[Congressional Record Volume 143, Number 1 (Tuesday, January 7, 1997)]
[Extensions of Remarks]
[Pages E66-E68]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




             HOMEOWNERS' INSURANCE AVAILABILITY ACT OF 1997

                                 ______
                                 

                            HON. RICK LAZIO

                              of new york

                    in the house of representatives

                        Tuesday, January 7, 1997

  Mr. LAZIO of New York. Mr. Speaker, today I introduce the Homeowners' 
Insurance Availability Act of 1997 as a first step toward addressing 
the exploding costs of Federal natural disaster assistance. Between 
1988 and 1994, the Federal Government spent more than $45 billion in 
disaster assistance, of which approximately half was for residential 
losses. Like coastal areas in many parts of the country, the shoreline 
homeowners in my Long Island district have been particularly hard hit 
by recent winter storms and nor'easters.

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The force of such natural disasters have left Long Island's south shore 
coastline, and other coastal areas throughout our Nation, in a delicate 
state. In this environment, States have begun to experience declining 
homeowners insurance availability in disaster-prone areas. This 
bipartisan legislation provides a Federal backstop for state-operated 
insurance programs, and complements existing insurance industry efforts 
without encroaching upon the private sector. The bill allows State 
officials and local industry leaders to create the most appropriate 
solutions to State and local needs.
  The Homeowners' Insurance Availability Act of 1997 authorizes the 
Secretary of the Treasury to offer annual Federal reinsurance contracts 
to eligible State insurance programs Covered losses include residential 
property losses resulting from earthquakes and hurricanes, as well as 
other losses determined appropriate by the Secretary. The bill requires 
neither States nor individuals to participate in the program, and 
envisions an entirely self-sustaining insurance fund with no direct 
taxpayer liability. Total Federal coverage is capped at $25 billion, 
and is phased in over a period of 4 years.
  In introducing this bill, we pay tribute to the late Congressman Bill 
Emerson and his efforts to provide protection for American families 
from the devastation of natural disasters. Over the last several years, 
Congressman Emerson attempted to comprehensively address the multitude 
of issues surrounding natural disaster assistance. Although this bill 
will be devoted solely to providing State-run insurance programs with 
Federal reinsurance, I look forward to other free-standing legislation 
that addresses the variety of relevant issues.
  Improving homeowners insurance availability in disaster-prone areas 
will be one of my highest priorities during the 105th Congress. The 
Homeowners' Insurance Availability Act of 1997 continues the working 
partnership between the Federal Government and States and provides 
improved safeguards that many homeowners in disaster-prone areas 
desperately need. The consequences of insurance illiquidity, in the 
form of lower property values and fewer home resales, must be 
addressed. I look forward to hearings across the country in our most 
vulnerable areas, listening to industry experts, State officials and 
families affected by catastrophe, as we perfect this legislation that 
is long overdue.
  The following are a section-by-section analysis and background 
summary of the legislation to be included in the Record.

             Homeowners' Insurance Availability Act of 1997


                               background

       The rising toll from natural disasters has placed a severe 
     strain on homeowners' insurance markets in many parts of the 
     country in recent years. Events such as Hurricane Andrew and 
     the Northridge Earthquake have demonstrated that insurers 
     face the risk of insolvency if they are overly concentrated 
     in areas prone to large earthquakes or hurricanes. As a 
     result, many insurers have withdrawn from these markets or 
     stopped underwriting new business, thereby making homeowners' 
     insurance difficult to obtain.
       State insurance commissioners and state legislatures have 
     created programs to prevent or forestall an insurance 
     availability crisis in several instances. These efforts 
     include the Florida Catastrophe Reinsurance Fund, a state-
     mandated, privately funded pool providing a backstop to 
     residential insurers after a major hurricane; the California 
     Earthquake Authority, a state-run, privately funded entity 
     offering earthquake insurance coverage to homeowners 
     throughout the state, and the Hawaii Hurricane Relief Fund, 
     the sole source of residential hurricane insurance coverage 
     throughout the islands.
       Besides the programs mentioned above, proposals are under 
     varying degrees of consideration in Texas, Louisiana, New 
     York, North Carolina and Virginia. In New York, more than 
     62,000 homes and businesses in inter-city and coastal 
     communities currently are covered by the New York Property 
     Insurance Underwriting Authority, a state-sanctioned insurer 
     of last resort. Other proposals, including one similar to the 
     Florida Catastrophe Reinsurance Fund, are likely to be 
     proposed in Albany in coming months.
       It is appropriate that solutions to address insurance 
     availability originate at the state level. The magnitude of 
     risk, as well as the size and nature of the local insurance 
     market, differs from one jurisdiction to the next. What works 
     in one locale may not be viable in another. State insurance 
     commissioners and state legislatures are in the best position 
     to determine the proper design for any program to address 
     local needs.
       However, there are certain limitations to what a state can 
     do. A state program will likely have sufficient capacity to 
     cover the vast majority of possible catastrophes. However, 
     some events are so large as to drain even the most carefully 
     constructed state program. Even though the chances of such an 
     event are low, the very possibility of one has a chilling 
     effect on the creation of state programs as well as the 
     recovery of the private insurance market.
       The Florida Catastrophe Reinsurance Fund, the California 
     Earthquake Authority and the Hawaii Hurricane Relief Fund all 
     share the problem of being unable to cover losses from the 
     worst-case disasters. For example,, both the Florida fund and 
     the California authority would be insolvent after disasters 
     causing more than $10 billion in insured residential losses. 
     While that level of loss is higher than that experienced to 
     date, including the Northridge Earthquake and Hurricane 
     Andrew, the possibility of events in the $10 billion plus 
     range are certainly possible. Similarly, the Hawaii fund also 
     has a limit well below the theoretical exposure in the state. 
     The fund's maximum capacity is $1.5 billion, which is roughly 
     the loss from Hurricane Iniki.
       In the aftermath of a large disaster that exceeds a state 
     program's capacity, it is likely that many homeowners insured 
     by these programs will not be immediately or fully 
     compensated for their losses. In fact, the California and 
     Hawaii programs must, by law, prorate claims if funds are 
     inadequate to cover all losses. Because there are no 
     precedents, one can only speculate what the consequences of 
     these funding shortfalls might be. However, an increase in 
     mortgage defaults and a drop in real estate values are 
     likely.
       Lacking some additional backstop, state residential 
     insurance programs are destined to fail at precisely the 
     moment they are most needed. That is why a complimentary 
     program at the federal level is so critical. Such a program 
     will improve the effectiveness of state initiatives and help 
     ensure that claims after a major catastrophe will be paid in 
     full. In addition, maintaining the integrity of state 
     programs even after large losses will help stabilize private 
     insurance markets and encourage new protection of homeowners' 
     investments.
       Creating a federal insurance backstop to state homeowners' 
     insurance availability programs has several advantages over 
     other proposals that have been considered.
       Unlike plans directly involving the federal government in 
     the business of providing homeowners insurance to consumers 
     or reinsurance coverage to individual insurance companies, 
     this legislation limits federal involvement to a direct 
     relationship with the states.
       The federal program is completely voluntary. It does not 
     compel any state to participate. In fact, the sale of federal 
     insurance can only occur once a state has gone to the trouble 
     and assumed the risk inherent in creating a homeowner's 
     insurance availability program. If the private market is 
     functioning adequately, or if local availability problems can 
     be addressed without the need of a larger solution, then the 
     federal program is a non-issue.

