[House Report 106-526]
[From the U.S. Government Publishing Office]
106th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 106-526
=======================================================================
HOMEOWNERS' INSURANCE AVAILABILITY ACT OF 2000
_______
March 15, 2000.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Leach, from the Committee on Banking and Financial Services,
submitted the following
R E P O R T
together with
DISSENTING VIEWS
[To accompany H.R. 21]
[Including cost estimate of the Congressional Budget Office]
The Committee on Banking and Financial Services, to whom
was referred the bill (H.R. 21) to establish a Federal program
to provide reinsurance for State disaster insurance programs,
having considered the same, report favorably thereon with an
amendment and recommend that the bill as amended do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Homeowners'
Insurance Availability Act of 2000''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title.
Sec. 2. Congressional findings.
Sec. 3. Program authority.
Sec. 4. Qualified lines of coverage.
Sec. 5. Covered perils.
Sec. 6. Contracts for reinsurance coverage for eligible State programs.
Sec. 7. Auction of contracts for reinsurance coverage.
Sec. 8. Anti-redlining requirement.
Sec. 9. Minimum level of retained losses and maximum Federal liability.
Sec. 10. Disaster Reinsurance Fund.
Sec. 11. National Commission on Catastrophe Risks and Insurance Loss
Costs.
Sec. 12. Definitions.
Sec. 13. Regulations.
Sec. 14. Termination.
Sec. 15. Annual study of cost and availability of disaster insurance
and program need.
Sec. 16. GAO study of hurricane related flooding.
SEC. 2. CONGRESSIONAL FINDINGS.
The Congress finds that--
(1) the rising costs resulting from natural disasters have
placed a strain on homeowners' insurance markets in many areas,
jeopardizing the ability of many consumers to adequately insure
their homes and possessions;
(2) the lack of sufficient insurance capacity threatens to
increase the number of uninsured homeowners, which, in turn,
increases the risk of mortgage defaults and the strain on the
Nation's banking system;
(3) some States have intervened to ensure the continued
availability of homeowners' insurance for all residents;
(4) it is appropriate that efforts to improve insurance
availability be designed and implemented at the State level;
(5) while State insurance programs may be adequate to cover
losses from most natural disasters, a small percentage of
events are likely to exceed the financial capacity of these
programs and the local insurance markets;
(6) limited Federal reinsurance will improve the
effectiveness of State insurance programs and private insurance
markets and will increase the likelihood that homeowners'
insurance claims will be fully paid in the event of a large
natural catastrophe;
(7) it is necessary to provide, on a temporary basis, a
Federal reinsurance program that will promote stability in the
homeowners' insurance market in the short term and encourage
the growth of reinsurance capacity by the private and capital
markets as soon as practicable;
(8) such a Federal reinsurance program should not remain in
existence longer than necessary for the private entities or the
capital markets, or both, to provide adequate reinsurance
capacity to address the current homeowners' insurance market
dislocations caused by various disasters; and
(9) any Federal reinsurance program must be founded upon
sound actuarial principles and priced in a manner that
minimizes the potential impact on the Treasury.
SEC. 3. PROGRAM AUTHORITY.
(a) In General.--The Secretary of the Treasury shall carry out a
program under this Act to make reinsurance coverage available through--
(1) contracts for reinsurance coverage under section 6, which
shall be made available for purchase only by eligible State
programs; and
(2) contracts for reinsurance coverage under section 7, which
shall be made available for purchase by purchasers under
section 7(a)(1) only through auctions under section 7(a).
(b) Purpose.--The program shall be designed to make reinsurance
coverage under this Act available to improve the availability of
homeowners' insurance for the purpose of facilitating the pooling, and
spreading the risk, of catastrophic financial losses from natural
disasters and to improve the solvency of homeowners' insurance markets.
(c) Contract Principles.--Under the program under this Act, the
Secretary shall offer reinsurance coverage through contracts with
covered purchasers, which contracts--
(1) shall not displace or compete with the private insurance
or reinsurance markets or capital markets;
(2) shall minimize the administrative costs of the Federal
Government;
(3) shall, in the case of any contract under section 6 for an
eligible State program, provide coverage based solely on
insured losses within the State of the eligible State program
purchasing the contract; and
(4) shall, in the case of any contract under section 7 for
purchase at auction, provide coverage based solely on insured
losses within the region established pursuant to section 7(a)
for which the auction is held.
