[Senate Hearing 118-533]
[From the U.S. Government Publishing Office]
S. Hrg. 118-533
THE CLIMATE-DRIVEN INSURANCE CRISIS
IS HERE_AND GETTING WORSE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
----------
December 18, 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
58-016 WASHINGTON : 2025
-----------------------------------------------------------------------------------
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
----------
WEDNESDAY, DECEMBER 18, 2024
OPENING STATEMENTS BY COMMITTEE MEMBERS
Page
Senator Sheldon Whitehouse, Chairman............................. 1
Prepared Statement........................................... 26
Senator Charles E. Grassley...................................... 4
Prepared Statement........................................... 28
STATEMENTS BY COMMITTEE MEMBERS
Senator Alex Padilla............................................. 15
Senator John Kennedy............................................. 17
Senator Tim Kaine................................................ 19
Senator Ben Ray Lujan............................................ 21
WITNESSES
Dr. Benjamin Keys, Professor of Real Estate and Finance, Wharton
School, University of Pennsylvania............................. 6
Prepared Statement........................................... 31
Mr. Ernest Shaghalian Jr., CPCU, AAI, Independent Insurance
Agent, Butler & Messier Inc. Insurance, Pawtucket, RI.......... 8
Prepared Statement........................................... 33
Dr. Robert Hartwig, Clinical Associate Professor of Finance,
Darla Moor School of Business, University of South Carolina.... 10
Prepared Statement........................................... 35
APPENDIX
Responses to post-hearing questions for the Record
Dr. Keys..................................................... 45
Dr. Hartwig.................................................. 47
Charts submitted for the Record by Chairman Whitehouse........... 52
Document submitted for the Record by Chairman Whitehouse......... 54
Document submitted for the Record by Senator Kennedy............. 138
Document submitted for the Record by Senator Padilla............. 163
NEXT TO FALL: THE CLIMATE-DRIVEN
INSURANCE CRISIS
IS HERE--AND GETTING WORSE
----------
WEDNESDAY, DECEMBER 18, 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, Kaine, Lujan, Padilla,
Grassley, Braun, Kennedy, and R. Scott.
Also present: Democratic Staff: Dan Dudis, Majority Staff
Director; Jonathan Misk, Director of Oversight and Senior
Counsel.
Republican Staff: Chris Conlin, Deputy Staff Director;
Krisann Pearce, General Counsel; Jordan Pakula, Professional
Staff Member; James Layne, Investigative Counsel.
Witnesses:
Dr. Benjamin Keys, Professor of Real Estate and Finance,
Wharton School, University of Pennsylvania
Mr. Ernest Shaghalian, Jr., CPCU, AAI, Independent
Insurance Agent, Butler & Messier Inc. Insurance, Pawtucket,
Rhode Island
Dr. Robert Hartwig, Clinical Associate Professor of
Finance, Darla Moore School of Business, University of South
Carolina
OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
---------------------------------------------------------------------------
\1\ Prepared statement of Chairman Whitehouse appears in the
appendix on page 26.
---------------------------------------------------------------------------
Chairman Whitehouse. Good morning, everyone. I call to
order this hearing of the Senate Budget Committee. Today's
hearing is entitled ``Next to Fall: The Climate-Driven
Insurance Crisis is Here--and Getting Worse.'' I welcome all
three witnesses who have come to share their expertise with us
today. As far as process, we are familiar with it.
Ranking Member Grassley and I will each have five minutes
for opening remarks. Witnesses will then have up to five
minutes each to deliver their oral testimony, and Senators will
have five minutes each for questions. The complete testimony of
each witness will be made a part of the record.
This is our 42nd and final hearing of the Senate Committee
on the Budget during this 118th Congress. It has been a
pleasure and an honor to lead this Committee for the last two
years. I am particularly proud of the work we have done to
illuminate risks to the federal budget.
In our first hearing in this Committee on February 15th,
2023, I brought with me this binder. I have it again with me
today. Nearly seven years ago, I sent a version of this binder
to all of my Senate colleagues, in which I compiled some of the
most compelling warnings about the economic risks associated
with climate change. At the beginning of this Congress, I sent
to the Committee this updated version of it.
Today, this binder is even more relevant than ever, and I
am continuing to update it with what we have learned over the
past two years of hearings. Examining the economic risks and
costs of climate change and the economic opportunities from
investing in clean energy, we repeatedly heard about the
central role that insurance affordability and availability play
in our economic system.
When insurance becomes unavailable, it can be impossible to
get a mortgage. And when the pool of buyers is limited to those
who can pay cash, that is lot fewer buyers and property values
suffer. Multiple witnesses drew parallels to the 2008 financial
crisis.
So the Committee launched an investigation into homeowners
insurance market conditions across the country, to better
understand the troubles affecting the market. The Committee
focused on non-renewal data, as insurance industry experts had
indicating that spiking non-renewal rates, even if still low in
absolute terms, are often an early warning sign of market
destabilization. Higher non-renewal rates are also correlated
with higher premium rates.
Well, today we release that report with brand new
information about the key questions of when and how bad this
will get. The answers are now and very, and it is only getting
worse. I would make one comment on the data that we relied on.
I have a letter from the National Association of Insurance
Commissioners (NAIC) suggesting that some of the data that we
have might have unidentified inconsistencies and inaccuracies.
I will put that letter into the record. We will continue to
pursue with the NAIC what they mean by this letter, and if we
need to make adjustments to the report we will correct the
report accordingly. It is a bit of a mystery to me because they
do not identify where those inconsistencies and inaccuracies
are, what they might be, and we worked directly with 23
insurance companies to get their data and not one of them
indicated that they had any concerns about inconsistencies or
inaccuracies in the data they were providing us.
Around half of them submitted their data to us through the
Milliman firm, which is perhaps the most respected and well-
regarded professional consulting and analytics firm in the
insurance industry. And so that data was also compiled and
combined together by Milliman, which also indicate--has not
indicated that it has any concerns about inconsistencies or
inaccuracies in the data.
Now we have been at this for many months now, and this came
in just at the last minute. So I have made the decision to just
go ahead with the hearing, and I have confidence in the data.
If it turns out that there are any inconsistencies or
inaccuracies that we need to adjust for, we will then do so.
This report is based on national, county level, non-renewal
data from almost two dozen insurers, who together represent
approximately two-thirds of the homeowners insurance market. So
it is a big data set. Here are a few highlights:
First, the data confirm that climate change is driving
increasing non-renewal rates. The counties that are most
exposed to climate-related risks, such as wildfires or
hurricanes, are the counties seeing the highest non-renewal
rates, especially counties in Florida, my friend Senator
Kennedy's home state of Louisiana, and California.
Second, the data reveal that those areas are not the only
places experiencing spiking non-renewal rates and increasing
premiums. Florida, as we would expect, has the highest average
statewide non-renewal rate. But Texas, thought to be at
significant risk, is not even in the top ten. Southern New
England, the Carolinas, including inland North Carolina,
Mississippi, New Mexico, counties in the northern Rockies,
Oklahoma and Hawaii all suffer high non-renewal rates,
demonstrating that the multiple climate-related effects,
hurricanes, wildfires, severe convective storms, extreme
precipitation and sea level rise are destabilizing widespread
insurance markets.
Third, the data confirms the correlation between rising
non-renewal rates and rising premiums. This underscores our
evidence that climate change has become a major cost of living
issue for families across the country.
Since this data was collected, climate change-driven
extreme weather events have wreaked havoc across Florida and
the southeastern United States, likely exacerbating the
insurance crisis that is building across the country. But that
data is not included in this set because it all happened since
the set was closed.
One thing is certain. Unless the United States and the
world rapidly transitioned to clean energy, climate-related
extreme weather events will become both more frequent and more
violent, resulting in ever-scarcer insurance and ever higher
premiums. This is predicted to cascade into plunging property
values in communities where insurance becomes impossible to
find or prohibitively expensive.
A collapse in property values with the potential to trigger
a full-scale financial crisis similar to what occurred in 2008,
according to the Chief Economist of Freddie Mac. Only unlike in
2008, these property values will likely never recover, because
the risk is not going to go down, nor will the sea levels.