  Homeowners' Insurance Availability Act of 1997--Section-by-Section 
                                Analysis

       Section 1: Title cited as ``Homeowners' Insurance 
     Availability Act of 1997''
       Section 2: Congressional Findings that homeowners' 
     insurance is becoming increasingly difficult to purchase, due 
     to increased natural disasters and that there is a federal 
     role in providing a reinsurance program for states that meet 
     those needs beyond the capacity of the state's claims paying 
     capacity.
       Section 3: Program Authority to the Secretary of Treasury 
     to provide a federal reinsurance program through reinsurance 
     contracts through a Disaster Reinsurance Fund (Fund) in Sec. 
     9.
       Section 4: Eligible Purchasers are state insurance programs 
     and state reinsurance programs.
       Section 5: Qualified Lines of Coverage provide specifically 
     for residential property and other losses as determined 
     appropriate by the Treasury Secretary.
       Section 6: Covered Perils include (i) earthquakes, (ii) 
     perils ensuing from earthquakes (fire and tsunami) and, (iii) 
     hurricanes.
       Section 7: Terms of Reinsurance Contracts are no more than 
     1 year, with claim payments only to state insurance or 
     reinsurance programs and a payout at the occurrence and level 
     where disasters costs exceed the state's claim paying 
     capacity. Qualified losses include only property covered 
     under the contract that are paid within a 3 year period from 
     the natural disaster event. Pricing is established by the 
     Secretary, in consultation with the Independent Commission on 
     Catastrophe Risks and Insurance Loss Costs and based on 
     actuarial analysis, a risk load not less than 2 times the 
     risk-based price and administrative costs. Finally, in cases 
     where Treasury borrowing occurs, contract purchasers and 
     recipients of aid from proceeds of borrowed funds are 
     required to continue purchasing contracts until borrowed 
     funds are repaid.
       Section 8: Level of Retained Losses and Maximum Federal 
     Liability is limited to contracts at $2 or $10 billion or any 
     other amount determined by the Secretary with the limitation 
     that contracts are greater than the current claims-paying 
     capacity of the state operated plan with a maximum yearly 
     liability of $25 billion. The Secretary is authorized to 
     phase-in maximum yearly liability during the initial 4 years 
     of the program. Annual adjustments are authorized.
       Section 9: Disaster Reinsurance Fund is established within 
     the Treasury Department to accept proceeds from the sale of 
     contracts, borrowed funds, investments or other amounts. 
     Borrowed funds are limited to an amount not to exceed the 
     Fund's capacity to repay within 20 years, with appropriate 
     interest. Except for borrowed funds or start-up costs in 
     Section 10(g), no federal funds are authorized or 
     appropriated for the Fund.
       Section 10: National Commission of Catastrophe Risks and 
     Insurance Loss Costs is established with an appropriation of 
     $1 million for initial start-up costs.

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       Section 11: Report on Secondary Market Mechanism For 
     Reinsurance Contracts requires the Treasury Secretary to 
     create a mechanism to sell excess-loss contracts (at least 20 
     percent of the total written dollar value) in the capitol 
     markets and report back to Congress, within 18 months, with 
     recommendations for statutory change.
       Section 11: Definitions.

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