[Congressional Record Volume 142, Number 104 (Tuesday, July 16, 1996)]
[Extensions of Remarks]
[Pages E1287-E1289]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                        DISASTER INSURANCE BILL

                                 ______
                                 

                           HON. BILL McCOLLUM

                               of florida

                    in the house of representatives

                         Tuesday, July 16, 1996

  Mr. McCOLLUM. Mr. Speaker, it seems that virtually everyone in 
America is going to see a movie about the threat of aliens destroying 
our country. The real threat this summer is the destructive force of 
another major hurricane, like the one bearing down on the coast of 
North Carolina as we speak.
  Hurricane Bertha has already taken lives and caused millions in 
property damage in Puerto Rico and the Virgin Islands. The threat 
caused by these destructive natural disasters is all too real. We face 
it every year and will continue to experience growing loss of life and 
property until we try to confront the destructive forces in a better 
way.
  Mr. Speaker, I have a great interest in legislation that my good 
friend, Mr. Emerson, has introduced to reduce the impact of such 
catastrophic disasters. Mr. Emerson was aware that we at the Federal 
level need to encourage high risk areas of our country to better 
prepare for such events. Homeowners and businesses in States like 
Florida need more reliable disaster insurance protection. I would like 
to put the following article that appeared in today's Wall Street 
Journal in the Record. This article describes the insurance crisis that 
is occurring in my home State of Florida.
  Currently, legislation to address these problems is under 
consideration in the House Transportation Committee in the form of H.R. 
2873, the Natural Disaster Protection Act. I urge my colleagues to 
support committee action on this critical issue during the 104th 
Congress.
  I am pleased to note that the Transportation Committee has been 
engaged in the process of revising the bill to address concerns raised 
in the hearing process, and the Senate has undertaken a similar effort.
  Although this legislation certainly will not completely solve this 
problem of disaster insurance and will not eliminate the Federal burden 
relief, I believe it is a good first up on which to build future 
efforts. My State is taking actions on its own which will complement 
the programs in the proposed Federal bill and I understand that the 
insurance industry is examining other private sector options to 
increase insurance availability in high risk areas like Florida.
  I would like to compliment the work of Chairman Shuster and his 
staff. We must support their efforts to report a revised bill out of 
committee as soon as possible. Mr. Speaker, for Congress to wait until 
the next major disaster to act on this issue would be a tragedy.

             [From the Wall Street Journal, July 12, 1996]

    Florida Homeowners Find Insurance Pricey, if They Find It at All

                 (By Leslie Scism and Martha Brannigan)

       The swath of South Florida devastated four years ago by 
     Hurricane Andrew is in far better shape these days. But the 
     state's insurance industry, devastated by the same storm and 
     wary of another direct hit, is still a disaster.
       Florida's homeowner-insurance business is like none other 
     in the country: Rates, once absurdly cheap, have more than 
     doubled in many coastal areas since Andrew, with double-digit 
     annual increases likely in the future. Some big companies are 
     so anxious to shed high-risk customers that they are openly 
     touting the merits of their smaller competitors and even 
     paying them bounties. Meanwhile, the state now operates an 
     underwriting agency that, though it has rapidly become 
     Florida's second-largest home insurer, is thought by many to 
     be underfunded and incapable of handling a major disaster.
       All of this comes at a time when the Atlantic is churning 
     forth bigger hurricanes, more frequently, than at any time in 
     decades. Last year's hurricane season was the busiest since 
     1933, and the march of Hurricane Bertha toward the East Coast 
     today reminds Floridians that they are just one storm away 
     from a disaster that could leave them homeless and 
     underinsured.