Climate change is no longer just an environmental problem
is our conclusion here. It is an economic threat, and it is an
affordability issue that we should not ignore. I will close
where I began around two years ago. My granddaughter Vera, who
was then one year old is now nearly three.
I said then that I was hopeful that by the end of our
series of hearings, if we hear these expert witnesses, if we
treat their testimony as our headlights, then our path would be
clear. I hope that path has become more clear. I am not sure
what I now have to say to my granddaughter, as climate-driven
extreme weather events and the economic shocks that come with
them continue to worsen.
We really need to get this right for the sake of our
planet's natural systems, for the sake of American families and
their prosperity, and for the sake of future generations like
Vera's.
Let me conclude my remarks on this last of our hearings by
turning the mic over to Ranking Member Grassley, and thank him
for his many courtesies through these many hearings. He has not
always agreed with the point of these hearings. His staff have
often disagreed even more with the points of these hearings.
But we have worked through a great number of issues, and
Senator Grassley is one of the most courteous members of the
Senate, and it has been a pleasure for me to have him as our
Ranking Member through these two years. With that, over to you
Chuck.
Senator Grassley. I was hoping you wouldn't say that so I
could say a few words, but I----
Chairman Whitehouse. I get to go first for a while.
Senator Grassley. I want to say that I associate myself
with your remarks from the standpoint of Chuck Grassley
appreciating a relationship, even though we have had some
differences. But we serve on other committees together----
Chairman Whitehouse. We do.
Senator Grassley. And we do not have those same differences
there. So I hope people will understand that even if we have
approached this Committee with a little different approach,
that we still get along and can work together.
Chairman Whitehouse. And we have done good work across
Judiciary, Finance and Budget Committees. So it is a pleasure.
To you, sir.
OPENING STATEMENT OF SENATOR GRASSLEY \2\
---------------------------------------------------------------------------
\2\ Prepared statement of Senator Grassley appears in the appendix
on page 28.
---------------------------------------------------------------------------
Senator Grassley. So, repeating a little bit what I just
said, our time at the helm of the Budget Committee is coming to
an end. Disappointingly, it is ending in the same way it began,
not focusing on our nation's unsustainable debt and deficits.
Instead of prioritizing the Committee's core responsibilities,
here we are holding the 21st hearing on climate change.
I agree climate change is a serious issue meriting
discussion, maybe on other committees as opposed to this
Committee. But it is difficult for me to take seriously a
report that the Chairman has talked about, that the Majority
chooses not to share with all Members of the Committee before
the Committee meeting.
So today's hearing is not a discussion on the merits. I
remain convinced that the Budget Committee should be focused on
the immediate fiscal problems facing our country. The American
people evidently feel the same way. The Majority invited left
wing film producers, consultants, luxury fishing guides, snow
skiers and other non-scientists to give us their opinion in the
course of their 21 climate hearings.
Their testimony used studies rooted in extreme climate
change modeling that failed to convince anyone of an impending,
climate doomsday. Fortunately, over these 21 hearings that we
have had the last two years, minority witnesses, those that I
choose to put at the table, had gave us actual scientific and
economic expertise, testifying to debunk many of the underlying
assertions of climate-driven fiscal collapse.
Moreover, the Majority continues to ignore the nonpartisan
Congressional Budget Office (CBO) analysis, finding that
negative economic effects of climate change are dwarfed by
those posed by our ballooning national debt. I understand why
the Majority will not talk about our nation's fiscal
trajectory.
After all, that would require acknowledging the past four
years of reckless spending, resulting in a 40 year high
inflation, and that inflation continues to wreak havoc in the
lives of middle class Americans.
That negligent malpractice on the part of the Majority cost
them the presidency and both houses of Congress. Instead of
addressing the concerns of Americans head on, President Biden
and his party attempted a strategy of deception and
distraction.
First, Democrats told the American people that inflation
was transitory. I hope you remember that. That was in 2021, and
that being transitory it was nothing to worry about. Once it
became obvious this was not true, they took their far left
spending agenda, which sparked inflation in the first place,
and repackaged it as if it were some sort of a cure.
Out of this, we got the ill-named Inflation Reduction Act,
which even President Biden later admitted was less about
fighting inflation than it was enacting their coveted Green New
Deal. And of course CBO confirmed that bill actually increased
inflation instead of reducing it.
The Inflation Enhancement Act, as I prefer to call it,
along with President Biden's expansive executive orders,
flooded the economy with trillions of additional deficit
spending, hardly a recipe for taming inflation and tamping down
the rising cost of living.
Bidenomics, as the President later rebranded it, was a
colossal failure. Given this, there was little else to be done
other than to change the topic to anything else. Whether that
be abortion, trumped up legal charges against a political rival
or the existential threat of climate change.
Despite this very loud message, Americans sent in November,
today's hearing is more of the same, rather than admitting
inflation fueled by reckless spending caused insurance premiums
to spike, climate change is used as the main scapegoat. Never
mind that historic inflation caused the cost of building
materials to rise nearly 40 percent since 2020.
Given the impact of inflation on insurance costs, our time
would be better spent exploring options to rein in $2 trillion
annual deficits and a national debt that recently topped 36
trillion. I had a good meeting with the Finance Minister of
Sweden last week. Sweden's fiscally sustainable policies have
near unanimous support across party lines and enjoy broad-based
public support.
Their fiscal framework establishes an annual deficit or
surplus target, incorporates an anchor at 35 percent of Gross
Domestic Product (GDP), and sets a reasonable expenditure
limits. I would have liked to see this Committee spend more
time this Congress exploring innovative approaches like this to
address our fiscal mess. We barely spent any time.
This Committee needs to move on to 2025 priorities, getting
our fiscal house in order. Mr. Chairman, I wish you and your
family a Merry Christmas and a Happy Holiday. Same to our
witnesses all here today, and we will join in a new year
working together on the Judiciary Committee.
Chairman Whitehouse. I look forward to it, which you will
be chairing. I look forward to it, and I guess time will tell
who has been right about climate change. So there is no point
having that argument here.
Let me introduce our witnesses. Dr. Benjamin Keys is the
Rowan Family Foundation Professor of Real Estate and Finance at
the University of Pennsylvania's Wharton School, and a faculty
research fellow of the National Bureau of Economic Research.
Among other things, Dr. Keys' research focuses on climate risk,
housing, mortgage markets and the geography of household
financial distress. Welcome, Dr. Keys. Good to see you back.
Our second witness is Mr. Ernest Shaghalian, an insurance
agent at Butler and Messier Insurance Agency in Pawtucket,
Rhode Island, and a past president of the Rhode Island State
Association of Independent Insurers. Mr. Shaghalian has been
working in the insurance industry as an agent for 40 years, in
both the Rhode Island and Massachusetts insurance markets.
Ernie, it is wonderful to see you down here today in
Washington.
Finally, we have Dr. Robert Hartwig, Clinical Associate
Professor of Finance and Director of the Risk and Uncertainty
Management Center at the Darla Moore School of Business at the
University of South Carolina. His research focuses on insurance
markets and structures and risk management, among other things.
Previously, he was president and economist for the Insurance
Information Institute.
I thank you all for being here today. You each have five
minutes for your oral statement, and before I turn it over to
Dr. Keys, I am just going to take a Rhode Island moment and go
back--gosh, 30 years now, to when the Rhode Island Workers'
Compensation system collapsed, which gave me some familiarity
with insurance collapses. And I as a young staffer for the
then-governor was handed the portfolio of fixing that mess.
And Mr. Shaghalian was one of the leaders of the insurance
industry, who helped us work us through to a resolution of that
crisis. We basically rebuilt the workers' compensation system.
Within the next five to ten years the cost per hour of payroll
went down by 55.0 percent, and employees were extremely happy
to not take benefit cuts.
It took process improvements to make that happen, and to
this day, the workers' compensation system is running smoothly
in Rhode Island and other distressed workers' compensation
systems around the country turn to us for lessons still. And so
it's a particular delight to have Ernest Shaghalian here with
us. Dr. Keys, to you.