SEC. 4. QUALIFIED LINES OF COVERAGE.
Each contract for reinsurance coverage made available under this Act
shall provide insurance coverage against residential property losses to
homes (including dwellings owned under condominium and cooperative
ownership arrangements) and the contents of apartment buildings.
SEC. 5. COVERED PERILS.
Each contract for reinsurance coverage made available under this Act
shall cover losses that are--
(1) proximately caused by--
(A) earthquakes;
(B) perils ensuing from earthquakes, including fire
and tsunamis;
(C) tropical cyclones having maximum sustained winds
of at least 74 miles per hour, including hurricanes and
typhoons;
(D) tornadoes; or
(E) volcanic eruptions; and
(2) in the case only of a contract under section 6, insured
or reinsured by the eligible State program purchasing the
contract.
The Secretary shall, by regulation, define the natural disaster perils
under paragraph (1).
SEC. 6. CONTRACTS FOR REINSURANCE COVERAGE FOR ELIGIBLE STATE PROGRAMS.
(a) Eligible State Programs.--A program shall be eligible to purchase
a contract under this section for reinsurance coverage under this Act
only if the State entity authorized to make such determinations
certifies to the Secretary that the program is a State-operated program
that complies with the following requirements:
(1) Program design.--The program shall be a State-operated--
(A) insurance program that--
(i) offers coverage for homes (which may
include dwellings owned under condominium and
cooperative ownership arrangements) and the
contents of apartments to State residents
because of a finding by the State insurance
commissioner or other State entity authorized
to make such determination that such a program
is necessary in order to provide for the
continued availability of such residential
coverage for all residents; and
(ii) is authorized by State law; or
(B) reinsurance program that is designed to improve
private insurance markets that offer coverage for homes
(which may include dwellings owned under condominium
and cooperative ownership arrangements) and the
contents of apartments because of a finding by the
State insurance commissioner or other State entity
authorized to make such determination that such a
program is necessary in order to provide for the
continued availability of such residential coverage for
all residents.
(2) Operation.--The program shall meet the following
requirements:
(A) A majority of the members of the governing body
of the program shall be public officials.
(B) The State shall have a financial interest in the
program, which shall not include a program authorized
by State law or regulation that requires insurers to
pool resources to provide property insurance coverage
for covered perils.
(3) Tax status.--The program shall be structured and carried
out in a manner so that the program is exempt from all Federal
taxation.
(4) Coverage.--The program shall cover only a single peril.
(5) Earnings.--The program may not provide for, nor shall
have ever made, any redistribution of any part of any net
profits of the program to any insurer that participates in the
program.
(6) Mitigation.--
(A) In general.--The program shall include mitigation
provisions that require that not less than 10 percent
of the net investment income of the State insurance or
reinsurance program be used for programs to mitigate
losses from natural disasters for which the State
insurance or reinsurance program was established. For
purposes of this paragraph, mitigation shall include
methods to reduce losses of life and property.
(B) Exception.--Notwithstanding subparagraph (A), in
the case of any State for which the Secretary has
determined, pursuant to a request by the State
insurance commissioner, that the 10 percent requirement
under subparagraph (A) will jeopardize the actuarial
soundness of the State program, subparagraph (A) shall
be applied by substituting ``5 percent'' for ``10
percent''.
(7) Requirements regarding coverage.--
(A) In general.--The program--
(i) may not involve cross-subsidization
between any separate property and casualty
lines covered under the program unless the
elimination of such activity in an existing
program would negatively impact the eligibility
of the program to purchase a contract for
reinsurance coverage under this Act pursuant to
paragraph (3);
(ii) shall include provisions that authorize
the State insurance commissioner or other State
entity authorized to make such a determination
to terminate the program if the insurance
commissioner or other such entity determines
that the program is no longer necessary to
ensure the availability of homeowners'
insurance for all State residents; and
(iii) shall provide that, for any insurance
coverage for homes (which may include dwellings
owned under condominium and cooperative
ownership arrangements) and the contents of
apartments that is made available under the
State insurance program and for any reinsurance
coverage for such insurance coverage made
available under the State reinsurance program,
the premium rates charged shall be amounts
that, at a minimum, are sufficient to cover the
full actuarial costs of such coverage, based on
consideration of the risks involved and
accepted actuarial and rate making principles,
anticipated administrative expenses, and loss
and loss-adjustment expenses.
