Chairman Powell has said, ``it's probably time, or past time,
to get back to an adult conversation among elected officials
about getting the Federal Government back on a sustainable
fiscal path.''
Absent correcting action, Iowans, and for that matter all
Americans, will be faced with even higher interest rates, lower
incomes, and elevated inflation, and that will be the situation
for years to come. As to the subject of today's hearing. We've
seen this show before. The majority continues to crusade
against American fossil fuel companies. They want to bully
insurers into abandoning their diversified portfolios, so they
stop underwriting all fossil fuel projects.
If the majority get their way, Americans can expect to pay
much more to put gas in their cars, and to heat their homes.
Now, I've done battle with big oil in the past, particularly
when it comes to their opposition to bio fuels, and I support
reasoned oversight over insurance companies. But oversight
isn't the same thing as advocacy that seeks to punish those
that hold different views from one's own.
As Justice Sotomayor wrote in last week's unanimous
National Rifle Association of America (NRA) versus Vullo
decision, ``government officials cannot attempt to coerce
private parties in order to punish or suppress views that the
government disfavors.'' Insurance premiums are far too high
across the board, and may increase after the recent storms,
including those very storms in my state of Iowa.
Climate change isn't the primary driver of insurance rates
hikes, and collapse of the insurance industry isn't imminent,
although I'll have to say, Iowa had six property and casualty
companies pull out of insuring Iowans. Climate change doesn't
explain why auto insurance premiums in 2024 have increased by a
whopping 20 percent year over year.
It also doesn't account for the consistent failure of
liberal cities to fight crime, which has raised insurance risk
and even caused insurers to deny coverage. Expensive liberal
policies, not climate change, are much to blame for these
market dynamics. Insurance companies and reinsurers are
scrambling to wrangle inflation, like the rest of us.
Disasters cost more than ever because our goods and
services are much more expensive. Moreover, there are more rich
people living in areas affected by weather, all the way from
Newport down to Miami Beach. It's simply more costly to pay the
bill for insurance claims.
What's more, the Federal Reserve can't keep up with the
Biden inflation, despite hiking interest rates to a 23 year
high. Reinsurance companies are in the business of purchasing
risk from insurance company portfolios. It's only rational for
them to forego risky investments when the U.S. Treasury pays
such a healthy return.
Inflation has become embedded in the economy, and the
historic levels of borrowing by the Federal Government are
crowding out the private sector. It only makes sense that the
majority would rather point the finger at climate change. To do
otherwise means that they acknowledge their reckless spending
is a major cause of the problem.
So, I welcome all today's witnesses, and I look forward to
each of your testimonies, and hope you guide this Committee to
focus on our primary responsibility. Thank you.
Chairman Whitehouse. Thanks very much, Senator Grassley.
Before I introduce the witnesses, let me just point out that we
have a budget agreed to in bicameral and bipartisan fashion.
And with respect to reducing fiscal risk, I've been pursuing
that on four routes. One is derisking the budget, which is
important because a third of our national debt came from
shocks, economic shocks, that we could have predicted that were
not part of regular and ordinary budgeting.
Second, raising revenues, particularly on the corporate
sector, whose contribution to our government revenues has
declined dramatically across recent decades. And of course,
high end people, including billionaires who literally pay zero
in income tax.
Third is to reduce healthcare spending. It's a major
component of our spending, and with system reforms that the
Ranking Member and I have discussed, a number of bipartisan
bills that we're working on, I think we can make real progress
there.
And the last, and probably the least, is to review
appropriated spending. That is not the highest value, or the
most significant, important focus I think, in terms of getting
to a balanced budget, but it is a small part of the overall
equation.
Senator Grassley. Could I respond to that before you
introduce our witnesses?
Chairman Whitehouse. Of course.
Senator Grassley. Yeah. We don't have a budget resolution
for 2025. What we do have is called a deemer, and it's no
substitute for a real Congressional Budget Resolution that can
be debated and amended on the floor by all 100 Senators. A
deemer has none of the basic contents of a congressional budget
required under Section 301 of the Budget Act.
And while a budget resolution can offer a serious financial
plan for the Federal Government, deemers based on baseline
estimates are simply placeholders until we finish a real
budget. Last year's debt limit deal explicitly said that a
deemer does not prevent Congress from doing a real budget
resolution for 2025. Thank you very much.
Chairman Whitehouse. That is true, and it remains the case
that we have a budget that was agreed to in bicameral and
bipartisan fashion. The first witness is Rade Musulin. Rade is
an actuary with 45 years of experience in insurance,
specializing in property, pricing, natural perils, reinsurance,
agriculture, catastrophe risk modeling, public policy
development and climate risk. Specifically, he spent many years
working in Florida, including as Chair of the Florida Hurricane
Catastrophe Fund Advisory Council during the time in which
Citizens Property Insurance Corporation was established.
Our second witness is Dr. Ishita Sen. Dr. Sen is an
Assistant Professor at Harvard Business School. Her recent
research examines the pricing of property insurance, and the
interactions between insurance and mortgage markets. This
includes the role that institutions and the regulatory
landscape play, and the broader consequences for real estate
markets, climate adaptation and our overall financial
stability.
Our third witness is Deb Wood. Ms. Wood and her husband,
Dan McGrath are both retired Floridians. They moved to South
Florida in 1979, and lived in Broward County, which includes
Fort Lauderdale, for 43 years until skyrocketing insurance
premiums became too much. They now reside in Tallahassee,
Florida.
I will now turn to my Ranking Member, Senator Grassley, to
introduce the Republican witnesses.
Senator Grassley. Thank you for the privilege of
introducing my invitees to this Committee. Dr. E.J. Antoni is a
Research Fellow at the Heritage Foundation, Grover M. Hermann
Center for Federal Budget. His research focuses on fiscal and
monetary policy, and he previously was an economist at the
Texas Public Policy Foundation. Antoni earned his master's
degree and doctorate's degree in economics from Northern
Illinois University.
Commissioner Glen Mulready has served as Oklahoma's 13th
Insurance Commissioner, and was first elected to this position
in 2019. Commissioner Mulready started his insurance career as
a broker in 1984, and also served in the Oklahoma State House
of Representatives.
He supports efforts to continue to apply best practices,
modernizing the Oklahoma Insurance Department, and embracing
new technology to serve the people of Oklahoma. Welcome to both
of you.
Chairman Whitehouse. With that, Mr. Musulin, you have 5
minutes, and your entire written testimony, which was very
helpful, and I appreciate, will be made a part of the record of
the proceedings. Please proceed with your oral statement.
STATEMENT OF RADE MUSULIN, PRINCIPAL, FINITY CONSULTING \3\
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\3\ Prepared statement of Mr. Musulin appears in the appendix on
page 39.
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Mr. Musulin. Chairman Whitehouse, Ranking Member Grassley,
and distinguished members of the Committee, thank you for the
opportunity to appear before you today. My name is Rade
Musulin. I'm an actuary who has extensive experience in natural
hazard risks, and funding arrangements for the damage and loss
they cause.
I worked with many public sector entities on policy
responses to the challenges of affordability, availability of
insurance, and community resilience. This work included
participating in Florida's response to Hurricane Andrew, which
included the creation of the Florida Hurricane Catastrophe
Fund, and Citizens Property Insurance Corporation.
The catastrophe (CAT) Fund and Citizens can access
different forms of funding than traditional insurance
companies. Instead of holding sufficient capital or reinsurance
before an event to cover the cost of potential losses, both
entities use public sources of capital to reduce upfront costs
by partially funding losses post event through bonding and
assessments.
All property casualty insurance policyholders, whether in
Citizens or not, are subject to its assessments, while the CAT
Fund could also assess almost all policies, including
automobile. This approach exposes Floridians to debt and
repayment if large losses occur, and it subsidizes high risk
policies from the entire population. These pools, others like
them in other states, and the National Flood Insurance Program
(NFIP) have contributed to rapid development in high risk
areas, driving higher costs in the long run.
In Florida, national insurers have reduced their exposure.
As a significant proportion of the insurance market has moved
to Citizens, or smaller insurers with limited capital that are
heavily dependent on external reinsurance. Now, to date,
Florida's system has been successful in meeting its claims and
obligations, while improvements in building codes have reduced
loss exposure.
However, for a variety of reasons, including exposure to
hurricanes, claims cost inflation, and litigation, Florida's
insurance premiums are the highest in the nation, causing
significant affordability stress for consumers. According to
market research from Bank Rate, the average premium for a
$300,000 home in Florida is 3 times the national average, with
some areas 5 times the national average.
A major hurricane hitting a densely populated area like
Miami could trigger large and long-lasting post assessments, or
even exceed the system's funding capacity. Continued rapid
exposure growth and more extreme hurricane losses amplified by
climate change will cause increasing stress on the nation's
insurance system, which can be felt through solvency issues,
non-renewals, growth of government pools, and affordability
pressure.
Evidence of increasing risk abounds, including Hurricane
Otis in 2023, which rapidly intensified from a tropical storm
to a CAT 5 hurricane, and devastated Acapulco in Mexico. Last
summer water temperatures off Florida exceeded 100 degrees
Fahrenheit. Last week, as was alluded to earlier, NOAA
forecasted an extremely active hurricane season for '24.
