[Congressional Record (Bound Edition), Volume 155 (2009), Part 8]
[Senate]
[Pages 10656-10657]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         CATASTROPHE INSURANCE

  Mr. NELSON of Florida. Mr. President, what do Florida, Louisiana, 
Texas, and California all have in common? Aside from all being Sunbelt 
States, each of these States is subject to a natural catastrophe event. 
We have certainly seen that in the case of hurricanes in Florida and 
Louisiana and Texas, and we know of it with the Northridge earthquake 
in the case of California.
  Each of these States approaches their homeowners insurance in a 
different way. But, increasingly, States are moving to a position 
whereby a quasi-government reinsurance company is set up--in the case 
of Florida, it is the Florida Hurricane Catastrophe Fund--that, in 
effect, reinsures private insurance companies in order to induce them 
to continue to sell insurance in the marketplace.
  So the insurance companies, instead of going out onto the world 
markets to get reinsurance--that is, insurance against catastrophe--
instead, or in addition to, go to a creature, in Florida's case called 
the Florida Hurricane Catastrophe Fund.
  The problem is that each of our States--Florida and Texas and 
California and Louisiana--that are each facing this potential 
megacatastrophe event--hurricane or earthquake--find it increasingly 
difficult to buy reinsurance at an affordable rate. Indeed, some of the 
reinsurance cannot be provided for, even if you go out and try to 
prearrange a bond issue, given the fact of these markets that are very 
uncertain now about being able to obtain a bond issue, and that 
uncertainty is causing a great deal of turmoil for a State to know that 
it can cover the losses if a major catastrophe hits.
  What I am introducing today--and I will be joined by Senators from 
Texas, California, and Louisiana, and will ultimately invite all of the 
Senators from the States on the Atlantic seaboard and the gulf coast, 
as well as other earthquake-prone areas, such as Memphis, TN, which has 
one of the major fault lines in the country running through it and 
would be a potential major catastrophe because of all the gas lines 
that run from the Texas and Oklahoma well fields all the way to New 
York and to New England--it would be a major catastrophe if an 
earthquake hits; and that is one of the fault lines--so what this 
legislation will do is provide a backup for the State catastrophe funds 
by allowing them to have the assurance that when they go into the 
private marketplace--to float bonds, to pay off claims after the 
disaster has hit--that they will be able, even in these uncertain times 
of the economic markets, to sell those bond issues because they will 
have a U.S. Government guarantee.
  You might say: Well, why would we want the Federal Government to 
guarantee those? Well, clearly it is in the interests of the Federal 
Government because these are only going to be guaranteeing public 
organizations that are an arm of the Government and that are run by 
members of a board that indeed are public officials, and it will 
actually end up saving Federal tax dollars.
  You might say: Why in the world? If the Federal Government is going 
to guarantee a bond issue, that has a certain cost to it. It does. But 
this is how it saves the Federal Government money: Because at the end 
of the day, when the natural disaster strikes, guess who is going to 
pay for it. It is going to be the Federal Government.

[[Page 10657]]

So if a large part of those payments has already been provided by 
private insurance, because we have enabled that through this 
catastrophe reinsurance fund, then that means that is an additional 
cost the Federal Government will not have to bear.
  I remind the Senate that after Katrina struck New Orleans, that total 
tab is somewhere in the neighborhood of $200 billion, and the Federal 
Government's share of that is well north of $100 billion, or over half 
of the total cost. When the category 4 or 5 hurricane hits an urbanized 
part of the coast--be it in any one of our States--it is clearly going 
to be a major economic loss, of which the Federal Government is going 
to come in. If a lot of those damages have already been paid by private 
insurance, enabled by these reinsurance funds set up by the State 
governments--enabled because they have a Federal guarantee on the 
loans--then it ends up being a win-win situation.
  Because my colleague from Tennessee is in the Chamber, I hasten to 
add that, of course, catastrophes are not just hurricanes, but some of 
the worse catastrophes that could happen are, in fact, earthquakes. An 
8-point plus on the Richter scale earthquake, centered on a major 
metropolitan area, such as San Francisco or Memphis, TN, would be a 
cost well in excess of insurance losses, well in excess of between $50 
and $100 billion.
  This is a rational way through the private sector marketplace to 
approach that problem, and I commend to the Senate this bill that I 
introduce today, the Catastrophe Obligation Guarantee Act. I ask the 
Senate to favorably consider it.
  Mr. President, I ask unanimous consent to have a Catastrophe 
Obligation Guarantee Act fact sheet printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