STATEMENT OF DR. BENJAMIN KEYS, PROFESSOR OF REAL ESTATE AND
FINANCE, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA \3\
---------------------------------------------------------------------------
\3\ Prepared statement of Dr. Keys appears in the appendix on page
31.
---------------------------------------------------------------------------
Dr. Keys. Chairman Whitehouse, Ranking Member Grassley and
Members of the Committee. Thank you for inviting me back to
address the turmoil in insurance markets, its connection to
climate change, and its effect on housing, mortgages and
household well-being.
My name is Ben Keys and I am a Professor of Real Estate and
Finance at the University of Pennsylvania's Wharton School. My
research agenda examines how households interact with the
financial system, and how the financial system manages risk.
I first testified before this Committee in March 2023.
In the last year and a half the situation in the homeowners
insurance market has gone from bad to worse. Both affordability
and accessibility issues have reached a crisis point in many
communities around the country.
In terms of affordability, my new research with Professor
Philip Mulder uses mortgage escrow data to build a dataset of
47 million homeowners insurance premiums from 2014 to 2023. Our
dataset shows rapidly increasing premiums across the country,
but especially in the highest climate risk areas.
We attribute this increase to a combination of inflation
and financial frictions associated with the pass-through of
rising reinsurance costs to homeowners policies. Insurers are
responding to larger realized disaster losses, better data and
risk models, and growing reinsurance costs. While raising
premiums is one margin of adjustment, insurers also change
where they are willing to write policies.
Some of the largest insurance companies have exited
markets, deciding that they cannot charge premiums that
adequately reflect this growing risk. While many of these high
profile departures have been publicly announced, all insurers
continually reassess their risks and adjust their portfolios of
policies in force.
Turning to the issue of accessibility, the data collected
by this Committee provide an unprecedented look at insurers'
decisions to not renew an annual policy. To my knowledge there
are no available granular data on non-renewal behavior beyond
the data collected by this Committee.
This new data covers 249 million policies from 2018 to
2023, and yields a number of striking findings. First, since
2020, the average non-renewal rate has almost exactly doubled.
These rates and their increases are highest in those areas with
the greatest risk of climate-related disasters.
Next, while Florida and California are seeing the highest
rates of non-renewals, they are also prevalent in high-risk
coastal areas like the Carolinas and along the New England
waterfront. Heightened non-renewal rates are also found
elsewhere in the country, such as in areas affected by
tornadoes and hail.
Finally, while rate regulation may play a role in insurers'
reluctance to do business in some markets, the most striking
pattern from the data is that both premiums and non-renewal
rates are higher in markets with more disaster risk. In other
words, accessibility and affordability issues go hand in hand.
To briefly characterize the accessibility issues, the data
show that 1.9 million policies were non-renewed between 2018
and 2023. That amount represents 1.9 million times that a
household had to quickly find a new insurer, very likely at a
higher premium, while juggling many other expenses and
commitments on their time.
If non-renewal rates had stayed at their 2020 level, there
would have been 423,000 fewer non-renewals. The cornerstone of
the private homeowners insurance market in the United States is
healthy and robust competition. When fewer insurers do business
in a market, as we see now, this reduces the options available
to homeowners and their ability to shop for the best rate.
In the most extreme case where a homeowner cannot find any
private insurer, these risks fall on state-backed insurers of
last resort, and potentially on taxpayers themselves. The
rising cost of coverage and the departure of insurers from
property markets has serious implications for home values, the
dominant store of wealth for the average household.
It also threatens communities that rely heavily on property
taxes to provide basic services and defend against further
climate-related damage. In addition, the insurance crisis
raises concerns for mortgage giants Fannie Mae, Freddie Mac and
the Federal Housing Administration (FHA), especially as the
number of outstanding flood insurance policies backed by the
National Flood Insurance Program have fallen by 16 percent
since 2009.
There is an enormous imbalance between the rich data and
sophisticated models that insurers have at their fingertips and
the information available to the average American household or
city mayor. Without adequate data, households and policymakers
cannot develop meaningful solutions to mitigate growing
climate-induced disaster risk. A starting point would be a
coordinated federal effort to collect and distribute relevant
data on insurance costs, physical risks and resiliency
investment options. I commend this Committee for taking
unprecedented steps to measure accessibility issues, and look
forward to further coordinated efforts to provide timely data
to decisionmakers.
Property insurance is facing a crisis on two pressing
fronts, affordability and accessibility. While the Rolling
Stones might say ``you can't always get what you want,'' in
insurance markets now households cannot even get what they
need. Thank you again for the opportunity to testify.
Chairman Whitehouse. Thanks very much. For the record, that
may be the first Rolling Stones reference in the history of the
Budget Committee. Mr. Shaghalian, welcome. Please proceed with
your statement.
STATEMENT OF ERNEST SHAGHALIAN, JR., CPCU, AAI INDEPENDENT
INSURANCE AGENT, BUTLER AND MESSIER, INC. INSURANCE, PAWTUCKET,
RHODE ISLAND \4\
---------------------------------------------------------------------------
\4\ Prepared statement of Mr. Shaghalian appears in the appendix on
page 33.
---------------------------------------------------------------------------
Mr. Shaghalian. Mr. Chairman, Ranking Member----
Chairman Whitehouse. Microphone on?
Mr. Shaghalian. Mr. Chairman, Ranking Member Grassley and
Members of the Committee, my name is Ernest Shaghalian. I am an
insurance agent at Butler and Messier Insurance Agency in
Pawtucket, Rhode Island. We are members of the Independent
Insurance Agents of Rhode Island, and I am a past president of
the state association.
Independent insurance agents represent many different
insurance companies at once, but are not employees of any
insurer. Our customers are your constituents. I am here to
testify that the insurance marketplace in Rhode Island, is the
worst I have ever seen it in my 40 years as an agent, and
getting worse each year.
The increased frequency and severity of weather events has
created havoc in the cost and availability of home, business
and even auto insurance. During recent years, Rhode Island's
coastal communities, which are high wind risk areas, have seen
a 562 percent increase in non-renewals.
Two insurers left the Rhode Island market during the last
two years. One of them came to Rhode Island about 12 years ago,
specializing in homeowners policies for coastal communities at
reasonable rates. They are now in receivership, cancelling
thousands of policies midterm. A third insurer announced that
in 2025 they will be non-renewing all their home and auto
policies in Rhode Island and all the other states where they
operate.
If I had a professional Christmas wish list, at the top of
it would be that states required insurance companies to give
more advanced notice before allowing to withdraw from
territories, unless they demonstrated actual financial
distress. When there are non-renewals, it creates a big problem
for consumers because most standard insurers will not accept
new customers in coastal communities.
This has increased the population in the Rhode Island Joint
Reinsurance Association, the residual market risk pool,
whatever you want to call it, by 30 percent during the last two
years. Consumers pay between 35 and 50 percent more in the risk
pool for a basic homeowners policy that does not offer optional
coverages like jewelry riders.
Other consumers have no alternative than buying coverage
through the unregulated surplus lines market. Insurers have had
large, multi-year premium increases, contributing to the
affordability problem for first-time homebuyers and putting a
major strain on the budget of existing homeowners. Thousands of
Rhode Island consumers have a five percent hurricane damage
deductible. A homeowner with a $500,000 house would have a
$25,000 hurricane damage deductible, more than most people
could afford to fix their house.
Massachusetts coastal communities have also had a spike in
policy non-renewals. Just in Barnstable County, Cape Cod, there
are 51,184 homeowners insured through the Massachusetts
Property Insurance Underwriting Association, their residual
market or risk pool, unable to get adequate dwelling property
limits on large homes.
Businesses that own property in coastal communities have no
alternative but to get coverage in the unregulated surplus
lines market at a much higher cost. These insurers require non-
standard exclusions that would eliminate coverage for
potentially devastating property and liability losses.
In recent years, we have seen more frequent incidents of
sudden street flooding, causing total losses on dozens of cars
each time, adding to the cost of auto insurance. Our highway
infrastructure can no longer handle the increased amounts of
rain in short time spans. Homes and businesses that are not in
flood zones are getting flooded.