We've seen losses in the Mid-Atlantic from Sandy, record
flooding from Harvey, and extreme devastation from Maria, among
others. In coming decades, we must prepare for the possibility
of more extensive--more extreme hurricanes, and coastal
flooding from Texas to New England.
Florida's experience is a warning of what we may see in the
future in other states. Despite its innovative and extensive
efforts to address its hurricane problem, premiums are high,
consumers may face large assessments, and many are dependent on
Citizens and smaller insurers.
Most current building codes and land use policies in the
country do not reflect potential future risk. Even if we
undertook rapid action to address this, existing exposure and
likely development will leave us vulnerable to large losses for
decades to come, which may trigger more widespread availability
and affordability issues, or even calls for federal assistance.
The combination of demographics, development, and disasters
pose a significant risk to our financial system, and climate
change increases that risk. Addressing this will be a long-term
effort which involves very difficult public policy choices,
thank you.
Chairman Whitehouse. Thanks very much. Dr. Sen, please
proceed with your testimony.
STATEMENT OF DR. ISHITA SEN, ASSISTANT PROFESSOR OF FINANCE,
HARVARD BUSINESS SCHOOL \4\
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\4\ Prepared statement of Dr. Sen appears in the appendix on page
56.
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Dr. Sen. Good morning Senators. I am Ishita Sen, Assistant
Professor at Harvard Business School, and my research studies
insurance markets. In recent work with coauthors at Columbia
University and the Federal Reserve Board, I examine how climate
risk creates fiscal and potentially financial instability
because of miscalibrated insurance screening standards, and the
repercussions for mortgage markets.
Insurance is critical to the housing market. Property
insurers help households rebuild after disasters. By preserving
collateral values and reducing the likelihood that a borrower
defaults insurance directly reduces risks for mortgage lenders
and the Government Sponsored Enterprises (GSEs), Fannie Mae and
Freddie Mac.
Mortgage lenders, therefore, require property insurance,
and the GSEs only purchase mortgages backed by insurers who
meet the minimum financial strength ratings, which measure
insurer solvency, and the ability to pay claims. The GSEs
accept three main rating agencies: AM Best, S&P, and more
recently Demotech. And to provide an example, Fannie Mae
requires insurers to have at least a B+ rating from AM Best, or
at least an A rating from Demotech, to accept a mortgage. Now,
despite having this policy in place, we find a dramatic rise in
mortgages backed by fragile insurers, and show that the GSEs,
and therefore the taxpayers, ultimately shoulder a large part
of the financial burden. Our research focuses on Florida
because of the availability of granular insurance market data,
and we show that traditional insurers are exiting, and the gap
is rapidly being filled by insurers rated by Demotech, which
has about a 60 percent market share in Florida today.
These insurers are low-quality across a range of different
financial and operational metrics, and are at a very high risk
of becoming insolvent. But despite their risk, these insurers
secure high enough ratings to meet the minimum rating
requirement set by the GSEs.
Our analysis shows that many actually would not be eligible
under the methodologies of other rating agencies, implying that
in many cases these ratings are inflated, and that the GSEs'
insurer requirements are miscalibrated.
We next look at how fragile insurers create mortgage market
risks. In the aftermath of Hurricane Irma, homeowners with a
policy from one of the insolvent Demotech insurers were
significantly more likely to default on their mortgage relative
to similar borrowers with policies from stable insurers.
This is because insurers that are in financial trouble
typically are slower to pay claims, or may not pay the full
amount. But this implies severe economic hardships for many,
many Floridians, despite having expensive insurance coverage in
place. However, the pain doesn't stop there. The financial cost
of fragile insurers go well beyond the borders of Florida
because lenders often sell mortgages, for example to the GSEs,
and therefore the risks created by fragile insurers spread from
one state to the rest of the financial system through the
actions of lenders and rating agencies.
In fact, we show two reasons why the GSEs bear a large
share of insurance fragility risk. First, lenders strategically
secularize mortgages, offloading loans backed by Demotech
insurers to the GSEs in order to limit their counterparty risk
exposures.
And second, that lenders do not consider insurer risk
during mortgage origination for loans that they can sell to the
GSEs, even though they do so for loans that they end up
retaining, indicating lax insurer screening standards for loans
that can be offloaded to the GSEs.
Before I end I want to leave you with two numbers. Over 90
percent, that's our estimate of Demotech's market share among
loans that are sold to the GSEs. And 25 times more, that's
Demotech's insolvency rate, relative to AM Best, among the GSE
eligible insurers.
Projections suggest risks will continue to grow with
climate change and with more building in risky areas--that is
unless action is taken to correct incentives and strengthen
insurance markets, which includes properly accounting for
insured solvency risks and climate risks. A necessary starting
point for all of this is access to granular insurance
underwriting data. I urge regulators to collect these data in a
comprehensive way, and make it widely available for research. I
really appreciate this opportunity, Senators, and your timely
efforts on this issue. Thank you.
Chairman Whitehouse. Thank you very much. I now have the
pleasure of welcoming Ms. Deborah Wood, who can bring some
lived experience to the expert testimony that we have heard.
Please proceed, Ms. Wood.
STATEMENT OF DEBORAH WOOD, FLORIDA RESIDENT \5\
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\5\ Prepared statement of Ms. Wood appears in the appendix on page
70.
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Ms. Wood. Good morning, and thank you for inviting me. My
name is Deborah Wood. My husband, Dan McGrath and I, moved from
New Jersey to South Florida in 1979. We lived in Broward County
for 43 years until we sold our home in January 2023, in part
because our home insurance was becoming unaffordable.
My husband and I are retired. He was a public school
teacher of special needs children, and I was a journalist. Dan
and I raised our two daughters in Florida, and all four of us
have earned degrees from Florida public universities.
In 1994, we moved to the City of Plantation, about 10 miles
inland from the east coast. Home insurance rates were
reasonable in those early years, and when we had to replace our
roof in 2008 after a storm, the claims process was very smooth.
Our policy renewed each October with manageable rate
increases. That changed in recent years. In 2017, we paid
$3,700 per year for insurance, and in subsequent years the
rates increased significantly, so that our proposed renewal for
2023 was more than $8,000. Our problems with insurance began in
2017.
Sometime before my husband and I left on a trip, a man
showed up unannounced, saying he was from my insurance company
and wanted to take a look at the property. As he had no
identification, I declined him access. I left the company a
voicemail, and forgot about it until a few weeks later when I
received a notice that our policy would not be renewed because
I had refused an inspection.
I contacted them immediately, said there was a
misunderstanding, and asked them to send another inspector.
They did. I didn't hear anything more, and naively thought we
no longer had a problem. I was wrong. In early September my
husband and I were at the Grand Canyon National Park, where we
caught the news of Hurricane Irma's pending assault on Florida.
I knew we would be covered for the storm, but I wanted
reassurance that my policy was on track to be renewed in
October, so I called the company. I will never forget that
phone conversation. I was told that we still would not be
renewed, but now the reason was because my roof had failed
inspection. I asked why did you not tell me this, and the
answer was because we don't have to.
I asked for the roofing report, and was told no. That was
the property of the insurance company. So, this company that I
had done business with for at least 20 years, was not only
dropping us, but was allowing us to ride out a potentially
catastrophic storm with what they had determined was a
defective roof without even warning us.
Fortunately, we only incurred minor damage from Irma, but
we had to scramble to find a new company in a matter of weeks
in a state that had sustained major damage. Our roof passed the
new company's inspection with no problems, even after Irma, but
unfortunately, their rates were higher, and kept increasing,
even as we had no new claims, reduced our coverage, replaced
our windows and doors with hurricane proof glass, at a cost to
us at about $40,000.
My husband I never intended to move. We loved our
community, our neighbors, and our friends. Our home in South
Florida was the regular gathering place for extended family. We
truly enjoyed hosting visitors.
But in 2022, we began discussions as to whether South
Florida was still the best place for us. There were family
concerns, the weather events were becoming more and more
frequent, and maintaining our home was becoming expensive.
The insurance quote for 2023 gave us the push to put the
house on the market. We intended to buy another home in
Tallahassee, Florida, near our daughter and son-in-law. We put
our belongings in storage, moved in with them, and looked for a
new home. Flash forward to 2024. We have reluctantly made the
decision that we will not be buying a home in Florida.
We've learned there's no escaping the insurance problems,
and weather disasters are becoming more and more prevalent,
even in previously safe areas, like Tallahassee. We haven't
decided what our next step will be, but at this stage of our
lives, we are not willing to risk our financial well-being by
buying a home that one day may be uninsurable, or craters in a
value in a housing market fueled by the homeowners insurance
crisis.
Chairman Whitehouse. Thanks very much. Our next witness may
proceed.
STATEMENT OF THE HONORABLE GLEN MULREADY, INSURANCE
COMMISSIONER, STATE OF OKLAHOMA \6\
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\6\ Prepared statement of Hon. Mulready appears in the appendix on
page 72.
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Commissioner Mulready. Chairman Whitehouse, Ranking Member
Grassley, members of the Committee. Thank you for the
opportunity to address you today on a topic that's becoming
increasingly important to homeowners across the nation,
increasing homeowners insurance premiums.
As natural disasters continue to rise, understanding the
dynamics of insurance pricing is crucial for both homeowners
and policymakers. Homeowners insurance is a fundamental
safeguard for what is for many Americans, their single largest
asset. This important coverage protects against financial loss
due to damage or destruction of a home and its contents.