(B) Applicability.--This paragraph shall apply--
(i) before the expiration of the 2-year
period beginning on the date of the enactment
of this Act, only to State programs which,
after January 1, 1999, commence offering
insurance or reinsurance coverage described in
subparagraph (A) or (B), respectively, of
paragraph (1); and
(ii) after the expiration of such period, to
all State programs.
(8) Other qualifications.--
(A) In general.--The State program shall (for the
year for which the coverage is in effect) comply with
regulations that shall be issued under this paragraph
by the Secretary, in consultation with the National
Commission on Catastrophe Risks and Insurance Loss
Costs established under section 11. The regulations
shall establish criteria for State programs to qualify
to purchase reinsurance under this section, which are
in addition to the requirements under the other
paragraphs of this subsection.
(B) Contents.--The regulations issued under this
paragraph shall include requirements that--
(i) the State program have public members on
its board of directors or have an advisory
board with public members;
(ii) insurance or reinsurance coverage, as
applicable, made available through the State
program not supplant coverage that is otherwise
reasonably available and affordable in the
private market;
(iii) the State program provide adequate
insurance or reinsurance protection, as
applicable, for the peril covered, which shall
include a range of deductibles and premium
costs that reflect the applicable risk to
eligible properties;
(iv) insurance or reinsurance coverage, as
applicable, provided by the State program is
made available on a nondiscriminatory basis to
all qualifying residents;
(v) any new construction, substantial
rehabilitation, and renovation insured or
reinsured by the program complies with
applicable State or local government building,
fire, and safety codes;
(vi) the State, or appropriate local
governments within the State, have in effect
and enforce nationally recognized model
building, fire, and safety codes and consensus-
based standards that offer disaster resistance
that is substantially equivalent or greater
than the resistance under any requirements for
floods, earthquakes, or wind resistance issued
by the Federal Emergency Management Agency;
(vii) the State has taken actions to
establish an insurance rate structure that
takes into account measures to mitigate
insurance losses;
(viii) there are in effect, in such State,
laws or regulations sufficient to prohibit
price gouging, during the term of reinsurance
coverage under this Act for the State program,
in any disaster area located within the State;
and
(ix) the State program complies with such
other requirements that the Secretary considers
necessary to carry out the purposes of this
Act.
(b) Terms of Contracts.--Each contract under this section for
reinsurance coverage under this Act shall be subject to the following
terms and conditions:
(1) Maturity.--The term of the contract shall not exceed 1
year or such other term as the Secretary may determine.
(2) Payment condition.--The contract shall authorize claims
payments for eligible losses only to the eligible State program
purchasing the coverage.
(3) Retained losses requirement.--For each event of a covered
peril, the contract shall make a payment for the event only if
the total amount of insurance claims for losses, which are
covered by qualified lines, occur to properties located within
the State covered by the contract, and result from the event,
exceeds the amount of retained losses provided under the
contract (pursuant to section 9(a)) purchased by the eligible
State program.
(4) Multiple events.--The contract shall cover any eligible
losses from one or more covered events that may occur during
the term of the contract and shall provide that if multiple
events occur, the retained losses requirement under paragraph
(3) shall apply to each event.
(5) Timing of eligible losses.--Eligible losses under the
contract shall include only insurance claims for property
covered by qualified lines that are reported to the eligible
State program within the 3-year period beginning upon the event
or events for which payment under the contract is provided.
(6) Pricing.--
(A) Determination.--The price of reinsurance coverage
under the contract shall be an amount established by
the Secretary as follows:
(i) Recommendations.--The Secretary shall
take into consideration the recommendations of
the Commission in establishing the price, but
the price may not be less than the amount
recommended by the Commission.