       COGA Fact Sheet: The Catastrophe Obligation Guarantee Act


                            Why it is needed

       Many states have catastrophic natural disaster risk so 
     large that the private markets simply can't insure it.
       Residential property insurance is vital to post-disaster 
     recovery, because it protects people's most valuable asset--
     their homes. But in the private insurance market, catastrophe 
     coverage is often very expensive or simply unavailable--this 
     can rob community recovery of much-needed resources.
       To bridge this affordability/availability gap, California, 
     Florida, Louisiana, and Texas have created public insurance 
     or reinsurance programs.
       These programs need substantial post-catastrophe capital to 
     pay their claims, but for public entities, the only available 
     form of external capital is debt capital.
       Sadly, in severely disrupted credit markets such as those 
     that prevail today, even creditworthy public entities can't 
     raise enough debt capital to fully meet program needs.
       The new COGA approach--Established programs in California, 
     Florida, Louisiana, and Texas have a continuing common need 
     for reliable, adequate private financing. They have come 
     together to advance an innovative approach: Federal 
     guarantees of the State programs' post-event debt. COGA will 
     provide these State programs, and any other qualifying State 
     program, with dramatically enhanced debt-market access, 
     across all market conditions, at much lower borrowing costs.


                              What it does

       COGA would authorize (at pre-set levels) Federal guarantees 
     of State-program debt incurred to pay insured losses from 
     major natural catastrophes.
       COGA does not furnish Federal funds to State programs and 
     does not make the Federal government a reinsurer of 
     catastrophe risk.
       Upon application by a qualifying State program, the 
     Treasury provides a 3-year COGA guarantee commitment--this 
     gives the State program vital certainty in planning its 
     claim-paying capacity. States re-confirm their qualifications 
     each year.
       The guarantee is not actually issued until after an event 
     (when a State program would go into the debt markets), and 
     then solely to obtain funds to pay and adjust losses it 
     cannot otherwise cover with existing resources.
       To be eligible, State catastrophe programs must meet 
     stringent criteria, including:
       Public purpose and organization, including tax-exempt 
     status, and a board composed of or appointed by public 
     officials.
       Proven ability to repay, and an actuarially sound rate 
     structure.
       States must have robust building codes and recognize loss-
     mitigation measures.


                What it will cost and what it will save

       Guarantees are only for public organizations with proven 
     ability to repay their obligations.
       Under COGA, the Federal government would make payments only 
     in rare circumstances--it is a debt guarantee, not a direct 
     loan. Guarantee fees cover COGA's administrative costs.
       States without effective programs will want to form them--
     COGA-supported post-event funding will provide broad, 
     sensible incentives to qualified State programs.
       The COGA guarantees will save Federal dollars: When more 
     people are covered by State catastrophe insurance, the 
     Federal Government's post-event burden is greatly reduced.

  Mr. ALEXANDER. Mr. President, I congratulate the Senator from Florida 
on his comments. He is exactly right, there is a major fault along the 
Mississippi River near Memphis, TN. There was a massive earthquake in 
the early 1800s that created Reelfoot Lake. The earthquake was so 
profound that the Mississippi River actually ran upstream in order to 
do that. One eyewitness to that was Davy Crockett, who was on a bear 
hunt that winter up in northwest Tennessee. He wrote about it in his 
autobiography which was intended to be his Presidential campaign 
autobiography. It never quite worked out. But we take it very 
seriously.
  The University of Memphis has a center dealing with earthquakes. We 
will be very interested in his proposal. I was glad to have a chance to 
hear about it.

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