However, recent years have seen a notable increase in
insurance premiums. One significant driver of this rise is
convective storms and other severe weather events. Convective
storms, which include phenomenon like thunderstorms, tornadoes,
and hail, have caused substantial damage in various regions.
The cost to repair homes or replace belongings after such
events has skyrocketed, leaving insurance companies to adjust
their premiums to cover that increased risk. Beyond convective
storms, we've witnessed hurricanes, wildfires and flooding.
These events have not only caused damage, but have also
increased the long-term risk profile of many areas.
Insurance companies are tasked with managing that risk, and
have responded by raising premiums to ensure they can cover
those potential claims. Another major factor influencing
homeowners insurance premiums is inflation. Inflation affects
the cost of building materials, labor and other expenses
related to home repair and reconstruction.
As the cost of living increases, so does the cost of claims
for insurers. When the price of lumber, steel, and other
essential materials goes up, the expense of repairing or
rebuilding homes also rises. Insurance companies must reflect
these higher costs in their premiums to maintain financial
stability, and ensure they can meet those contractual
obligations to policyholders.
So, what can homeowners do to mitigate these rising costs?
One of the most effective strategies is proactive mitigation.
Homeowners can invest in measures that reduce the risk of
damage from severe weather events. For instance, installing
storm shutters, reinforcing roofs, using ``hail resistant
shingles,'' and using fire resistant materials can make a home
much more resilient.
Additionally, maintaining proper drainage systems, and
removing potential fire hazards from around the property can
help. Insurance companies often provide discounts for homes
that incorporate these protective measures, making them a
worthwhile investment for homeowners.
I believe the most essential aspect of managing insurance
premiums is fostering a robust, competitive free market.
Competition among insurance companies encourages innovation and
efficiency, leading to better pricing and services for
consumers. When insurers can properly underwrite and price for
risk, they create a more balanced and fair market. This
involves using advanced data analytics, modeling techniques to
accurately assess the risk levels of different properties.
By doing so, insurance companies can offer premiums that
reflect the true risk of avoiding excessive charges for low
risk homeowners, and ensuring high risk properties are
adequately covered. Regulation also plays a crucial role in
maintaining a healthy insurance market.
Policyholders must strike a balance between consumer
protection, and allowing insurers the freedom and flexibility
to adjust their pricing based on the risk. Overly stringent
regulations can stifle competition, and lead to market exits,
reducing choices for consumers.
We've seen this play out most recently in another state,
where there were artificial caps put in place on premium
increases. That worked well for consumers in the short-term,
but then one by one, all of the major insurers began announcing
they would cease to write any new homeowners insurance in that
state. These are all private companies, and if there's not the
freedom and flexibility to price their products properly, they
may have to take drastic steps, as we've seen.
Conversely, a well-regulated market encourages transparency
and fairness, ensuring that homeowners have access to the most
affordable and adequate coverage options. In conclusion, the
rise in homeowners insurance premiums is driven by severe
weather events and the impact of inflation. However, homeowners
are not powerless in the face of these challenges.
By investing in mitigation measures, and supporting a
competitive insurance market, they can manage costs, and ensure
their homes are protected. Collaboration between homeowners,
insurers, and policymakers is essential to create a sustainable
and a resilient insurance landscape.
Thank you for your attention. I look forward to any
questions you might have.
Chairman Whitehouse. Thank you very much, sir. I appreciate
you being here. Dr. Antoni.
STATEMENT OF DR. EJ ANTONI, RESEARCH FELLOW, HERITAGE
FOUNDATION'S GROVER HERMANN CENTER FOR THE FEDERAL BUDGET \7\
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\7\ Prepared statement of Mr. Antoni appears in the appendix on
page 75.
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Mr. Antoni. Chairman Whitehouse, Ranking Member Grassley,
members of the Committee, thank you for the invitation to
discuss with you today the current state of the insurance and
reinsurance markets, and especially how they have been impacted
by inflation and climate change.
I am a Public Finance Economist and the Richard F. Aster
Fellow at the Heritage Foundation, where I research fiscal and
monetary policy with a particular focus on the Federal Reserve.
I am also a senior fellow at the Committee to Unleash
Prosperity.
Since January 2021, prices have risen a cumulative 19.3
percent on average in the American economy. Construction prices
for single family homes have risen much faster, up 30.5 percent
during the same time. This has been a direct result of public
policy choices made here in Washington, D.C., and those choices
have imposed significant costs on the insurance industry.
Unprecedentedly large federal deficits over the last four
years financed by the Federal Reserve's purchase of Treasury
securities, increased the money supply by trillions of dollars,
much faster than the increase in the real economy. Roughly,
one-third of all dollars in existence were created in just a
few years. That transferred wealth from the people to the
government, and devalued the dollar at rates not seen in four
decades.
Consequently, it now takes more dollars to purchase the
same products and services. This has increased repair and
replacement costs throughout the economy, which has directly
contributed to higher insurance premiums and losses for
insurers, and reinsurers alike.
Actuarial tables used in underwriting to estimate risk and
future losses, as well as calculate premiums, rely heavily on
those input costs. When prices increase radically, precisely as
has happened over the last several years, old actuarial tables
are of significantly less use when pricing premiums because
they will grossly understate the future cost to the insurer.
The sharp increase in total claim costs since 2019 has
resulted in billions of dollars of losses for both insurers and
reinsurers, prompting large premium increases to stop those
losses. This has put significant financial stress on consumers,
who are already struggling with a cost of living crisis, and
are now faced with much higher insurance premiums, especially
for homeowners insurance.
Other factors, mostly stemming from public policy failures
have contributed to today's insurance premiums as well. The
widespread rioting caused by groups like Black Lives Matter
(BLM) and Antifa in 2020 caused $100 billion in damages, a
massive financial loss for the insurance industry. Likewise,
general lawlessness in American cities over the last several
years, and the refusal of government authorities to protect
private property, has resulted in more damages, more claims,
and ultimately higher premiums.
Over regulation has also put upward pressure on premiums by
increasing repair and replacement costs, a fact which is
frequently omitted from the cost benefit analysis conducted
when such regulations are proposed.
Lastly, while some assert that climate change has been a
significant contributor to higher premiums and general stress
in the insurance industry, there is no empirical evidence to
support this claim. In fact, the evidence indicates it is not
true. For example, hurricanes are not becoming significantly
more numerous, nor more powerful, but we are building more
homes in their path, and we are building more expensive homes
there too.
The increase in claims related to weather events has
undoubtedly increased, but it is not due to the climate
changing. This is why the insurance and reinsurance markets do
not rely heavily on climate modeling when pricing premiums.
Furthermore, climate models are inherently subjective, not
merely in how the models are constructed, but also by way of
the inputs that the modeler uses.
In other words, because insufficient data exists to create
a predicted model, a human being must make wide ranging
assumptions, and add those to the model in place of real world
data. Thus, those models have no predictive value for insurers.
If government broadly, and this Committee specifically, seek to
relieve stress to the insurance industry, and lower costs to
consumers, your focus should be on reducing the government
spending that created the inflation, which was responsible for
most of the increase in insurance premiums over the last
several years.
Passing a budget, ideally a balanced one, would be a good
place to start. Thank you kindly for your time, and I look
forward to your questions.
Chairman Whitehouse. Thank you. Mr. Musulin, your testimony
is that a major hurricane hitting a densely populated area like
Miami could trigger large, and long-lasting post event
assessments, or even exceed the system's funding capacity. What
does exceeding the system's funding capacity look like? Your
microphone please.
Mr. Musulin. Well,--it's on, sir. Sorry. According to
public statements, you know, the system concurrently cover
events like in Citizens up to their modeled 100 year event. But
also note that the ability of like Citizens to pay claims
depends on the ability of the CAT Fund to pay its reinsurance
obligations.
There are certainly storm scenarios such as a repeat of the
1926 great Miami hurricane, which have been estimated to cost
well over $125 billion to the market, and there is a point at
which an event becomes large enough to exhaust Florida's
entity's ability to issue bonds and form assessments.
Chairman Whitehouse. And then what happens?
Mr. Musulin. Well, and then Florida will face some very
difficult choices, which could include raising assessment caps,
or finding some other source of funding, or taking other
actions to try to----
Chairman Whitehouse. You kind of step into the unknown at
that point, right?
Mr. Musulin. Yes, sir. I will note that that's an extreme
event.
Chairman Whitehouse. Yeah.
Mr. Musulin. But it is something that has happened in the
past.
Chairman Whitehouse. You say that this combination of
demographics, development and disasters, poses a significant
risk to our financial system. What do you mean by risk to our
financial system?
Mr. Musulin. Well, Senator, if you look at the combination,
as has been pointed out, of high growth and, you know, wealth
accumulation in coastal areas, and you look at just what we've
observed in the climate, much less what's predicted in the
future, there is significant exposure along the coastline from
Maine to Texas.
In fact, my family is from New Jersey, and there is
enormous development on the coast of New Jersey, and if we
start to get major hurricanes coming through those areas, the
building codes are probably not up to the same standards they
are in Florida, and we could be seeing some significant losses,
as I believe was pointed out in the recent----
Chairman Whitehouse. And how does that create risk to the
financial system?
Mr. Musulin. Well, because it's sort of a set of dominos.