(ii) Fairness to taxpayers.--The price shall
be established at a level that is designed to
return to the Federal Government fair
compensation for the risks and costs being
borne by the people of the United States and
that takes into consideration the developmental
stage of empirical models of natural disasters
and the capacity of private markets to absorb
insured losses from natural disasters.
(iii) Self-sufficiency.--The rates for
reinsurance coverage shall be established at a
level that annually produces expected premiums
which shall be sufficient to pay the expected
annualized cost of all claims, loss adjustment
expenses, and all administrative costs of
reinsurance coverage offered under this
section.
(B) Components.--The price shall consist of the
following components:
(i) Risk-based price.--A risk-based price,
which shall reflect the anticipated annualized
payout of the contract according to the
actuarial analysis and recommendations of the
Commission.
(ii) Risk load.--A risk load in an amount
that is not less than the risk-based price
under clause (i). In establishing risk loads
under this clause, the Secretary shall take
into consideration comparable private risk
loads.
(iii) Administrative costs.--A sum sufficient
to provide for the operation of the Commission
and the administrative expenses incurred by the
Secretary in carrying out this Act.
(7) Information.--The contract shall contain a condition
providing that the Commission may require the State program
that is covered under the contract to submit to the Commission
all information on the State program relevant to the duties of
the Commission, as determined by the Secretary.
(8) Additional contract option.--The contract shall provide
that the purchaser of the contract may, during the term of such
original contract, purchase additional contracts from among
those offered by the Secretary at the beginning of the term,
subject to the limitations under section 9, at the prices at
which such contracts were offered at the beginning of the term,
prorated based upon the remaining term as determined by the
Secretary. Such additional contracts shall provide coverage
beginning on a date 15 days after the date of purchase but
shall not provide coverage for losses for an event that has
already occurred.
(9) Others.--The contract shall contain such other terms as
the Secretary considers necessary to carry out this Act and to
ensure the long-term financial integrity of the program under
this Act.
(c) Private Sector Right To Participate.--
(1) Establishment of competitive procedure.--The Secretary
shall establish, by regulation, a competitive procedure under
this subsection that provides qualified entities an
opportunity, on a basis consistent with the contract cycle
established under this Act by the Secretary, to offer to
provide, in lieu of reinsurance coverage under this section,
reinsurance coverage that is substantially similar to coverage
otherwise made available under this section.
(2) Competitive procedure.--Under the procedure established
under this subsection--
(A) the Secretary shall establish criteria for
private insurers, reinsurers, and capital market
companies, and consortia of such entities to be treated
as qualified entities for purposes of this subsection,
which criteria shall require such an entity to have at
all times capital sufficient to satisfy the terms of
the reinsurance contracts and shall include such other
industry and credit rating standards as the Secretary
considers appropriate;
(B) not less than 30 days before the beginning of
each contract cycle during which any reinsurance
coverage under this section is to be made available,
the Secretary may request proposals and shall publish
in the Federal Register the rates and terms for
contracts for reinsurance coverage under this section
that are to be made available during such contract
cycle;
(C) the Secretary shall provide qualified entities a
period of not less than 10 days (which shall terminate
not less than 20 days before the beginning of the
contract cycle) to submit to the Secretary a written
expression of interest in providing reinsurance
coverage in lieu of the coverage otherwise to be made
available under this section;
(D) the Secretary shall provide any qualified entity
submitting an expression of interest during the period
referred to in subparagraph (C) a period of not less
than 20 days (which shall terminate before the
beginning of the contract cycle) to submit to the
Secretary an offer to provide, in lieu of the
reinsurance coverage otherwise to be made available
under this section, coverage that is substantially
similar to such coverage;
(E) if the Secretary determines that an offer
submitted during the period referred to in subparagraph
(D) is a bona fide offer to provide reinsurance
coverage during the contract cycle at rates and terms
that are substantially similar to the rates and terms
for reinsurance coverage otherwise to be provided under
this section by the Secretary, the Secretary shall
accept the offer (if still outstanding) and,
notwithstanding any other provision of this Act,
provide for such entity to make reinsurance coverage
available in accordance with the offer; and
(F) if the Secretary accepts an offer pursuant to
subparagraph (E) to make reinsurance coverage
available, notwithstanding any other provision of this
Act, the Secretary shall reduce, to an equivalent
extent, the amount of reinsurance coverage available
under this section during the contract cycle to which
the offer relates, unless and until the Secretary
determines that the entity is not complying with the
terms of the accepted offer.