It is not just the big, well-publicized hurricane claims,
but more frequent and severe local storms. In Rhode Island
since 2018, we have had six tornado strikes. Prior to that, it
took 32 years for six tornado strikes. We have new weather
hazards like atmospheric rivers, which cause floods to wide
sections of the country, and we are seeing wildfires in places
that never had them.
When insurance companies do not accept millions of dollars
of premiums, even at today's much higher prices, that tells me
they think things are going the wrong way. Thank you for the
opportunity to testify, and relay the complaints that we get
from our customers every single day. The crisis is not with
insurance companies; the crisis is with consumers. Thank you.
Chairman Whitehouse. Thanks very much, Mr. Shaghalian. Dr.
Hartwig. Over to you.
STATEMENT OF DR. ROBERT HARTWIG, CLINICAL ASSOCIATE PROFESSOR
OF FINANCE, DARLA MOORE SCHOOL OF BUSINESS, UNIVERSITY OF SOUTH
CAROLINA \5\
---------------------------------------------------------------------------
\5\ Prepared statement of Dr. Hartwig appears in the appendix on
page 35.
---------------------------------------------------------------------------
Dr. Hartwig. Thank you, Senator Whitehouse, Ranking Member
Grassley and Members of this Committee. Good morning. My name
is Robert Hartwig, and I am a Clinical Associate Professor of
Risk Management, Insurance and Finance at the University of
South Carolina (USC). Prior to joining USC, I spent 23 years in
the property casualty insurance and reinsurance industries,
during which I had the opportunity to work on a wide variety of
issues related to the industry's exposure to catastrophic loss.
Let me get straight to the point. The insurance industry is
not in the midst of a climate-driven crisis, nor is it about to
fall. Strength and stability are the hallmarks of this
industry.
Indeed, a recent report from A.M. Best, the largest
insurance rating agency in the U.S., found that the cumulative
impairment rate of A.M. Best-rated insurers over any 15 year
period from 2001 through 2023 was just 0.3 percent, down
significantly from the 3.9 percent over the 1977 to 2001
period.
In other words, there is no evidence that the industry is
on the precipice of collapse, despite material increases in
insured losses arising from natural disasters over the past
quarter century. There are also no insurers designated as
systemically important financial institutions or SIFIs, and
since 2017 the U.S. Treasury's Financial Stability Oversight
Council, FSOC, have effectively ceased relying on non-bank
Systemically Important Financial Institution (SIFI)
designations for regulatory purposes.
Examining the data collected by this Committee, which I
received just yesterday on non-renewal rates for homeowners
insurance reveal that a small increase in the non-renewal rate
for the U.S. overall is largely driven by two states, Florida
and California. The same pattern of increase is not observed in
other large, disaster-prone states such as Texas and New York,
suggesting that there are idiosyncratic issues that play a
major role in determining insurance availability and
affordability in both of those states.
In the vast majority of states, 99 percent plus of
homeowners are able to renew their policies each and every
year. Climate risk is an important determinant in the cost of
insurance, but there has been a tendency, however, to over-
attribute the impact of climate change when describing the
state of insurance markets.
The dynamics of insurance markets are far more complex than
can be explained by climate change and isolation, with insured
losses and ultimately the price and availability of coverage
determined by a range of factors including rapid population
growth and urbanization, inflation, litigation and fraud. To
take population growth as an example, since 1970 the U.S.
population has increased by 65 percent. In catastrophe-prone
states, it has been far more than that.
The population of hurricane-prone Florida, for example, is
up 217 percent since 1970. In the Cape Coral-Fort Myers Metro
Area, it's up 620 percent. Why do I bring that up? Because it
is unsurprising that when Hurricane Ian made landfall in that
area just two years ago, insured losses totaled some $55
billion, making Ian the second most costly natural disaster in
U.S. history.
This example vividly illustrates the dominance of
demographics over climate change as a driver of insured loss.
Let me move to inflation. Inflation in the U.S. in recent years
reached the highest level in 40 years. Inflation directly and
immediately impacted the cost of repair and rebuilding
structures damaged not only by natural disasters, but property
claims of all sizes, by all major perils throughout the
country.
Inflation, as experienced by property insurers in recent
years, is actually materially higher than that as measured by
the Consumer Price Index (CPI). From January 2020 through June
of this year, the cost of construction materials increased by
41 percent, nearly double the 21 percent of the CPI over the
same period of time. Whereas home insurance premiums rose by
approximately 18 percent over that same period.
So again, the economic impact of inflation on property
insurance claim costs dominates any impact from climate.
Let me move on to litigation and fraud. Litigiousness and
fraud have also contributed to the upward trend in claim costs,
driving premiums upward and reducing coverage options for some
policyholders. According to the Florida Office of Insurance
Regulation, that state accounted for 76 percent of all
homeowners insurance-related litigation in 2021 nationwide,
despite account for only seven percent of homeowners' claims
that year.
Excessive litigation contributed not only to higher
premiums in Florida, but a more than doubling in the policy
count at Florida Citizens, the state's insurer of last resort.
The recent leveling off in the number of policies in Florida
Citizens is early evidence that reform legislation passed in
2021 and '22 is beginning to improve insurance availability in
that state.
So let me summarize by saying that insured losses from
natural disasters across the United States continue to rise,
and they will continue to rise for the foreseeable future.
Climate change drive incremental system costs. But the dynamic
of insurance markets are complex. Many factors have contributed
to the record and near-record losses experienced in recent
years, including demographics, inflation and litigation.
Meaningful reforms, coupled with investments in mitigation
are proven solutions that can help ensure the stability of
insurance markets across the country. Thank you for the
opportunity to testify before the Committee today. I will be
happy to respond to any questions you may have.
Chairman Whitehouse. Thank you very much. Dr. Keys, let me
start with you. I want to show this graph from our report,
which compares the non-renewal rates that we found across the
country over time, and adjusts--breaks them out into the
various climate risk quintiles.
It appears that depending on your quintile, lowest climate
risk, lowest non-renewal rate increase, higher climate risk,
higher climate renewal increase, and all the way up into the
top quintile, where the non-renewal rate really is growing
explosively. That is the information that we gathered. How does
that correlate with what your work shows?
Dr. Keys. Well, thank you Senator. I think that this is the
most striking chart in the report, and the data that has been
shared with me very clearly show an extremely sharp and
differential increase in those riskiest, most exposed counties.
I think one of the other striking takeaways is how much
variation there is within states. And so even in a state that
might have the same regulatory regime across the entire state,
you see very different patterns say along the Carolina coast.
Chairman Whitehouse. Before you--before you to go that----
Dr. Keys. Yes.
Chairman Whitehouse. Let me just go back. More climate
risk, higher non-renewal rates.
Dr. Keys. Dramatically----
Chairman Whitehouse. Is that correlation consistent with
what you see through your own research?
Dr. Keys. Yes. Much higher, much higher non-renewal rates
here, much higher premiums in the----
Chairman Whitehouse. Well, let's flip to your second point,
which coincidentally I want to illustrate with a second graph.
So we have graphs in the report that show the state level of
non-renewables, and unsurprisingly, Florida and Southern
California, where the wildfires are very significant.
But once you actually drill down to the county levels, as
you were beginning to describe I believe, which is why I wanted
to put this graphic up, then you begin to see things break out
that are a little unexpected. I mean obviously every county in
Florida is in big trouble, with very high non-renewal rates.
But if you look up for instance at New York, New York does not
even appear in the top 30 states, I do not believe. It is not
particularly troubled from a non-renewal point of view.
But when you drill down to the counties, and you look at
say a coastal county on Long Island, suddenly you see the same
explosive growth in non-renewal rates and the same high non-
renewal rates that you see. Could you comment a little bit on
what drilling down to the county level shows us about how this
non-renewal crisis is developing?
Dr. Keys. Yes, thank you. I think it reinforces this, this
takeaway along the lines of the last figure you showed, which
is that there is differential risk and that especially exposed
counties are seeing much sharper changes in the availability of
insurance. We are also seeing that that is related to the price
of insurance as well.
So certainly related and very much concentrated in the
highest climate risk areas, especially along the coasts. But
also in areas, as you mentioned at the outset, like in Oklahoma
and parts of New Mexico.