You start with potential claims, issues with the insurers, you
know, being stressed and not ability to pay claims. You have
post event rate increases, as we've seen in Florida. You could
have situations where people cannot secure insurance because
they cannot afford it, then that affects their mortgage
security and so on and so forth.
So, there are a number of ways that this could affect the
financial system, sir.
Chairman Whitehouse. Cascading beyond the immediate
insureds and becoming a national problem?
Mr. Musulin. Well, I would just note, Senator, that in
Florida the real problem started years after we got past
Andrew, you know. We got past the claims in Andrew, and then
the big problems occurred later when we tried to renew the
policies.
Chairman Whitehouse. Do you have your testimony in front of
you?
Mr. Musulin. Yes, sir.
Chairman Whitehouse. Could you turn to page 9 where you
have a graph?
Mr. Musulin. Okay. Just a second please. I may need my
glasses for this, excuse me. Age related issue. Yes, sir.
Chairman Whitehouse. On page 9, you have a graph of the
Florida Hurricane Catastrophe Fund, and there's a bottom line
that says, ``total liquidity resources,'' below potential
obligations, and then there's a number. Could you explain that
line?
Mr. Musulin. Yes. Well, basically that represents the
amount of debt, which in this case $7 billion that they would
have to issue in order to meet their claim obligations, because
that is not money that they have on hand from their fund
balances, pre-event bonding, et cetera.
Chairman Whitehouse. Thank you. Ms. Sen, your testimony
basically describes the Florida risk being transferred to the
Federal Government through Demotech Insurance that taxpayers
bear large unpriced exposure to climate risk through insurance
market fragility, and the fragile insurance with inflated
ratings now dominate the insurance markets in Florida. Is that
correct?
Dr. Sen. That's right.
Chairman Whitehouse. And you see in this, and I'm quoting
you here, ``parallels in the 2008 financial crisis.'' What
parallels do you see?
Dr. Sen. So, just like what happened during the financial
crisis. There were rating agencies that gave out high ratings
to pools of mortgages backed by sub-prime loans. Here we have a
situation where rating agencies like Demotech are giving out
inflated ratings to insurance companies. The end result is that
it's just too much risk, and too many risky mortgages being
originated, in this case backed by really low quality
insurance, that are then entering the financial system.
And the consequences of that have to be borne of course by
the homeowners, but also the mortgage owners, GSEs, the
lenders, and ultimately the federal and state government.
Chairman Whitehouse. You say, this will be my last
question. The fragility of property insurers is an important
channel through which climate risk might threatened the
stability of mortgage markets, and possibly the financial
system. What do you mean when you refer to a risk to the
financial system?
Dr. Sen. Well, as I was explaining, the GSEs, if there are
large losses in the GSE space, then those losses have to be
paid by somebody, so the taxpayers. That's one channel through
which you've got risk to the financial system. And the GSEs
serve as a backstop in the mortgage market. They may not have
the ability or the capacity to do so in such a scenario which
affects mortgage-backed security prices, which are held by all
sorts of financial institutions, so that's affecting all of
these institutions.
On the other hand, if you've got a bunch of insurers
failing, another channel is these insurers are one of the
largest investors in many asset classes like corporate bonds,
equities and so on, and they may have to dump these securities
at inopportune times, and that affects the prices of these
securities as well.
Chairman Whitehouse. Senator Grassley?
Senator Grassley. Thank you, Mr. Chairman. Dr. Antoni, is
there any evidence to support the notion that climate change is
the greatest threat to the insurance market?
Mr. Antoni. No, Senator, there is not. And part of that has
to do again with the fact that when we look at the models that
are used to predict climate change, we simply don't have enough
empirical data, with which we can input into those models, and
so as a result of that we have to have human assumptions on
what we think is going to happen, based essentially on a guess.
And as a result of that, these models really are not of any
predictive value, and that's why these models for the last 50
years have been predicting catastrophic outcomes, none of which
have come true.
Senator Grassley. Okay. And also to you Dr. Antoni. How has
the Biden administration's economic leadership failed to help
our economy, and what can this Committee do to get our economy
back on track?
Mr. Antoni. Senator, I would say the biggest failure in
terms of the Biden administration on economic policy has been
constantly pushing for more and more spending, which this
government and the American people simply cannot afford. And as
a result of that we have today's not only inflation problem,
but today's cost of living crisis as well.
And the increase in insurance premiums is part of that. In
terms of what this Committee and the Congress, more broadly,
can do they need to be, in my opinion, sending the White House
balanced budgets regardless of how large a budget the White
House is asking for.
Senator Grassley. And Commissioner Mulready, you heard me
say that we had six property and casual companies pull out of
Iowa, so from your experience what can states do to increase
market competition and best serve policyholders?
Commissioner Mulready. Thank you, Mr. Ranking Member. And
if I can, I'd like to address something before that just
quickly, this focus on the rating agencies. I would agree with
that if that was sort of the be all end all, but the State
Insurance Commissioners in each 50 states is tasked with the
financial solvency of the insurance companies.
We do not depend on rating agencies for that. We are doing
financial exams on them. We are doing financial analysis every
quarter on each one of them, so I would agree if that was the
sort of be all, end all, forgive that phrase, but it's not at
all. And we don't depend very much at all on those rating
agencies from our standpoint.
Okay. And that said to your question what can we do? In my
comments I mentioned I think the most important factor is
having a robust competitive free market. The state of Oklahoma,
we have over 100 companies licensed to write homeowners
insurance in our state. We had one company leave. You
mentioned, I think, that you had a handful. We had one who
exited nine different states because it was a very, very small
piece of their business.
But I think having a business friendly environment, and
allowing folks to come in and offer their products, and offer
consumers choices is the most, best thing that you can do. I
think secondly, I can't focus enough on mitigation and
resilience. The state of Oklahoma just passed two weeks ago the
Governor signed a bill that we pushed through to Strengthen
Oklahoma Homes Act.
The Governor signed that in place. It will allow us to
issue grants to Oklahomans as they're replacing their roofs, or
they want to replace their roofs, you know, to upgrade to more
resilient shingles, fasteners, wind proofing, that sort of
thing. So, homes in Oklahoma can withstand, you know, up to 130
mile an hour winds, so there is mitigation.
There are things that can be done, I think that as
policymakers, and as a former policymaker, the things we can do
is help incentivize that. I know that the Senate has before
them, I think it's Senate Bill 1953, pretty easy thing. Should
be a no brainer to the Tax Parody Act for Disaster Mitigation,
that will just allow state based programs, like ours, that
other states are doing.
Kentucky passed that this legislative session as well. It
will address the tax issue for those folks that receive those
grants.
Senator Grassley. Commissioner, this is my last question.
How have you worked with both political parties to reduce
costs, remove red tape, and create a stronger economic
environment for Oklahomans?
Commissioner Mulready. Well, I blew with a lot of that in
that last answer. I would just respond with that, that we have
worked with that piece of legislation that passed. I will tell
you that the National Council of Insurance Legislatures, NCOIL,
if you didn't know there's an association of state legislatures
who focus on insurance issues.
The Chairman of that property county committee is a
democrat from Oklahoma, who has pushed through, is leading the
way to make that a model act across the country, and so there's
a bipartisan effort there. I'll just tell you that when I was
in the House, I worked on a substantial number of issues with
the Senate Minority leader, who was a democrat attorney from
Harvard, actually, and we did a lot of good work on the
insurance side of things.
Insurance isn't a partisan issue. Mitigation and resilience
is not a partisan issue.
Senator Grassley. For the majority I'm done.
STATEMENT OF SENATOR KAINE
Senator Kaine [presiding]. Thank you, Ranking Member
Grassley. I'm going to take over the helm, but unless my head
swells too big, I'm not going to take the Chairman's seat. I'm
going to do it from here, and I'm up next. Ms. Wood, I wanted
to dig into your question. I really appreciate you being here
and sharing your story.
And tell me a little bit more. You thought moving to
Tallahassee, farther away from the coast, where maybe the
weather emergencies were less extreme, you thought that would
be the solution, and yet why was that not the solution. You had
a bad experience with this insurer that was going to cut you
off without even telling you, and not even sharing the
information about your roof.
You did find another insurer, but were there not companies
in the Tallahassee area when you talked to them that, you know,
would offer affordable homeowners insurance, and is that part
of the reason why you decided not to buy another home in
Florida?
Ms. Wood. Thank you. When we knew that South Florida was
kind of the epicenter of the weather disasters, the insurance
problem, and we thought Tallahassee would be safer. Our
daughter lives there. And we started looking for homes, and we
started talking to people about their insurance problems, and
they were basically repeating the same things that were
happening down south at a lower level.
And we just a few weeks ago in Tallahassee had a freak
thunderstorm come through, knock out the power to 70--80,000
people for several days. And it wasn't a hurricane. It was a
storm, a rainstorm. And then I started talking to people. How
are you doing? What do you see here? And they all say they are
seeing increased weather events where they live, where they
didn't have that before.
Senator Kaine. One of the things about your testimony
that's important is, you know, I'm a senior citizen now. You
are too, you and your husband, you describe the ability of
seniors to just kind of tolerate an unknown upside increase in
a big cost item like insurance is pretty darn limited.