SEC. 7. AUCTION OF CONTRACTS FOR REINSURANCE COVERAGE.
(a) Auction Program Requirements.--The Secretary shall carry out a
program to auction contracts for reinsurance coverage under this Act
made available pursuant to section 3(a)(2), which shall comply with the
following requirements:
(1) Purchasers.--The auction program shall provide for
auctioning all contracts made available under this section to
private insurers and reinsurers, State insurance and
reinsurance programs, and other interested entities.
(2) Regional auctions.--The auction program shall provide for
auctions on a regional basis. The Secretary shall divide the
States into not less than 6 regions for the purpose of holding
such regional auctions, which shall include separate regions
for all or part of the State of California and all or part of
the State of Florida. In determining the boundaries for such
regions, the Secretary shall consider which areas have greater
risks of losses from covered perils and which areas have lesser
risks of losses from covered perils, and shall attempt not to
combine those different types of areas. Auctions for each
region shall be conducted not less often than annually.
(3) Reserve price.--In auctioning contracts under this
section for reinsurance coverage, the Secretary shall set, for
each contract, a reserve price that is the minimum price at
which the contract may be sold, based upon the recommendations
of the Commission. The reserve price shall be determined on the
basis of the following components:
(A) Risk-based price.--A risk-based price, which
shall reflect the anticipated annualized payout of the
contract according to the actuarial analysis and
recommendations of the Commission.
(B) Risk load.--A risk load in an amount that is not
less than the risk-based price under subparagraph (A).
(C) Administrative costs.--A sum sufficient to
provide for the operation of the Commission and the
administrative expenses incurred by the Secretary in
carrying out this section.
(D) Mitigation.--An adjustment based on an actuarial
analysis that takes into account any efforts that are
being made to reduce losses to property in the region
in which the contract is being sold.
(4) Price gouging protections.--The auction program may
provide reinsurance coverage for losses incurred only for
property located in a State for which the State entity
authorized to make such determinations has certified to the
Secretary that there are in effect, in such State, laws or
regulations sufficient to prohibit price gouging, during the
term of such reinsurance coverage, in any disaster area located
within the State.
(5) Mitigation requirements.--
(A) In general.--The auction program shall require
each purchaser of a contract that is not an eligible
State program, as a condition of such purchase, to
contribute an amount, that the Secretary (in
consultation with the Director of the Federal Emergency
Management Agency) shall establish and which shall not
exceed 5 percent of the price paid for the contract, to
communities that--
(i) are located in the State in which the
reinsurance coverage under the contract is
provided (or in the case of multiple States,
among such States, as determined by the
Secretary);
(ii) are designated by the Director of the
Federal Emergency Management Agency and the
appropriate emergency management agency for the
State as Project Impact communities (for
purposes of the pre-disaster mitigation program
of such Agency); and
(iii) are participating in such programs or
initiatives as the Secretary may require that
provide incentives for construction of
structures and communities that are resistant
to damage from covered perils, which shall
include the Building Code Effectiveness Grading
Schedule of the Insurance Services Office.
(B) Use of contributions.--Amounts contributed to
communities pursuant to the requirement under
subparagraph (A) shall be used only--
(i) for activities to reduce losses from
covered perils to properties covered under the
reinsurance contract purchased under the
auction program that are located in such
communities; and
(ii) in accordance with such requirements as
the Secretary, in consultation with the
Director of the Federal Emergency Management
Agency and appropriate State agencies, shall
establish to ensure cost-effective use of such
amounts.
(C) Allocation.--The Secretary, in consultation with
the Director of the Federal Emergency Management
Agency, shall establish requirements for allocation of
contributions among communities eligible under
subparagraph (A) to receive such contributions.