                         flirting with disaster

       ``Insurance companies and buyers have not yet fully come to 
     terms with the new reality of megacatastrophes in the 1990s, 
     and nowhere in the U.S. is this issue seen more dramatically 
     than in Florida,'' says Sean Mooney, an economist with the 
     Insurance Information Institute, a trade group.
       This was inconceivable in the boom years of the 1980s. 
     Hurricanes were rare, and those that hit the mainland tended 
     to stay far from the state's two most densely populated 
     coastal zones, the stretch from Miami to Palm Beach and the 
     St. Petersburg-Tampa area. The insurance firms were relying 
     on primitive models that didn't anticipate multibillion-
     dollar losses. The companies competed ferociously to insure 
     the thousands of homes being built every year in the nation's 
     third-fastest growing state.
       Then came Aug. 24, 1992. Hurricane Andrew swept through 
     south Dade County, about a dozen miles from downtown Miami. 
     It was the most expensive natural disaster in U.S. history, 
     causing about $16 billion in insured losses--more than half 
     of that incurred by homeowners.


                         billion-dollar losses

       Insurance firms took a huge hit. According to the state, 10 
     companies, most of them small, went broke from storm-related 
     losses. Others also felt Andrew's punch. State Farm Group, 
     which held policies on more the 30% of Florida's insured 
     homes, sustained $3 billion in losses.
       Some agencies couldn't make it. Scott Johnson, executive 
     vice president of the Florida Association of Insurance 
     Agents, says that since the storm, nearly 100 members of the 
     group went out of business, reducing its ranks to 1,155 
     members. Many other agencies that weren't members also 
     failed.
       Meanwhile, the companies that stayed in Florida immediately 
     sought to reduce their market share, especially in risky 
     coastal areas. They dropped old customers and refused to 
     insure new ones. One company, Prudential Insurance Co. of 
     America, even paid many of its own policyholders a year's 
     worth of premiums to take their business elsewhere. The cost 
     to Prudential: about $15 million.

[[Page E1288]]

                         second-biggest insurer

       Most of those Prudential customers wound up with the new 
     Florida Residential Property and Casualty Joint Underwriting 
     Association, widely known as the JUA. It was intended to be 
     the insurer of last resort. Instead, it has grown to nearly 
     900,000 homeowners, just 100,000 policies shy of State Farm, 
     Florida's biggest home insurer.
       The JUA now covers 18% of residences in Florida. In the 
     densely populated, hurricane-prone southern part of the 
     state, it covers an even higher percentage of homes, giving 
     it a potential exposure of more than $4 billion for a storm 
     of the intensity of Andrew. ``If the JUA were a regular 
     insurance company, it would be fatally overconcentrated'' 
     because of its exposure in southeast Florida, says Sam 
     Miller, vice president of the Florida Insurance Council, an 
     industry trade group.
       As the JUA has grown, so have the questions of its ability 
     to make good on claims after a big hurricane. The JUA is 
     exempt from the rules that require private-sector insurers to 
     have thick financial cushions. Instead, the JUA got up and 
     running on a hand-to-mouth basis: The premiums it collects--
     now running about $400 million a year--almost immediately go 
     out the door to pay routine claims. Little of it lies around 
     long enough to earn much investment income--a big source of 
     capital for established insurers.
       The JUA can borrow money to pay claimants. The state would 
     then repay those debts by assessing, perhaps for years 
     policyholders of all companies in Florida, including the JUA. 
     Immediately after a devastating storm, policyholders could 
     probably count on a 35% premium jump to pay off those debts, 
     with follow-up annual increases of 20% or more, experts say.
       A big problem has been the issue of raising huge sums of 
     short notice. Last fall, the JUA secure a $1.5 billion line 
     of credit through a consortium of banks led by J.P. Morgan & 
     Co. ``The JUA's math is that, even with a [storm] hitting an 
     area of greatest vulnerability, they would not go'' 
     substantially above $1.5 billion in claims, says state 
     Insurance Commissioner Bill Nelson.
       But many in Florida doubt such assurances. As bad as 
     Hurricane Andrew was, if it had taken a small turn northward 
     toward the more densely populated areas of downtown Miami or 
     Fort Lauderdale, the damages would have been far greater.
       Should the state exhaust its line of credit, it then would 
     have to turn to the bond market--an expensive and time-
     consuming proposition. ``If you've got roofs flying off 
     houses, it will seem like forever'' for the JUA to float 
     bonds, says John Auer, a vice president with Bankers 
     Insurance Group in St. Petersburg, a midsize insurer of 
     Florida homes.