And so, when you were worried about the unpredictability of
upside, that hit seniors particularly hard. Dr. Sen, I have a
question for you. When we talk about the impact of insurance on
housing, we're often thinking about homeowners, but there's a
significant impact to multifamily properties as well.
I reached out to the Virginia Housing Agency, which is our
housing financing agency that largely supports low and moderate
income rental properties, and I asked about what they're seeing
on projects that their agency finances across the 119 local
jurisdictions on which they have sufficient data, 105 are
averaging at least double-digit annual increases between '21
and '23, and 9 averaged triple digit increases, including 2 in
the Hampton Roads area near the Atlantic Ocean, Virginia Beach,
and Chesapeake. If you're a nonprofit developer, public housing
agencies serving low and moderate income families, and it's an
important thing, these increases are really tough on the
developer, and then they get passed on to a tenant, unlimited
means.
Are the same dynamics in play when we talk about
multifamily insurance markets as in single family?
Dr. Sen. Yeah. So, in Florida, a similar set of insurers
are sort of in both markets. And so I would expect similar
dynamics play out. However, unfortunately we haven't been able
to explore this in as much depth, in part because the data on
multifamily insurance is not granular enough for us to look at
it in any sort of systematic way.
And that's why collecting these data, the Federal Insurance
Office (FIO), National Association of Insurance Commissioners
(NAIC) data call needs to focus across all segments of
insurance and collect these data in a systematic way so that we
can look at them because these issues are so much worse for
people with a low income, in the low income segment. Their
premiums are the highest, and they've also sort of grown the
most in the past few years. I would also--sorry.
Senator Kaine. Please.
Dr. Sen. If I could also respond to Mr. Mulready on the
point about regulators sort of looking at and reshaping
agencies is not something that we need to look at. I would just
point out that in Florida if you look at the number of exams of
the Demotech rated insurers that by the way have a 20 percent
insolvency rate relative to zero percent for traditional
insurers, they get examined at the same rate as the traditional
insurers like Farmers and All State get examined, which is not
something that you would expect.
If you're at more risk, you would expect regulators to come
look at them, much, much more frequently. And they're just
based on capital requirements that we have got that were
designed in the 1980s. They are just not sensitive enough to
new risks like wildfire and hurricanes and so on, and also not
as well designed for under-diversified insurance companies
because if so, all of these insurers were meeting the risk-
based capital requirements.
However, at the same time they are going insolvent at the
rate of 20 percent, so those two things sort of don't really go
hand in hand.
Senator Kaine. Thank you. Senator Johnson.
STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you, Mr. Part-time Chair, but now we
got the real guy back. So, first of all I mean I think the
premise of this hearing is just completely off. And I think the
chart that the Chairman talked to you about, Mr. Musulin is
indicative of that. So, the Florida Hurricane Catastrophic
Fund, or Catastrophe Fund has a shortfall for a year about $7
billion, right?
Mr. Musulin. Yes, sir.
Senator Johnson. So, we've had testimony before this
Committee that we've already spent $5 to $6 trillion, that's
$5,000 to $6,000 billion, trying to mitigate climate change,
and we haven't made a dent in it.
Their estimates are it's going to cost tens of trillions of
dollars every year to reach net zero, so again, this is not the
solution for a real problem, which is the broken insurance
market. I have enough Wisconsin residents living on the Gulf
Coast in Florida, you know, after Hurricane Ian we've got some
real problems in Florida.
But fixing climate change isn't the solution. So there are
other causes, and that's what I really want to focus on too,
Dr. Antoni. You talked about inflation. You talked about riots
and lawlessness. You talked about high cost of properties being
located in these vulnerable areas, and then you know, Mr. or
Commissioner Mulready talked about the harmful regulations, you
know, price caps.
So, can you off the top of your head, nobody has calculated
this, but if you can give me some sense of what percentage of
the total problem is each one of those elements? I mean how
much of--let's say it's $100 billion worth of a problem here.
How much of that is due to inflation? How much to the
lawlessness, the riots? How much to the high cost of
properties?
And then how much has been just from market distortions of
pricing caps and that type of thing?
Mr. Antoni. Senator, it's a very good question. The only
caveat I want to say in answering this is that much of the
regulatory costs actually get rolled into what we attribute to
inflation. The reason for that is because typically, these
regulatory costs because it's something being done by
government mandate those are essentially assumed away under a
hedonic adjustment.
So, if we can just talk about government action broadly,
and include both a failure to respond to criminal activity, and
inflation and regulatory costs. That explains 90 percent
approximately of the increase that we have seen in insurance
premiums over the last several years.
Senator Johnson. But I want to zero more--what do you think
inflation is in that component? Just during inflation? I mean
again, I know it's government action, but that government
action. What percent is inflation? Is it half? Is it a quarter?
Mr. Antoni. Probably about three-quarters, almost three-
quarters, Senator.
Senator Johnson. Did you confirm that or?
Commissioner Mulready. I just have a personal and timely
example on the impact of inflation. About six months ago we had
our roof replaced in Tulsa, Oklahoma. And 18 months prior I had
a proposal to have the roof replaced, and that 18 months almost
to the day, 18 months, same roofer, same roof, same materials,
that cost had increased exactly 30 percent, from $20,000 to
$26,000 for a roof that was strictly impact on material and
labor.
Senator Johnson. Okay. So that's overall, Florida is just a
different animal here, right? I mean Florida's insurance market
is completely screwed up because of hurricanes, because of
probably regulation and that type of thing. Insurance
conception is pretty simple. Yeah, we all pay a little bit in
to protect ourselves against a catastrophic loss, and with the
marketplace it moves around.
If it's priced properly, it discourages people from putting
high cost properties in a very vulnerable area, but it hasn't
been priced properly, right? So, I guess I'm kind of wondering
for a Wisconsin resident, with a Wisconsin house, how much are
our insurance premiums being boosted because of the distortions
in the marketplace because of over regulation?
In other words, are we paying the price for all these
hurricanes in Florida because the Florida insurance market is
just screwed up? You have reinsurance companies that are losing
money, and by the way, you did talk about high losses. What is
that? I mean how big a loss was this last year? And is that
just loss premium versus payments, or did this go into
reserves?
Is that the whole part? You get premiums, you set up
reserves, you have a loss. Generally, the reserves ought to
cover the loss, right? You shouldn't be taking them out of
premiums. Premiums ought to just continue to fill up those
reserves, Mr. Mulready.
Commissioner Mulready. Yes. Thank you. And I hate to over
simplify it, but sometimes I do when speaking publicly back in
my state, and that is that you know it's not rocket science,
it's math. It is premiums in, and claims paid out, and then
what's the end result? Of course, there's investments and other
things in there. They're over simplifying it.
But it is math, and so the insurance companies have the
role of determining what that math is going to be. What do
those storms look like? I mean in Oklahoma, we get hit--we have
a terrible spring. We have had 100 tornadoes this year, but the
previous 3 years--the previous 4 years we were substantially
below our average. So, you know, we've had a rough year with
the two Enhanced Fujita Scale (EF) 2s, and so the companies
will absorb that. Our role is to make sure they're financially
solvent, they have risk-based capital that we monitor
quarterly, and if they're investing in things that they
shouldn't be investing in, or we have concerns.
Heck, if a company drops a certain percentage of their
surplus, they get a letter from me saying what's your plan?
You've dropped a bit here, a little too much in this past year,
and so that's where monitor makes sure it can be there to pay
their claims. And like I said, we've had one company leave.
We've had no property companies exit the market, but you've got
to have that freedom, the flexibility to price it properly.
Senator Johnson. One quick comment, closing comment is this
hearing ought to be called Riskier Business, How Massive
Deficit Spending Which Caused Inflation is Challenging the
Insurance Markets. Would you kind of agree with that, Mr.
Antoni?
Mr. Antoni. I could not agree more, Senator.
Senator Johnson. Thank you.
Chairman Whitehouse. Senator Merkley.
STATEMENT OF SENATOR MERKLEY
Senator Merkley. Thank you, Mr. Chair, and thank you all
for bringing your expertise to bear. And the conversation is
essentially focused on the challenge of flooding, hurricanes,
so on and so forth, but let's go west for a moment. Let's go to
New Mexico and California and Oregon and Washington, Idaho,
Montana, Colorado, where wildfires are the real challenge.
And we have a much longer, hotter, fire season. We have
more lightning strikes. As the climate has changed, the result
has been much more devastating wildfires. So, we are seeing
folks go hmm, our insurance rates are really going up, and or I
can't get insurance at all.
I just held a group of town halls, nine town halls in
Eastern Oregon, and the town hall for town hall, people came
forward to say hey, I came to say I got a problem. My insurance
company either has greatly raised the rate, or said they're not
insuring anymore. What am I going to do?
Well, so Dr. Sen, has any of your work focused on the
challenge of the western insurance markets, and the growing
destruction from climate change induced wildfires?
Dr. Sen. Yes. I mean I do look at the homeowners insurance
market more broadly as well, not just the Florida experience.
Senator Merkley. And so, you're aware of this growing
challenge, and here's the rub, which is if your company says it
won't insure you, then you have a mortgage. And the mortgage
company requires that you have insurance. And if you can't find
a private insurer, they will put an insurance policy on your
property.