(6) Other requirements.--The Secretary may establish such
other requirements for the auction program as the Secretary
considers necessary to carry out this Act.
(b) Contract Terms and Conditions.--Each contract for reinsurance
coverage auctioned under the program under this section shall include
the following terms and conditions:
(1) Maturity.--The term of each such contract shall not
exceed 1 year or such other term as the Secretary may
determine.
(2) Transferability.--The contract shall at all times be
fully transferable, assignable, and divisible.
(3) Threshold of coverage.--The contract shall provide that
the covered purchaser may receive a payment for losses covered
under the contract if, under a process specified in the
contract, the Secretary determines that the insurance industry
will, as a result of a single event of a covered peril, incur
losses within the coverage area for the region established
under subsection (a)(2) for which the contract was auctioned
that are covered by one or more lines of insurance under
section 5 in an aggregate amount, for such event, greater than
the level of retained losses specified in section 9.
(4) Multiple events.--The contract shall contain the
provisions described in section 6(b)(4).
(5) Additional contract option.--The contract shall contain
the provisions described in section 6(b)(8).
(6) Submission of information.--The contract shall include
terms that--
(A) require the purchaser to notify the Secretary of
any sale, transfer, assignment, or division of the
contract or any interest in the contract, identify the
interest involved, and identify the price paid or
compensation provided; and
(B) authorize the disclosures required under
subsection (c)(2).
(7) Others.--The contract shall contain such other terms as
the Secretary considers necessary to carry out this Act and to
ensure the long-term financial integrity of the program under
this Act.
(c) GAO Audit.--
(1) In general.--For each fiscal year, the Comptroller
General of the United States shall conduct an audit of prices
for contracts made available under the auction program under
this section during such fiscal year that determines--
(A) the reserve prices established for such
contracts;
(B) the prices paid for such contracts that are
purchased;
(C) the prices paid, or compensation provided, in any
sales, transfers, assignments, or divisions of any such
contracts (or any interests in such contracts) in the
secondary market or to any third party; and
(D) pursuant to the information obtained under
subparagraphs (A) through (C), the appropriate reserve
prices for such contracts that are to be made available
in the succeeding fiscal year.
(2) Use of information.--The Secretary shall provide any
information referred to in subsection (b)(6) that is obtained
by the Secretary to the Comptroller General, the Director of
the Congressional Budget Office, and the Director of the Office
of Management and Budget, and shall make such information
publicly available. The Secretary, the Director of the
Congressional Budget Office, the Director of the Office of
Management and Budget shall each take such information into
consideration in preparing any budget, report, estimate, or
recommendation to the extent it relates to the auction program
under this section, and in any determinations relating to the
Budget of the United States or the concurrent resolution on the
budget (as such term is defined in section 3 of the
Congressional Budget Act of 1974). The Secretary shall take
such information into consideration in establishing reserve
prices for contracts made available under this section.
SEC. 8. ANTI-REDLINING REQUIREMENT.
Notwithstanding sections 6(a) and 7(a), the Secretary may not make a
contract for reinsurance coverage under this Act available for purchase
unless the purchaser certifies to the Secretary--
(1) in the case of a contract under section 6, that--
(A) no insurer (or affiliate of such insurer)
participating in the State-operated program of such
purchaser has been adjudicated in any Federal court, or
has entered, after the date of the enactment of this
Act, into a consent decree filed in a Federal court or
into a settlement agreement, premised upon a violation
of the Fair Housing Act for the activities involved in
making insurance coverage available; and
(B) if such insurer (or affiliate) has entered into
any such consent decree or settlement agreement, the
insurer (or affiliate) is not in violation of the
decree or settlement agreement as determined by a court
of competent jurisdiction or the agency with which the
decree or agreement was entered into; and
(2) in the case of a contract under section 7, that--
(A)(i) in the case of a contract purchased by an
insurer or reinsurer, the insurer or reinsurer (or
affiliate of such insurer or reinsurer) has not been
adjudicated in any Federal court, and has not entered,
after the date of the enactment of this Act, into a
consent decree filed in a Federal court or into a
settlement agreement, premised upon a violation of the
Fair Housing Act for the activities involved in making
insurance coverage available; or
(ii) in the case of a contract purchased by a State
program, no insurer (or affiliate of such insurer)
participating in the State program has been adjudicated
in any Federal court, or has entered, after the date of
the enactment of this Act, into a consent decree filed
in a Federal court or into a settlement agreement,
premised upon a violation of the Fair Housing Act for
the activities involved in making insurance coverage
available; and
(B) if such an insurer or reinsurer (or affiliate of
such an insurer or reinsurer) has entered into any such
consent decree or settlement agreement, the insurer or
reinsurer (or affiliate) is not in violation of the
decree or settlement agreement as determined by a court
of competent jurisdiction or the agency with which the
decree or agreement was entered into.