                           selling the bonds

       More alarming, the state could have problems finding buyers 
     for the bonds--especially given that, after a terrible storm, 
     two other Florida catastrophe-insurance agencies would likely 
     be seeking investors at the same time, also with the promise 
     that repayment would come from assessments on policyholders. 
     ``There haven't been bond issues of this size done in these 
     circumstances,'' says James Newman Jr., the JUA's executive 
     director.
       Faced with its huge responsibility, the state has tried 
     several approaches. It has funded projects aimed at reducing 
     hurricane damage with stronger shutters, windows and doors. 
     It also has stopped companies from dropping clients en masse, 
     and it has slashed some proposed rate increases.
       Now, the state is trying to reduce its role in the 
     underwriting business. Even there, though, officials are 
     running into problems. The legislature in May approved 
     creation of ``special purpose'' insurance companies to take 
     over policies otherwise destined for the JUA. As an 
     incentive, these companies would be exempt from the 
     assessments that the JUA would make to cover shortfalls 
     arising from a major storm. But J.P. Morgan objected. So Mr. 
     Nelson promised last week that he would authorize no such 
     ``special purpose'' companies, eliminating one of the 
     approaches the state devised to trim the JUA.
       Under another program, more than a dozen existing companies 
     have committed to taking JUA policyholders; one such company 
     is a unit of American International Group Inc., a leading 
     insurer of businesses and one of the industry's most 
     profitable firms. Many of those heeding Mr. Nelsons's call 
     are smaller players, including Bankers Insurance. Mr. Auer, 
     the Bankers' vice president, says his company was lured 
     partly by the prospect of picking through the policyholder 
     base, an opportunity it used to identify homes located 
     farther from the coastlines. Companies that take customers 
     from the JUA are exempt from the JUA assessments on those 
     policies for up to three years. (Each policyholder also comes 
     with a bounty of as much as $100 from the state.)
       Many homeowners who have had to resort to the JUA for 
     coverage feel powerless. The policies don't cover many items 
     that private insurers will, such as jewelry and silverware. 
     More important, homeowners have fears about the financial 
     status of the JUA.
       Jay Esche owns a two-bedroom, two-bath frame home in West 
     Palm Beach that was virtually untouched by Hurricane Andrew. 
     He says he has shopped widely for coverage outside the JUA 
     but to no avail.
       Mr. Esche says he dropped Allstate Corp. when the company 
     said in 1993 it would more than double his premium, which had 
     been about $250 a year in 1992.
       Initially, the JUA provided him with coverage for 
     approximately $400 a year in 1993, but that soared to about 
     $800 this year. Moreover, the JUA agreed to renew him for 
     only six months this past April, as it seeks to move 
     policyholders to private companies.
       Mr. Esche says he is leery of the JUA. He believes the 
     state would stand behind the policy, but that it would take a 
     painfully long time to collect. ``I can't understand why 
     companies aren't writing new policies,'' he says.
       Many JUA policyholders, like Mr. Esche, are concerned bout 
     being selected by a private carrier. The JUA rates are often 
     lower than those in the private market. Moreover, if a 
     company offers to take over coverage from the JUA, homeowners 
     have to accept the new company, whether or not they like the 
     terms or the company's financial status--or try their luck in 
     the tight insurance market.
       Florida bankers are also concerned. Barnett Banks Inc. In 
     Jacksonville has about $11 billion in home mortgages 
     outstanding in the state. Rich Brewer, Barnett's chief credit 
     policy officer, says he believes the JUA can handle one 
     storm, but ``I tend to believe the JUA doesn't have the 
     ability to handle storms in consecutive years or two storms 
     in one year.''
       Most businesses must rely on private insurers, often with 
     expensive results. Stephen J. Stevens owns Hamilton's 
     Restaurant, a beachfront eatery with $4 million in annual 
     sales on Panama City Beach, in the Panhandle. In 1994, the 
     premium on his policy from Aetna Life & Casualty Co. for 
     overall coverage was $32,000. That grew to $49,000 in 1995. 
     Then last October, Hurricane Opal hit; Mr. Stevens's business 
     sustained some $500,000 in damages and was closed 10 days.
       His losses were insured, but his costs have soared again. 
     The premium this year is $79,000; moreover, Aetna has raised 
     his deductible and dropped some parts of its coverage.