And the mortgage company actually gets a kickback on these
arrangements. So, they have an incentive to go to a very high
priced policy, and that may be totally unaffordable to any
ordinary family. So, if you were at one of my town halls, and a
citizen was saying I've got this problem because if I can't
find an insurance company I'm going to lose my house because I
won't meet the terms of the mortgage. What would be the right
policy response to that challenge?
Dr. Sen. Right. What you're describing is something that we
obviously are already seeing, homeowners get forced based
insurance, they have to go to insurers of last resort. And in
all these situations they have--they're basically paying a lot
of money for the coverage that they're getting.
Ultimately what the solution is, is something that is
obviously the main question that we are here to answer, but I
would say that it is extremely hard to really figure out what
the solution is in part because we are not in a position right
now to even answer some basic facts about how big the problem
is. What exactly the numbers look like.
For instance, we do not know basic facts about how much
coverage people have in different places. How much they're
paying. It would be nice if we did know. And you don't know
that it's at a granular enough level because the data does not
exist. And the first steps towards designing any policy is for
us to know exactly how bad the problem is, and then we sort of
come up with the solution for that, and start to evaluate these
different policy responses.
Right now, we are sort of trying to make policy
blindfolded.
Senator Merkley. So, in looking at the materials, I saw
that Citizens Property Insurance Company, I gather that's
Louisiana and Florida, that have a completely state backed
program. Well, all right, so if the state becomes the insurer
of last resort, and they now suffer the same losses that a
regular private insurance company is suffering, now the folks
in the state are carrying massive debt. So that doesn't seem
like a great solution.
Dr. Sen. That's definitely a problem, right? I mean you
do--the problem is of course whether the state then has the
physical capacity to actually withstand a big loss, like a big
hurricane season, which is a concern that was raised about
Citizens. And in such a scenario, then you know, in a world
where they do not have enough tax revenue, then they would have
to sort of go into financial markets, try to borrow money,
which could be very costly, and so on.
So fiscally it's going to be very challenging for many
cities and many municipalities and counties, and so on, yes.
Senator Merkley. Well, let me close with this question, and
perhaps Mr. Musulin, I'll direct this to you. Is it responsible
for Congress to say we're going to ignore the enormous damage
that climate change is doing across our country through fires,
through smoke, through ice storms, through flash floods,
through hurricanes, and we'll just somehow back up the
insurance market.
If we are looking ahead 20 or 30 years, shouldn't we be
undertaking the core challenge of the overheating of this
planet from carbon dioxide (CO2) and methane?
Mr. Musulin. Well, Senator, one thing. I would never want
to comment on what Congress should or shouldn't be doing.
That's certainly not my job. But I certainly think that we, in
many cases, look decades into the future as we do with say the
social security trust funds, or many other things.
And this is an issue which has the potential to cause, you
know, significant losses to our economy and our system, and I
think it would be responsible for everyone to start stress
testing the system, to consider the possibilities. It doesn't
have to be a certainty.
We don't know the future for certain, but the possible
exposure to damage up and down the east coast, and what that
could mean for----
Senator Merkley. And the west coast.
Mr. Musulin. And I'm sorry, sir, I was referring to east
coast because I was talking to Florida, but yes, the west
coast, and across the country, sir, I should note, apologies.
But yes, we should be considering that, and including
wildfires, and certainly we've even seen issues like the tragic
fires in Maui where things like the electrical grid can
contribute to fires, and maybe we can kill two birds with one
stone by hardening the grid against weather, and also building
it out for renewable power, so there's a lot of opportunities
for us to do both.
Senator Merkley. I see my colleague, Senator Romney is
here, and my time is up, but I really appreciate you all's
contribution, and I'll just say from my perspective, it's
hugely irresponsible for us to just say we can try to fix the
insurance market, and fail to address the underlying causes
that will get worse with every succeeding decade far into the
future.
Chairman Whitehouse. Senator Romney.
STATEMENT OF SENATOR ROMNEY
Senator Romney. My colleague, Mr. Merkley, I wish there was
something we could do that would reduce the climate change
we're seeing, and the warming of the planet. But I have seen
absolutely nothing proposed by anyone that reducing
CO2 emissions, methane gases, and the heating of the
planet.
Climate change is going to happen because of the
development in China and Indonesia and Brazil, and the only
thing that actually makes any measurable impact at all is
putting a price on carbon, and no one seems to be willing to
consider doing that. Everything else that's being talked about
in the climate front.
Chairman Whitehouse. I've got two bills.
Senator Romney. I know, you and I are. But you guys had
reconciliation. You could have done it all by yourselves, and
you didn't. So, the idea that somehow we're going to fix
climate and solve the insurance problem, is pie in the sky.
That's avoiding the reality that we can't fix climate, because
that's a global issue, not an American issue.
Anyway, let me turn back to insurance. I'm not going to
count that as part of my time. Let's see. I'm going to ask you
ladies and gentlemen about what we ought to do to try to help
people be able to afford insurance. And I listen to the causes,
inflation being the largest single one.
And of course, seniors are on fixed income, so inflation is
a huge problem as Ms. Wood has indicated. Building in high risk
areas is a big part of the problem, and then there's climate.
We're not going to be able to fix global climate, not any time
I am aware of, and according to Mr. Antoni, so far at least
with regards to hurricanes and so forth, there's no evidence
that climate is causing more hurricanes, although I think it's
fair. In the American West, where I come from, more fires,
drought is climate related, and so that's just a reality. So,
the question is what actions can we take? Fiscal reform? Yes.
To try and deal with inflation, except I want to note something
for Mr. Antoni because you're esteemed at the Heritage
Foundation.
72 percent of federal spending is not part of the budget we
vote on. So, we talk about Biden wants to spend all this--72
percent. We don't vote on it. We only vote on 28 percent. Half
of that is the military. We republicans want more military
spending, not less.
So that means the other 14 percent, which is what the
democrats want to expand, there's no way we can reduce the 14
percent enough to have any impact on the massive deficits we're
seeing. So, there's going to have to be a broader analysis of
what we have to do to reign in our fiscal challenges. I just
want to underscore that.
I would say a second thing we can do besides fiscal reform,
and dealing with inflation is stopping subsidizing high risk
areas. Basically, subsidizing people to build expensive places
along the coast, and in places that are at risk of wildfire.
And we subsidize that, and that creates huge financial risk to
the system.
And finally, mitigation of one kind of another. That's the
other thing we can do, it's all sorts of mitigation, forestry
management, having people move in places that are not high
risk. But if you want to live in a big house on the coast,
you're going to have to spend a lot of money to insure it, or
take huge risk, that's just the reality.
So, those are the three I come up with. Stop the subsidy,
mitigation, and fiscal reform. What else am I missing? Mr.
Musulin, and I'm just going to go down the line for those that
are sort of in this area to give me your perspectives.
Mr. Musulin. Well, thank you Senator, and I'd agree with
all of those things, and I'd also add that we need to start
thinking about future proofing our building codes and land use
policies. The sea levels are rising. There's, you know, if
you're going to build a house that's supposed to last 75 years,
you'll ought to be thinking about the climate in 75 years when
you, you know, give somebody a permit to build there.
So, I'd say that's important. I'd also say that, you know,
large disasters also drive inflation because it puts more
pressure and demand on labor and materials. More disasters mean
supplies that could have been used to build new homes for
Americans, are diverted to rebuild homes from the past. So
certainly, doing things to reduce the vulnerability of
properties, and improve the resilience is important.
And I do think, sir, that there are things we can do about
climate change with respect over periods of decades that can
make a difference in the long run. Thank you.
Senator Romney. Thank you. Yes, Ms. Sen.
Dr. Sen. Sure. So, before that, the point about this--one
point about inflation that we are missing which is without
doubt it is a contributing factor, but the U.S. has had
inflation in the past without such an acute crisis in insurance
markets. So, whether that is the biggest cause or not, is up
for debate.
I don't think we have reached a conclusion on inflation
being the biggest contributor of rising insurance costs.
Senator Romney. It's just a big one. You'd agree it's a big
one.
Dr. Sen. I agree it's a big one, but I wouldn't say it's
the biggest one.
Senator Romney. Good enough.
Dr. Sen. In terms of policy solutions, I completely agree
with you on we need to stop subsidizing building in high risk
areas. That's definitely one of the things that we need to do
that. Mitigation, another point that you bring up, and on that
I would say not only do we need to harden our homes, but we
also need to harden our financial institutions, our banks, and
our insurance companies in order to make them withstand really
large climate shocks that are for sure coming their way.
Senator Romney. Thank you. Ms. Wood, I'm going to let you
pass on this, just because that's not your area of expertise.
Your experience was something which focused our thinking today.
Mr. Mulready
Commissioner Mulready. Thank you, Senator. I would say amen
to your comments, but I will give you three quick things.
Number one, the Federal Emergency Management Agency (FEMA) has
a survey out that states that every $1 spent in mitigation
saves $6 in loss claims. It pays off.
Number two, unfortunately a lot of communities have to have
a disaster happen. In Moore, Oklahoma, back a dozen years ago,
an EF5 hit, it was totally devastating. After that, the City of
Moore changed their zoning. They changed their building zoning
codes.
And then third, the City of Tulsa, back in the '80s had
horrible flooding happened, and so they invested over decades,
decades, infrastructure to prevent flooding. Now, one of only
two communities in the country that are class 1 NFIP rated.
Senator Romney. Thank you. Mr. Antoni.