Chairman Whitehouse. Which would suggest that insurers are
making highly localized risk-based decisions when they are
deciding to non-renew, and not just writing off all of New York
or something like that. They are really drilling down and
looking closely at individual properties and property owners.
Mr. Shaghalian, is that what you are seeing in Rhode Island? Do
you think the insurers are paying--can differentiate between
coastal properties, for instance, and others?
Mr. Shaghalian. So what I see in Rhode Island----
Chairman Whitehouse. If your microphone is not on, please
turn it on.
Mr. Shaghalian. It is on, I guess.
Chairman Whitehouse. Okay, good.
Mr. Shaghalian. Yeah. So what I see in Rhode Island is most
insurers have like a mileage, you know. If you are within three
miles of the coast, then you have got problems. In Rhode Island
as you know, you know, if you are in Foster, Rhode Island or
you are in ten miles, 12 miles inland, it is not that much of a
problem. So it is predominantly the coastal communities.
Chairman Whitehouse. And I understood, Dr. Hartwig's
testimony to be basically insurance is sound, insurance is
stable, nothing to see here folks, not a problem. How does
correlate with your experience with your clients in Rhode
Island? Are they seeing that everything's fine and there are no
problems?
Mr. Shaghalian. So there is no problem with the insurance
companies. The problem is with the consumers that are being
forced into risk pools, being forced into the surplus lines
markets, being forced to pay more money for the insurance and
having, you know, less availability of optional coverages.
Chairman Whitehouse. My time is up. Mr. Chairman.
Senator Grassley. Thank you, thank you. Dr. Hartwig, is
there any evidence that over the past quarter century,
insurance companies have had an increased failure rate because
of climate change?
Dr. Hartwig. Thank you, Senator. In fact, there is no
evidence that over the past quarter century, that there has
been any increase in the failure rate, the rate of
insolvencies, the rate of impairment as we typically refer to
it with respect to property casualty insurance or reinsurance
companies as a result of climate change or quite frankly, for
any other manner.
The data I cited earlier from A.M. Best, the premier rating
organization of insurers in the United States, is quite clear
on this, that in fact the insolvency rate, the impairment rate
of insurers has actually fallen dramatically over the past
quarter century.
So what this shows is that insurers have done a good job of
managing this risk. What insurers are doing is try to make
insurance available everywhere that they can, but they can only
do if they can earn a fair rate of return. Going back to the
figures that Professor Keys just showed, as he acknowledged in
his testimony that the numbers overall are very, very heavily
influenced by Florida and California, okay.
And when we look at those two states, those two states have
structural issues. I will take Florida for an example.
Absolutely rampant legal abuse in the system that drove up
system costs, and was in fact the principle factor associated
with the impairment of a number of insurance companies in that
state, okay, leading to an explosive growth in the state's
market of last resort.
Very fortunately, we have had a series of reforms in recent
years, and in fact Chart 2, Exhibit 2 in my testimony, what you
see is that the non-renewal rate in Florida in fact seems to
have peaked at around three percent, even went down slightly in
2023. Those reforms took place in 2022, at the very end of
2022, so are really bearing fruit just this year.
So I expect to see in fact the non-renewal rates in states
like Florida fall. California has been a bit slower. They have
been slow to come around to the realization of reform. They
finally signed onto that. Some of those reforms will go into
place in 2025. Some of them went into place this year.
We would expect to see a turnaround there and in both
states, we are seeing insurers signal that they are coming back
into the marketplace, as a result of the reforms. They are not
talking about climate. They are talking about the obstacles to
writing coverage in these states are related to the legal
environment associated with those states.
Obviously, there is the explosive population growth, and
then of course the pressures associated with the inflation.
Senator Grassley. I think you have answered this question,
but I am going to ask it anyway and I want you to decide if you
have answered it. Are fraud and litigation major drivers of the
insurance prices and what can state governments do to limit the
effect of these factors have on insurance costs?
Dr. Hartwig. Right. So, yes. In my response to the last
question, I think I discussed quite a few of these things. But
when we think about--let me give you an example in Florida, to
be very concrete. And Florida's problem, which again is often
ascribed to climate and not to say that climate is not a driver
of loss.
But Florida's problems and California's problems are
largely man-made disasters. In the state of Florida, for
instance, an issue called assignment of benefits, which I did
not see reported at all in the report that we received
yesterday, not discussed at all.
This is a situation which, to my knowledge, is relatively
unique in the country, where a policyholder can say to a
roofing company hey, guess what? I am going to turn my policy
effectively over to you. You deal with the insurance company.
Well, what do you think is going to happen when you have a
bunch of roofers that are now in charge of millions of people's
insurance policies?
They are going to knock on everyone's door and get every
roof in the entire state to try to be replaced, even when it
does not need to be replaced. This results in immense amounts
of litigation, for which insurers had not priced into the
policies. Their only thing that they could do at that point is
essentially impose moratoria on writing new policies until the
situation was solved from a regulatory perspective.
And that is exactly what happened in 2022, when Governor
DeSantis called two special sessions of the legislature.
Senator Grassley. Dr. Hartwig, my last question. Democrats
intentionally withheld their new staff report on the effect of
climate change on insurance. As a result, my staff did not have
an opportunity to fully review their findings prior to the
hearing.
However, they did provide raw data concerning non-renewals.
What stuck out to you in your review of this data?
Dr. Hartwig. Right. So I was in the same boat of course,
not receiving the--I received a spreadsheet with absolutely no
detail as to actually what it was yesterday. But looking at it
quickly, so as I mentioned, the U.S. non-renewal rate is
greatly influenced by two states, California and Florida.
If you back those out, and in fact in Exhibit 2 in my
analysis, in my testimony, I show a column, the right-most
column. It is called ``Median State.'' The variation in median
state from 2018 non-renewal rate to 2023 goes from .79 percent
to .86 percent, very little variation.
So across the country, when you look at the individual
state experience, again this is why I say 99 percent plus of
policyholders across the country are able to renew their
policies with--in virtually every year without a problem. I see
that Florida's non-renewal rate has leveled off, and I would
expect California within a year or two to see the same pattern.
But again, the fact that large disaster-prone states like
Texas and New York do not mirror the pattern we are seeing in
states like California and Florida suggests that something else
is at work, and that something else is not more climate change-
related pressures in Florida than there are in Texas.
Lord knows, we have had a huge number of disasters in
Texas. But Texas went through its cathartic moments in terms of
problematic regulation of the insurance industry 15 or so years
ago. They understand now that they need to create a market that
attracts capital, capital in a place that is always going to be
risky, and so far so good.
Chairman Whitehouse. We have Senator Padilla, then Senator
Kennedy, then Senator Kaine, then Senator Braun.
Senator Padilla.
STATEMENT OF SENATOR PADILLA
Senator Padilla. Thank you, Mr. Chair. As you have led
discussion in this Committee in the past, we, I think,
acknowledge that the federal government needs to step up to
increase coordination between states and insurance providers,
help equip stakeholders with mitigation tools and help identify
potential solutions to the clear insurance crisis.
Now California has invested billions of dollars in wildfire
risk reduction and implemented a number of programs designed to
incentivize homeowners and businesses to make safety
improvements. The federal support for such risk mitigation
measures, infrastructure and home hardening, and community-wide
resilience could better equip states to get creative on how to
manage insurance, the insurance markets and affordability
challenges.
Dr. Keys, would you agree or disagree that there is space
for the federal government to constructively engage on this
issue, to help communities, to help states, to help industry
better navigate the climate-led changes to the home insurance
market?
Dr. Keys. Thank you, Senator. I completely agree. I think
that when we look at the landscape of property insurance, it is
a market that is regulated at a state level. And so you have a
lot of inconsistencies in terms of--in terms of what data is
provided to consumers, what the regulatory landscape looks like
for the insurers.
We are operating in almost total darkness when it comes to
data in this market, and it is really through the efforts of
this Committee to get a glimpse into--into non-renewals. But if
you think about all the other margins along which insurers are
collecting sophisticated data and acting on that data, there is
really no coordinated effort to understand their actions.