                            allstate's role

       Few insurers have worked as hard as Allstate to reduce its 
     Florida exposure. Andrew, which left Allstate with a stunning 
     $2.5 billion in losses, hit just as the insurer was being 
     spun off from its founder, Sears, Roebuck & Co. Unlike 
     closely held insurance companies, or those like State Farm 
     that are owned by their policyholders, Allstate is publicly 
     traded, so reducing investors' fears about the company's 
     volatility became a top goal.
       Allstate pursued a hot growth strategy in Florida during 
     the 1980s, and now it has been among the most aggressive in 
     dropping customers as their policies come up for renewal, to 
     the limits allowed under Florida law. In fact, Allstate's 
     actions in the days after Andrew helped get the law passed. 
     At that time, the insurer told Florida regulators it intended 
     to drop 300,000 homeowners out of its more than 1.1 million 
     policyholders. That generated fierce criticism and even jokes 
     on national television. One comedian mocked the insurer's 
     concept of being ``in good hands'' by dropping an egg to the 
     floor.
       Allstate has canceled about 90,000 Florida policies since 
     Andrew, and it has lost tens of thousands more through 
     attrition. It also has pursued stiff price increases, higher 
     deductibles and capping of payments under replacement-cost 
     clauses. Last month, it announced a far-reaching package that 
     it said put it close to its goal of reducing its exposure in 
     Florida to no more than about $1 billion per hurricane. The 
     day the moves were announced, the stock price surged 6.4%.
       Specifically, Allstate has agreed to pay midsize insurer, 
     Clarendon Insurance Group, to acquire 137,000 policies. 
     Analysts estimate that Allstate is paying $250 a policy, or 
     about $34.3 million. Almost anywhere else, Clarendon would be 
     paying Allstate to acquire the business.
       Allstate also wants to separately create a wholly owned, 
     Florida-only property-insurance business. The idea is that, 
     by isolating that business and giving it its own clearly 
     stated set of financials, it could better persuade state 
     regulators to allow rate increases; when the unit's 
     operations are blended with highly profitable ones elsewhere, 
     it is harder to argue for increases, the thinking goes.
       Allstate Chairman Jerry Choate concedes the moves will 
     anger some policyholders, but says they are necessary. ``We 
     got into a situation that was not a responsible one because 
     of the concentration of risk,'' he says. And he speaks highly 
     of Clarendon: ``The fact that we found a very good company to 
     come in is something they should feel good about.''
       Florida isn't alone in struggling to make insurance 
     available and affordable. In California, regulators have 
     pushed hard during the past year to create a state-run agency 
     that would sell earthquake policies, as insurers there balk 
     to providing the coverage. Californians likewise are 
     experiencing stiffer terms, including higher prices and 
     increased deductibles. And people in both states are pushing 
     in Congress for the passage of legislation creating a federal 
     disaster insurance fund that would assume liabilities after 
     private insurers paid up to a certain cap on a catastrophic 
     event.
       But it is in Florida where the issues are most clearly 
     drawn--something clear to Insurance Commissioner Nelson. 
     ``Can the JUA handle a disaster? That's a question I ask all

[[Page E1289]]

     the time,'' Mr. Nelson says. He believes the answer is yes, 
     but adds that when hurricane season starts each June, ``I 
     become very religious.''

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