Mr. Antoni. Senator, regarding the wildfires out west.
I think California is a really good example of this. They
have a combination--a deadly combination of terrible forest
management, where they prohibit things like controlled burns to
get rid of underbrush, and then also not investing enough in
public utility infrastructure, so that they have power lines
that are throwing sparks, for example, and starting these
wildfires.
Regarding your comments on the budget, you're absolutely
right. At this point non-discretionary spending and gross
interest on the debt exceed tax revenue. And tax revenue, as a
percentage of the economy right now, is near an all time high.
So, you're not going to actually get much more in terms of
revenue out of this economy, and so that leaves you with
essentially two options, both of what you should do.
The first is the economy needs to grow a heck of a lot
faster than it is right now. And then the other thing is that
you need to address even non-discretionary parts of the budget.
Chairman Whitehouse. Thanks, Senator Romney. Senator Van
Hollen.
STATEMENT OF SENATOR VAN HOLLEN
Senator Van Hollen. Thank you, Mr. Chairman, thank all of
you for your testimony today. You know, there are a lot of
folks out there who still deny that climate change is real, and
the impacts and the human component. I've always believed that
when skeptics began to feel the impact in their pocketbooks it
would become more real.
And that is unfortunately what we are seeing, and today's
hearing is an example. When homeowners find that either they
cannot get homeowners insurance, or it becomes so expensive
they can't afford it, then we're seeing the real pocketbook
impacts, and Ms. Wood, thank you for your testimony. I listened
in to C-SPAN, and I think that really brings things home to
what more and more Americans will be experiencing.
You know, Swiss Re has done a number of studies on this,
and yes, of course there are a number of components to
increasing insurance premiums. No one denies that there aren't
different pieces, but according to Swiss Re, climate impacts,
and the growing risk from climate is the predominant factor in
what they predict will be increasing costs due to climate
risks.
And I do know in my State of Maryland that in areas that
are particular vulnerable we've seen property insurance rates
going up in the Ocean City area and others. One way to address
this, and I think it was discussed in a different matter, is
the need to get the data, and get the consensus on where the
risks lie, which is why last year Senator Whitehouse, Senator
Warren, and I sent a letter to the Treasury Department to the
Federal Insurance Office, urging them to collect information
from different states.
I am a supporter of a state-based insurance system for
property and casualty insurance, but I do think it would
benefit all of us to have a sort of national yardstick against
which we can measure what's happening. So, Dr. Sen, could you,
you know, talk a little bit about the benefit of having a
common source of insurance data through the FIO, and how that
could benefit state regulators and benefit all of us?
Dr. Sen. Yeah. Absolutely. Thanks for bringing that up.
That's just the first order of importance I think because we
don't even know the basic facts about this problem at the
granular level. The risks here are local, and so we need to
know what's going on ZIP Code by ZIP Code, census track by
census track.
And for regulators to be able to figure out exactly how
much risk is sitting with each of these insurance companies,
they need to know how many policies they're writing, what type
of coverage they're selling, and what cancellations are looking
like in different ZIP Codes, because only then can they figure
out exactly how exposed these different insurers are.
And then they can start designing policy around whether the
risk-based capital ratios look all right or not, or should we
put a surcharge on wildfires, or hurricanes and so on, and we
do need a comprehensive picture. We just can't have a
particular state regulator look at the risks in that state
because of course, insurers are selling insurance all over the
country, and we need to get a comprehensive picture of all of
that.
Senator Van Hollen. No, I appreciate that. I gather that
the Treasury Department is getting some resistance from some
state insurance regulators. I hope we can overcome that because
I'm not sure why anyone would want to deny, you know, the
American people the benefit of the facts here.
If I could ask you, Mr. Musulin, with respect to some of
the sort of measures we should be taking. I mean obviously we
want to collect information here, in the Budget Committee, but
what kind of measures should we be taking now to address and
mitigate some of these issues, and what are the consequences of
failing to do so?
Mr. Musulin. Well, as I said, I think the biggest thing we
need to do is future proofing our building code land use
policies as I've said before, you know. We have to recognize
that we're going to be facing extreme weather in places that we
haven't experienced it before, and we've got to certainly
address that.
I also think it's important to address climate change. I
will just note that sometimes climate change itself can
contribute to the inflation we've been talking about. For
example, there were beetle infestations and droughts and fires
in Canada, which decimated some of the lumber crop and the
forest, and led to a fivefold increase in the cost of lumber a
few years ago.
So, some of this, you know, claims inflation is actually
related to climate change, and I think we need to address that.
And we also need to recognize that we have to build smarter and
protect our people better to make sure that, you know, they've
got affordable insurance, and that they can fix up their houses
when there's a disaster.
Senator Van Hollen. Appreciate that. Mr. Mulready, I saw
you wanted to comment on that first question.
Commissioner Mulready. Thank you, Senator. I just wanted to
follow-up on our comment about FIO and the collection of data.
Just if you didn't know, the NAIC, National Association of
Insurance Commissioners, is in the midst of a data collection
right now.
Senator Van Hollen. Yeah.
Commissioner Mulready. They will collect that data for at
least 80 percent of the homeowner's market, and we have an
agreement with FIO to be sharing that data with them. They
originally came to us. I got a letter from FIO, and they were
requesting data that we did not actually collect at the ZIP
Code level, and they have a very stringent timeline for that,
so my response wasn't no, it was just look, we can't meet that
timeline.
We don't collect that today. We can in the future, but from
that is where this is ground, the data call by the NEIC.
Senator Van Hollen. So, I appreciate. I saw that there had
been now this effort on behalf of the state, so has this now
been worked out? Are there any states that are objecting to
your knowledge at this point in time in terms of sharing data?
Commissioner Mulready. I don't know about specific states.
Senator Van Hollen. Okay.
Commissioner Mulready. We will be collecting data that will
represent at least 80 percent of the market share.
Senator Van Hollen. Okay. Thank you. Thank you.
Chairman Whitehouse. Thank you for that, by the way, we are
watching the data call, and we're grateful to the NAIC for that
effort. Senator Kaine had another question or two?
Senator Kaine. Just a follow-up comment, and it's really on
that point. I think we often assume that rates charged
homeowners by homeowners insurance is based upon some rational
algorithm using actuarial data, but that is not always true. My
legal career, the highlight of it was a lawsuit that I brought
against the Nationwide Insurance Company for redlining minority
neighborhoods all of the United States in 1998.
It led to the largest civil rights jury verdict in the
history of the United States at that time. And we were able to
gather data that through the discovery process that our
insurance regulators didn't have.
Other states insurance regulators didn't have, and it
demonstrated that part of the entire set of where we put
agents, where we sell policies, how we price policies was based
on the racial composition of neighborhoods using ZIP Code plus
four data, that essentially labeled every neighborhood in the
United States in categories that were either we want to do
business here or we don't.
And so, the notion that this is all, you know, actuarial
and math and it's based upon claims experience and investment
income, those are factors, but until you get the data you can't
be confident that there are not other factors at work that, you
know, might explain why, you know, Ms. Wood--this whole thing
about not even being told that your policy was being cancelled,
and being told your roof flunked, but they're not going to give
you the information about your roof.
And the next company that analyzes it says your roof is
just fine, you really can't assume that the system is being
fairly operated in accord with actuarial data until you get the
data. And I applaud the NAIC's effort, and Dr. Sen, your
testimony and your answers to questions.
You say we need to know a lot more to understand what's
going on. I do believe these increases in places like Florida,
or coastal communities in Virginia, extreme weather events are
playing a role, but there may be other factors that we need to
dig into deeper if we are going to try to find the right relief
so that homeowners like Ms. Wood and others don't face the kind
of problems they're experiencing. Thank you.
Chairman Whitehouse. Thanks very much. I appreciate the
conversation we've had here, and I appreciate all of the
witnesses. I would like to ask two questions for the record,
which will give you a chance to deliberate a minute and put
your thoughts in writing.
The first is for Dr. Sen. Here's your statement. ``Our
analysis shows that a vast majority of the Demotech insurers
would not meet GSE eligibility if subjected to traditional
rating agencies methodologies.'' Would you be willing to
elaborate on that in a paragraph or two, so that I can better
understand specifically what the methodological differences are
that you're referring to, and why they're allowed to exist?
Dr. Sen. Absolutely.
Chairman Whitehouse. Thank you. I appreciate that. And Mr.
Musulin, to your statement, the risks that threaten the U.S.
coastal home insurance industry are potentially devastating.
Could you elaborate on what the elements are of that risk, or
of those risks, you used the plural, specifically including
what role you think inflation plays?
Mr. Musulin. Yeah.
Chairman Whitehouse. And elaborating a big further on what
you mean by potentially devastating? You are an actuary, are
you not?
Mr. Musulin. Yes, sir. I am.
Chairman Whitehouse. Yeah. Actuaries are not known for
hyperbole.
Mr. Musulin. No. But one of the lessons we need to learn
though, sir, is the difference between potentially the correct
answer, and the right answer. And often those two are somewhat
different, and I'll strive to give you a mixture of both.
Chairman Whitehouse. Okay. I'm not challenging your
testimony here. I'm just asking for further elaboration.
Mr. Musulin. No. I understand that.