So I think there is a very clear role for the federal--at
the federal level to coordinate these efforts in terms of
collecting data, better communicating risks to communities, and
then to your point about mitigation, developing best principles
for acting on that data and reducing risk.
I think the risk is really not in the insurance industry
per se. The risk is really about managing risk for households
and communities.
Senator Padilla. Thank you. That is actually very helpful.
Now as we make progress on the data points that you just made
and other tools and solutions, how would you address the
concerns of skeptics who would say how is this actually going
to translate into lower insurance premiums for families, as
opposed to just increasing profits for insurers?
Dr. Keys. I think this is one of the challenges right now,
is understanding a bit more about how pricing works in this
space and how much of that is really trying to meet the costs
that insurers are facing, versus to your point, towards the
profitability of issuing these policies.
What we are seeing in many markets where, you know, the
insurers are stepping back is we are seeing now an increased
dependence on these state-run entities. They are going to have
the data on how much it costs to insure these properties.
And so I think there is a another layer of information that
can be communicated there. And then I think just risk
mitigation more broadly is actually a win-win, and that it is
good for the insurers because they have to pay out less. And it
is good for the households and it is also good for the mortgage
market.
And so we have to remember the chain here, which is that
without good insurance, you cannot get a mortgage. Without a
mortgage you cannot buy a house, and the mortgage market is one
of the direct beneficiaries of this insurance landscape. And so
I think we should think about them as well when we are thinking
about who should bear some of the costs going forward to put
together better information for--for households to make these
kinds of mitigation choices.
Senator Padilla. Okay. Thank you very much, and Mr.
Chairman, Nevada County in California was highlighted in the
Budget Committee's report, and I do have a letter I would like
to submit into the record from Nevada County Supervisor Heidi
Hall, addressing the local impacts of the climate-driven
insurance crisis.\6\
---------------------------------------------------------------------------
\6\ Statement submitted by Senator Padilla appears in the appendix
on page 163.
---------------------------------------------------------------------------
I think it would be--it is helpful perspective to add to
this hearing and our----
Chairman Whitehouse. Without objection.
Senator Padilla. Thank you. Thank you, Mr. Chair.
Chairman Whitehouse. I should note that Senator Dawn Euer
from Rhode Island is here. She represents Newport County, which
is the county that our data shows has the highest non-renewal
rate, highest non-renewal increase rate in Rhode island,
consistent with the observations of Mr. Shaghalian, that the
insurers are withdrawing from or raising rates dramatically,
and/or forcing people into the assigned risk pool along the
coastal high risk climate areas.
And that will take us to Senator Kennedy of Louisiana.
STATEMENT OF SENATOR KENNEDY
Senator Kennedy. Thank you, Mr. Chairman. Dr. Keys,
Professor Keys, are you clairvoyant?
Dr. Keys. Thanks for the question, Senator. No, I am not.
Senator Kennedy. I am not either. So when you make
predictions, these are my words, not yours, when you make
predictions that climate change is going to destroy home
ownership and the insurance market and otherwise cause the
earth to spin off its axis, those predictions are made on the
basis of climate models, is that right?
Dr. Keys. The forward-looking forecasts are based on
models. My discussion was retrospective and focused on the data
we have collected over the last five years.
Senator Kennedy. If those models are wrong, then your
predictions would be impacted, would they not?
Dr. Keys. Senator, I would say that the famous quote is
that ``All models are wrong, but some are useful,'' and in this
case there is a preponderance of evidence that suggests the
direction----
Senator Kennedy. What is meant by methanethiol?
Dr. Keys. I am not aware of that term, Senator.
Senator Kennedy. I am surprised. I have read a lot of your
writings. You seem to fancy yourself as a climate expert.
Dr. Keys. Senator, I am an expert on housing markets,
mortgage markets and insurance markets. I am not a climate
scientist.
Senator Kennedy. If I told you that methanethiol is a--is a
sulfur-based aerosol gas, kind of smells like rotten cabbage
that is produced by microscopic plankton in all of our oceans,
which covers 75 percent of the earth's surface, would you have
reason to disagree with me?
Dr. Keys. I certainly would not, Senator. I am here to talk
about insurance.
Senator Kennedy. If I told you that this methanethiol, it
is an aerosol which escapes into our environment. It oxidizes
and produces particles that substantially reflect the sun's
radiation and heat, and prevents climate change. Would you have
a reason to disagree with me?
Dr. Keys. I would not, Senator. I am here to talk about the
insurance crisis.
Senator Kennedy. I know you do not want to talk about
things that undermine your confident assertions, but this is
important. The Institute of Marine Sciences and the Cabrera
Institute of Physical Chemistry just a few days ago published a
startling study that's being widely reported, and it--and it
found that while scientists in these climate change models on
which you rely have always known about methanethiol, that now
science has discovered ways to better measure it, and that it
appears--not appears, it demonstrates that there is 25 percent
more methanethiol being released into our atmosphere than any
scientist ever thought.
And that is going to have a huge impact on cooling the
earth, and we are going to have to--to recalibrate all of our
climate change models. I suggest you read it, Doc. I mean I see
this essay that you wrote in the New York Times appropriate,
New York Times, ``Climate Change Should Make You Rethink Home
Ownership.'' Did you write that?
Dr. Keys. Yes I did, Senator.
Senator Kennedy. That is pretty bold. Do you own a home?
Dr. Keys. I do, in a flood zone.
Senator Kennedy. Have you sold it?
Dr. Keys. Have I sold my home? I live in my home, sir.
Senator Kennedy. Well, you are telling everybody else to
sell theirs. You are a climate extremist, are not you
Professor?
Dr. Keys. Certainly not, Senator.
Senator Kennedy. You are a political extremist, are you
not?
Dr. Keys. Certainly not, Senator.
Senator Kennedy. On July 9th of 2024, did you tweet the
following: ``Honestly, the biggest long-term political problem
the Democrats have is that they do not know how to talk to low
information morons''?
Dr. Keys. I do not believe those are my words, Senator. I
would have to be able to see them if you would share that with
me.
Senator Kennedy. Yeah. Here it is, big as Dallas.
Dr. Keys. I do not believe those are my words, Senator.
Senator Kennedy. You tweeted them.
Dr. Keys. I do not believe that I did.
Senator Kennedy. Yes, you did.
Dr. Keys. I may have, liked someone else's tweet or
retweeted someone else's tweet?
Senator Kennedy. Oh. Do you often tweets you do not agree
with?
Dr. Keys. Those are not my words, Senator.
Senator Kennedy. Yeah. But you tweeted them in approval,
did you not?
Dr. Keys. Those are not----
Senator Kennedy. You can't make this cat walk backwards,
Professor.
Dr. Keys. Those are not my--those are not my words,
Senator.
Senator Kennedy. On July 16, 2024, did you tweet the
following: ``A big part of modern right wing culture is this
frisson of the illicit. The reading of this or that writer or
account that are outre in whatever ways, fascists, race IQ
[Intelligence Quotient] obsessives, Holocaust denial-adjacent,
people with very weird sexual fixations and pathologies. They
turn into their own philosophy, etcetera.''
``A lot of them, and I think this is true of Vance, and
definitely true of the creepy Silicon Valley MAGA [Make America
Great Again] weirdos have simply pickled their brains.''
Dr. Keys. Again Senator, those are not my words and I did
not----
Senator Kennedy. You tweeted them, Professor.
Dr. Keys. I did not tweet that, sir. Those are not my
words.
Chairman Whitehouse. Senator Kennedy, you are----
Senator Kennedy. Let me make this last point.
Chairman Whitehouse. You are more than two minutes over
your time. We have other Senators waiting.
Senator Kennedy. You have got a lot of nerve, Professor.
Chairman Whitehouse. You always go over your time, so I
have to call it for you.
Senator Kennedy [continuing]. In lecturing us about
Holocaust denial being from the University of Pennsylvania.
Chairman Whitehouse. But really, you have other Senators
who are waiting for their time, and you're well, well over
yours.
Senator Kennedy. Thank you for your indulgence, Mr.
Chairman.
Chairman Whitehouse. Senator Kaine.
STATEMENT OF SENATOR KAINE
Senator Kaine. Thank you, Mr. Chair. You noted that one of
the witnesses used a Rolling Stone lyric, so I am going to use
one. ``Oh a storm is threatening my very life today. If I don't
get some shelter, I'm going to fade away.'' So I am going to
ask one question about shelter and one question about storms.
So on the shelter question, I would sort of like address
Professor Keys and Mr. Shaghalian. I am not thinking about
climate models in this hearing. I have certainly thought about
them in other hearings. I am just thinking about the experience
of Virginians who are trying to get homeowners insurance or
flood insurance, and what I hear from them.
And I think that is the data that this hearing really is
digging into. Let us talk a little bit about what that means if
somebody's home is uninsurable. For most Americans, middle
class Americans, their home is their principal source of
wealth. It is their most significant asset.
It is the asset whose appreciation in value also is often
the beginning of a family being able to, over generations,
amass more and more wealth. So let us--let us focus on that. If
you live in an area where suddenly you cannot get insurance or
when you are trying to sell your home and realize that wealth,
purchasers are reticent to purchase, because they have a hard
time getting insurance.
What does that do to families in these areas, and we have
them in Virginia too, Portsmouth and the Hampton Roads area.
Mr. Shaghalian, if you could go first?
Mr. Shaghalian. Yeah. So, yes. Especially with flood
insurance, what you are saying is true, that if you go to sell
your house and the buyer finds out that the flood insurance
sometimes is 15, 20, 30 thousand dollars for flood insurance
that can, you know, it can almost be that you cannot sell the
house.
And in the flood insurance, I mean you know, the federal
government, you know, they make the rules and basically set the
prices, and even though there is some private insurance out
there now, the private insurance markets can decline people.
So you know, that can be another problem. It is not a
relief valve for everybody.
Senator Kaine. So you either--you might not be able to sell
your house, or you may have to sell it at a really significant
discount because of the flood insurance.
Mr. Shaghalian. Right. The buyer, you know, is not going to
be willing to pay the same price if they know they are going to
pay, you know, a lot of money for flood insurance?
Senator Kaine. There are neighborhoods in the Hampton Roads
area of Virginia, Portsmouth, for example, beautiful, historic
neighborhoods where flooding used to be very rare and it is now
quite common. And it is very, very difficult for people to sell
their homes for example, what they purchased the homes for.
And so we see this again and again, and then Dr. Keys, talk
a little bit about what effect that has then on a family's
ability to use this principal asset to have--have wealth?
Dr. Keys. Well thank you, Senator. That is right. This is a
challenge where you are going to be facing rising costs year
over year. I think a lot of people think of home ownership as a
way to lock in their housing costs. You take out a fixed rate
mortgage. You have a predictable payment that you are going to
be able to deal with each year, and changes in homeowners
insurance is undermining that predictability.
And so now you have this additional uncertainty into what
your actual outlays are going to be to live in that home, and
that is going to be really challenging.
Senator Kaine. So there is an additional--there is an
additional cost in the short term, and then a probable decline
in the wealth and the value you get out of the asset in the
long term. Let me switch to asking about storms. We are working
on a supplemental bill today, to deal with natural emergencies.
Actually, the bill is now what I would call a real disaster
supplemental. A lot of it is about the natural disaster,
Hurricane Helene and others. But some of it is about a
predicted man-made disaster, namely if tariffs are put in
place, people will get hit so badly that we have had to put
money into the disaster bill to compensate for the predictable
man-made disaster of a Trump tariff policy, which I think is
interesting.
So this disaster bill has grown in scope to encompass both
natural and man-made disasters. But look. Hurricane Helene in
particular hit southwest Virginia, Appalachian Virginia very
hard. And I have been there to see the damage to homes, to
businesses, to national parks and forests which kind of drive
economic activity, to infrastructure like roads washed out.
And what we are seeing in Appalachia, I just looked at some
of the data Mr. Chair, is we are seeing some of the highest
non-renewal rates. We certainly see them in coastal Virginia.
We are starting to also see them in Appalachian Virginia,
because even if annualized rainfall is not changing that much,
we are seeing rainfall and storms come much more episodically
and unpredictably.
And the infrastructure that has been built based on kind of
norms and averages in these hollows, whether they be roads or
schools or homes, they are not an infrastructure that can
withstand abnormal weather patterns. And so we are seeing
significant effects, and then that is also, at least there
appears to be some correlation.
I do not know that I know enough about the report yet to
talk about causation, but we are starting to see non-renewal
rates tick up in Appalachia as well. So I appreciate the work
that the Committee has done to surface this non-renewal issue.
I do think this is an area where we are seeing it. Sure, we are
seeing it in Florida and California, and I recognize that they
have had some challenges that are severe on the climate side.
We are starting to see it in Rhode Island, we are starting
to see it in Virginia, including in places in Virginia where we
would not have predicted ten years ago. I appreciate the
Committee for holding this hearing.
Chairman Whitehouse. Thanks, Senator Kaine. Senator Lujan.
STATEMENT OF SENATOR LUJAN
Senator Lujan. Mr. Chairman, thank you very much and thank
you for holding this important hearing. Mr. Chairman, I also
want to thank you for the work that this Committee has done
throughout this Congress, which has been abundantly clear,
about the concern that families all across the country are
faced with.
And as we have seen with these most recent natural
disasters, our brothers and sisters throughout the United
States that live in some of the most rural areas, folks that
still do not have running water. It is actually devastating
that we are seeing as a result of higher temperatures, drier
conditions in the Mountain West, the West with these wildfires,
the intensity of hurricanes.
In the end, this is all impacting the cost of living for
people all across America, which brings me to this hearing, Mr.
Chairman. The climate risks like natural disasters have created
a homeowners insurance crisis as well, and with it, real pain
and anxiety for communities and states like mine.
We know that the climate crisis is driving higher insurance
premiums and non-renewal rates, leaving entire regions
vulnerable when another disaster strikes. And based on data
collected during this Committee's investigation, it is the
communities that are most vulnerable to these risks that need
protective insurance policies the most.
What we are seeing in New Mexico and most parts of the
country is rural areas experiencing the highest increases in
premiums and non-renewals.
In New Mexico, more extreme and frequent wildfires push
insurers to refuse renewing or approving policies in aeras at
high fire risk. It happened after the Hermit's Peak/Calf Canyon
fires in 2022, a fire by the way that was started by the
federal government, a prescribed burn that was never put out,
that resulted in the state's largest fire in our history.
It happened after the South Fork and Salt fires in Ruidoso
earlier this year, and I am fearful that it will happen again.
So Dr. Keys, yes or no, does refusing to renew home insurance
plans after a natural disaster add to the challenges of the
recovery process?
Dr. Keys. Yes, and if insurers are exiting the market in
the aftermath of the disaster, that is going to leave fewer
options for homeowners as they seek to rebuild and reestablish
the community.
Senator Lujan. The Ruidoso fires this year destroyed or
badly damaged more than 1,100 homes, but only around ten
percent had adequate insurances according to estimates. As
climate impacts worsen, that number will fall even further. For
those that want to rebuild their lost homes, the question now
is where? What options do families have if companies refuse to
insure their property or choose to cancel their insurance plans
years later? The questions that my colleague from Virgina, Mr.
Kaine was asking clearly articulate that.
Now to many in my state, picking up and moving elsewhere is
not just financially difficult, these are families that have
been there for generations, lands that have been held in the
family for centuries. And because someone somewhere with some
methodology, some actuarial says no, cannot build there. We are
not going to insure you there.
I have a real problem with this. This is a pocketbook
issue. Now Dr. Keys, yes or no, for those homeowners lucky
enough to have their insurance policies renewed, does
skyrocketing home insurance premiums make it more difficult to
families to recover from natural disasters?
Dr. Keys. Thank you, Senator. It makes it much more
difficult to recovery from a household budget standpoint if
they are now spending a significantly larger amount of their
annual income towards homeowners insurance.
Senator Lujan. I appreciate that response, and Mr.