Chairman Whitehouse. On the point. What do you mean by
devastating? Who gets devastated? How? Elaborate on that, and
what are these risks, and specifically what role does inflation
play because we are, you know, watching this very carefully,
and we're seeing people who are truly expert in the insurance
market, including major insurers themselves, very clearly say
that the problem here is climate change, and the uncertainty of
weather events, and harms that they're not able to anticipate
or predict for.
So, we obviously heard other views here from entities that
are funded by the fossil fuel industry, and it would just be
helpful to know what your views are more specifically to that.
Mr. Musulin. Yes, sir. And I'll be happy. If I might, just
one quick comment that you know, regardless of whether we think
we know what the future holds or not, it's well established
practice in economics that uncertainty has a positive cost.
Chairman Whitehouse. Yeah.
Mr. Musulin. And the more uncertain we are about things,
the higher the cost is, and I think that's a significant factor
here at play too. And I'll make sure I put that in my comment.
Chairman Whitehouse. That and six-inch hailstones too. We
may be setting new records. Thank you so much.
Senator Kaine. Mr. Chairman.
Chairman Whitehouse. Yeah.
Senator Kaine. One other thing. My innate sense of fairness
makes me add an addendum to the comment that I last made about
insurance rates not being purely actuarial in nature. I talked
about the suit against Nationwide. After we successfully sued
them, they dropped all the use of the non-actuarial data. They
endeavored to do better, and years later they said you know
what, we actually not only did good, but by doing good we did
well because minority neighborhoods turned out to be really
good places to sell insurance.
And the homeowners to whom we sold insurance turned out to
be really loyal customers. So, I didn't want to leave it
hanging in midair with just the lawsuit against Nationwide, I
also wanted to indicate that when we got information and put it
out there, they took corrective action, and the corrective
action ended up, you know, working out well for all concerned.
Chairman Whitehouse. Senator Lujan has appeared with
seconds before the gavel, so let me respect his arrival by
allowing him to ask his questions. I will just allow him a
minute to get himself settled in his seat here, and thank him
for attending. I want to thank all of you for attending.
I think that the personal experience of Ms. Wood was really
important because, you know, behind the statistics and the
warnings and the threats, and the risks, and the potentially
devastating consequences that are described by our expert
witnesses, are individual homeowners who are often swept around
in the maelstrom of this insurance mess, not knowing where to
turn, being shuffled around among insurance companies, not
getting straight answers.
And it is a hell of a tough time to be a consumer, and I
want to thank you for putting such a good, human face on that
part of this problem. Senator Lujan. Our closing questions.
STATEMENT OF SENATOR LUJAN
Senator Lujan. Mr. Chairman, thank you so very much for
this hearing. Thank you all for being here today, as well. I
very much appreciate that now. Two years ago, we had the most
destructive fire in our state's history in New Mexico. The
Hermit's Peak Calf Canyon fire tore through my state.
This year, Southeastern New Mexico is currently the only
region in the nation experiencing exceptional drought,
according to the U.S. drought monitor. The National Interagency
Fire Center reports above normal wildfire potential in wide
swaths of New Mexico for most of the summer.
I think everyone that has been watching the news has seen
the heat that's going to hit the southwest over the next few
days. Now the potential for another massive wildfire is real.
These climate driven extreme weather conditions are changing
the way New Mexican businesses operate.
Electric co-ops are just one example. Co-ops are struggling
to obtain wildfire insurance because of the chance their
equipment is faulted for a major fire because their lines have
to connect communities. And in places like where I live, the
shortest path and the path where they're located is often in
some of these areas where there's a lot of trees, and higher
elevations as well.
Co-ops and utilities are dealing with frequent extreme
weather. They're also hard at work at the daunting task of
clearing some of these easements as well because it doesn't
take much when it gets dry for something to tip over. And once
that happens, and clips one of those lines, then we lose
everything.
And the Hermit's Peak Calf Canyon fire region, the
bipartisan Infrastructure Law is providing money to the local
co-op through the Grid Resilience and Innovation Partnership
Program. The co-op will deploy modern grid technologies that
both mitigate wildfire risk, and help recover from power
outages.
Now, Mr. Musulin, is that correct?
Mr. Musulin. Close enough, sir.
Senator Lujan. Musulin.
Mr. Musulin. Musulin. That's fine, sir.
Senator Lujan. Musulin, thank you. What can Congress do to
support the rural co-ops, and other critical infrastructure
adapting to climate?
Mr. Musulin. Well, thank you for that question, and I think
there's no doubt that there's enormous opportunities in rural
infrastructure and power grids to do both. Hardening those
grids to support, or sorry--to prevent tragedies like the fires
we've seen, and also to support growth in rural communities,
and to prepare the grid for the increase in renewable power,
which is inevitably going to occur in the next several decades.
So, we can actually spend the same dollar multiple times,
and accomplish multiple benefits by investing in grid
hardening, and also you know, a more renewable friendly grid at
the same time.
Senator Lujan. I appreciate that. When major wildfire
strikes it destroys both homes and critical infrastructure. If
these basic services aren't quickly rebuilt, homeowners may be
forced to leave their communities. And in a small town, in a
small community, even a few people leaving, completely erodes
the tax base.
It erodes the small business that may be in that community
that everyone depends on. An eroded tax base undermines public
services like emergency response and schools. This can decimate
a town. Dr. Sen, if folks who want to rebuild can't get
insurance, will these communities struggle to thrive?
Dr. Sen. Yeah, absolutely. Insurance is sort of required if
you want to maintain a mortgage, and so in the absence of
finding insurance, folks would either be forced by lenders, or
they would have to resort to insurers of last resort through
the markets, and in all of these cases the costs for the
coverage that is being sold is extremely high.
And so, there is an immediate financial implication for the
household, exactly when they're also going through the
devastation of having their home destroyed. On top of that, the
other challenge is to not have enough insurance going forward
for future shocks. And if you do not have adequate coverage for
all of the future shocks that might be coming, then it makes
you that much more vulnerable for, you know, the next fire.
Senator Lujan. I appreciate that. Now the Hermits Peak Calf
Canyon fire was a prescribed burn that got out of control. It
was started by the federal government. Now, because of this the
Federal Government has a responsibility to the people of New
Mexico to clean up and rebuild our communities.
Disaster costs keep rising, or as disaster costs keep
rising, FEMA is reporting that its disaster fund could run out
this summer, and require additional Congressional
appropriations. Yes or no, are rebuilding efforts at FEMA
strained by the cost of disasters around the country, Rade?
Mr. Musulin. Yes. You know, to the extent that FEMA has
finite resources, more disasters mean more stress on FEMA, but
I'm not really able to comment on what this may mean for the
fiscal situation under the budget because I'm not familiar with
that.
Senator Lujan. I appreciate that. And Mr. Chairman, when I
sat on the Public Regulation Commission in New Mexico, it was a
hodgepodge of agencies. We were essentially the Public Utility
Commission. But New Mexico had insurance underneath it. The
Superintendent of Insurance worked for the Commission. We had
oversight over them.
I just certainly hope that through our experiences
throughout the decades, and even now, as we're seeing what's
happening in this particular space, that we have folks that are
willing to police themselves, that if a company is not a good
company, that some rogue Commissioner doesn't try to relocate
them into a jurisdiction that may allow them to get licensed
there, and then that company preys on other companies, or other
families, and things of that nature, which only compounds the
problem we have today.
That was happening when I was elected to that particular
body. And it's just not right. So, with all the challenges that
we have across the country, I certainly hope that there's a way
for state by state to get this right. If not, Mr. Chairman, we
all need to have a serious conversation about what's going to
happen at the federal level to make sure that we're going to be
doing some things in a different way for the good of all the
people that we represent all across America.
So, thank you very much for the time, and thank you for
letting me go over my time.
Chairman Whitehouse. Thank you, Senator Lujan. Thank you to
all of the witnesses. Mr. Musulin, sorry I said Musulin before,
Musulin, if you don't mind me adding an edit to the question
for the record (QFR) request to you, it would be also to
elaborate a little bit on your description of the cycle between
climate causing inflation, and inflation itself.
We certainly heard a lot of testimony about that in the
agriculture area here with respect to shipping delays in the
Panama Canal, and through a whole lot of other vectors, so I
would appreciate that. Anybody else with questions for the
record, they'll be due by noon tomorrow, by email, or with a
signed hard copy delivered to the Committee Clerk.
We would ask that QFRs be responded to within 7 days of
receipt, and with that the hearing is adjourned.
Commissioner Mulready. Mr. Chairman, okay. If I could, just
one minute on Senator Lujan's comments on FEMA, and at the risk
of, as my mom would say, sounding like a broken record, I've
met with FEMA numerous times this year in the State of Oklahoma
with some of our disasters.
The FEMA Administrator Criswell came to Sulphur, and I
toured that with her, and she did a wonderful job by the way.
But FEMA's own survey from a few years ago again, shows a 6 to
1 return on dollars invested in mitigation. FEMA comes into our
communities, there's been numerous of them this spring, and
they help out with the individual systems, and as well as U.S.
Small Business Administration (SBA) loans.
And some of that money was put towards mitigation, I think
that would be extremely helpful. Thank you.
Chairman Whitehouse. I think that's a good point to end on.
Thanks very much everyone. The hearing is adjourned.
[Whereupon, at 11:53 a.m., Wednesday, June 5, 2024, the
hearing was adjourned.]
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