Chairman, I appreciate all the conversations in the hearing
today, but you have clearly demonstrated is this is a
pocketbook issue. This is something we should all be talking
about more. This should not be partisan.
Families in states that are represented by Republican
members of this body or Democratic members of this body that
voted for the incoming President or the current President,
everyone is getting hit with this. And I cannot thank you
enough for having this conversation, and especially what the
people that I am fortunate to represent have been going through
back home.
This is not right. So whether it is through this body or
state by state with Superintendents of Insurance, someone has
got to do better. And we have got to make sure that we keep
families at the center of all of these decisions, and
understanding what is happening to them when they get kicked in
the face with these pocketbook issues that are just getting
worse and worse.
So thank you very much, Mr. Chairman. I appreciate all of
you experts for being here today.
Chairman Whitehouse. I believe Senator Merkley is trying to
get here. So I will take just a moment of Chairman time.
I can recall driving along the Gulf coast on some of my
climate travels to red states, and as Mr. Shaghalian will know,
when a property is up for sale, there is a sign out front that
hangs the name of the real estate company that is selling the
property, and then underneath that there is another little sign
that gives you the name of the individual realtor in the real
estate company who is the person to contact if you are
interested in buying the home.
And what I saw over and over again was that underneath that
plaque with the individual realtor's name, was another little
plaque that said what the height above sea level was of the
property.
That was such important information along that Gulf coast
that they were literally hanging it off the real estate sign of
the properties that were for sale, because if it is a--if it is
low, then that means the flood risk is huge and the person
driving by is just going to keep on driving. But if it has got
enough altitude above sea level well, maybe they will be
interested.
The other thing that I wanted to say in response to the
testimony about the litigation problem. I am not an expert like
the panel, but I am not a rookie either. I ran the Rhode Island
Attorney General's Office Regulatory Unit, which included
insurance rate cases.
I was the insurance regulator for the state of Rhode
Island. I came back as attorney general and oversaw the
insurance rate work of the Attorney General's Office. I helped
lead our rebuild from an epic insurance failure, the Rhode
Island Share and Deposit Indemnity Corporation (RISDIC)
failure, a deposit insurance failure, which Mr. Shaghalian will
remember, and I was the architect, I guess I would say,
orchestrator of the workers' comp insurance reform that we had,
which has worked after we had a workers' comp failure, in which
every single insurer left the state, announced their departure.
So what is happening in Florida has some resonance for me.
But I have also been around this conversation in which the
insurance industry blames things on litigation, and I just want
to offer my own experience in this regard. Which is that
litigation goes up when insureds are getting screwed. If you do
not want a lot of litigation, pay claims fully and promptly,
and that really helps solve the problem.
If you look at Florida, we are seeing Citizens Property
Insurance reporting 70 percent claims denial for individual
storms. 70 percent of claims filed with that insurer are just
denied. You have got a hell of a fraud epidemic if you are
telling me that 70 percent of Floridians are fraudsters, and
that their claims should be summarily denied.
When your claim is just auto-denied, and by the way there
is some logic to this. When claims are denied, it puts people
under more and more pressure. They may not be able to stay in
their houses if they are not livable.
They may move someplace else, to a cousin out of state, and
at that point fighting with the insurance company really does
not make any sense any longer. You just wash your hands. You do
not pursue the claim.
Dr. Hartwig. Can I just say something----
Chairman Whitehouse. No, you may not interrupt me, and the
problem defaults to the bank that owns the mortgage. They now
own the ruined property.
So there is some real logic, unfortunate logic but real
logic to running up your claims denial rates. We have also seen
long delays in payment, you know. Ultimately, you may get paid,
but if you cannot live in the house, if you cannot fix it in
time, if mold grows, we saw it in Katrina. People moved to
Texas to get away from the disaster, and they got resettled.
They found a new job. They did not want to come back and the
claims just languished.
We saw 60 Minutes go through the insurance adjusters of
Florida, relating stories about how they would go--they are
independent insurance adjusters. They would go to the insured's
home. They would look around and they would say ``Okay, here is
the damage. Here is how much it should cost,'' and then the
insurance company would rewrite the adjuster's report and just
remove stuff.
Well, if you are the insured and it is your home and you
know from your adjuster what he told the insurance company,
then the insurance company comes back and says, you know, you
get 20,000 on a $200,000 adjuster. What are you going to get?
You are going to get litigation.
So there are two sides to this story. I have been hearing
this for as long as I have been around insurance.
The insurance industry loves to blame litigation, but a
great deal of the litigation has to do with the way the
insurance industry treats its customers.
And that is the experience that I have had. Mr. Hartwig has
expertise in this area. He has the view that he expressed, that
it is actually the litigation that is driving the insurance
costs.
I just wanted to offer back my experience, having been
through this argument for decades now, that there is a very
strong counter-narrative about that, which is that if you want
less litigation, pay the damn claims. Be solvent, pay the
claims, pay them quickly, pay them fully and then the
litigation abates. So that is my experience. You wanted to say
something, Mr. Hartwig?
Dr. Hartwig. Yes. Thank you very much. So I would say that
Florida did have a hell of a fraud problem----
Chairman Whitehouse. 70 percent? 70 percent of Floridians
are fraudsters? Is that what you are telling us?
Dr. Hartwig. I do not think anybody is saying that. But
what we are saying----
Chairman Whitehouse. Well, it is the thing you deduce if
you look at a 70 percent claims denial rate for a storm, is it
not?
(Simultaneous discussion.)
Chairman Whitehouse. You are saying that they are
fraudsters.
Dr. Hartwig. There is three percent. Three percent is the
non-renewal rate in that state, and so--and let me speak to
some of these other things. And so for instance in a prior
role, when I ran the Insurance Information Institute, and was
its chief economist, in the wake of Hurricane Katrina, 1.75
million claims, largest ever and even to this day it is a
record.
We did do a study at six months and one year, and found
that approximately one percent of those claims were in dispute.
By that, I mean they were not fully settled within about six
months, and it was about a half of one percent after one year.
This is after the largest claiming event ever in United States
history. So my experience is that, and even my personal
experience, having my first ever homeowners insurance claim
with Helene a couple of months ago, is that the claims are
settled fairly and expeditiously, and there are fair claims
handling in all 50 states----
(Simultaneous discussion.)
Chairman Whitehouse. I am not disputing that from time to
time, the insurance industry--in fact perhaps even most of the
time, they pay their claims expeditiously. Rhode Island is the
home of Amica. They're legendary for their good payments and
quick behavior.
But where litigation is the issue, I contend that there is
a case to be made that very often, the litigation is the
product of the behavior of the insurers, and when you have got
70 percent claim rates, when you have got documented cases of
adjuster's reports being whittled away by the insurance
company, I mean that is what you then get.
You create a litigation environment that you can then blame
for your problems. So we are going to disagree. I am going to
call this hearing to an end. I wanted to make sure that both
sides were reflected. You have made your statement, I have made
mine. People can make their own determinations about it.
I want to thank all of you for appearing before the
Committee today. Each of your full written statements will be
included in the record. If there are questions for the record,
please get them into us by noon tomorrow, any Members who are
interested in that, and we will ask the witnesses if you do get
questions for the record, to respond within seven days of when
we get them to you.
And I will make a final statement, which is that 42
hearings in the Budget Committee is quite a lot. 21 of them
took on or 22 of them I guess now, took on a really challenging
issue that required a lot of work and required bringing in
really renowned expert witnesses.
And I particularly just want to thank my staff director and
his team for the enormous amount of work that went into
building that body of evidence, which I think has helped people
understand that the climate crisis that is coming our way is
not just about polar bears and it is not just about green jobs.
It actually is coming through your mail slot in the form of
insurance cancellations, insurance non-renewals and dramatic
increases in insurance costs, sometimes tripling or
quadrupling.
So with much appreciation to the team that helped this
happen, again my thanks to the witness and particularly to Mr.
Shaghalian for his trip down from Rhode Island. He is a leader
in our Rhode Island community, and a wonderful guy. So glad to
have you here, sir. And with that, for the last time we are
adjourned. (Whereupon, at 11:22 a.m., Wednesday, December 18,
2024, the hearing was adjourned.)
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
[all]