SEC. 9. MINIMUM LEVEL OF RETAINED LOSSES AND MAXIMUM FEDERAL LIABILITY.
(a) Available Levels of Retained Losses.--In making reinsurance
coverage available under this Act, the Secretary shall make available
for purchase contracts for such coverage that require the sustainment
of retained losses from a single event of a covered peril (as required
under sections 6(b)(3) and 7(b)(3) for payment of eligible losses) in
various amounts, as the Secretary, in consultation with the Commission,
determines appropriate and subject to the requirements under subsection
(b).
(b) Minimum Level of Retained Losses.--
(1) Contracts for state programs.--Subject to paragraphs (3)
and (4) and notwithstanding any other provision of this Act, a
contract for reinsurance coverage under section 6 for an
eligible State program that offers insurance or reinsurance
coverage described in subparagraph (A) or (B), respectively, of
section 6(a)(1) may not be made available or sold unless the
contract requires retained losses from a single event of a
covered peril in the following amount:
(A) In general.--The State program shall sustain an
amount of retained losses of not less than the greater
of--
(i) an amount between $2,000,000,000 and
$5,000,000,000, that is determined by the
Secretary in accordance with the requirement
under section 3(c)(1);
(ii) the claims-paying capacity of the
eligible State program, as determined by the
Secretary; and
(iii) an amount, determined by the Secretary
in consultation with the Commission, that is in
the range between the amount equal to the
eligible loss projected to be incurred once
every 100 years from a single event in the
State and the amount equal to the eligible loss
projected to be incurred once every 250 years
from such an event.
(B) Transition rule for existing programs.--
(i) Claims-paying capacity.--Subject to
clause (ii), in the case of any eligible State
program that was offering insurance or
reinsurance coverage on the date of the
enactment of this Act and the claims-paying
capacity of which is greater than the amount
determined under subparagraph (A)(i) but less
than an amount determined for the State under
subparagraph (A)(iii), the minimum level of
retained losses applicable under this paragraph
shall be the claims-paying capacity of such
State program.
(ii) Agreement.--Clause (i) shall apply to a
State program only if the State program enters
into a written agreement with the Secretary
providing a schedule for increasing the claims-
paying capacity of the State program to the
amount determined for the State under
subparagraph (A)(iii) over a period not to
exceed 5 years. The Secretary may extend the 5-
year period for not more than 2 additional one-
year periods if the Secretary determines that
losses incurred by the State program as a
result of covered perils create excessive
hardship on the State program. The Secretary
shall consult with the appropriate officials of
the State program regarding the required
schedule and any potential one-year extensions.
(C) Transition rule for new programs.--
(i) 100-year event.--The Secretary may
provide that, in the case of an eligible State
program that, after January 1, 1999, commences
offering insurance or reinsurance coverage,
during the 5-year period beginning on the date
that reinsurance coverage under section 6 is
first made available, the minimum level of
retained losses applicable under this paragraph
shall be the amount determined for the State
under subparagraph (A)(iii), except that such
minimum level shall be adjusted annually as
provided in clause (ii) of this subparagraph.
(ii) Annual adjustment.--Each annual
adjustment under this clause shall increase the
minimum level of retained losses applicable
under this subparagraph to an eligible State
program described in clause (i) in a manner
such that--
(I) during the course of such 5-year
period, the applicable minimum level of
retained losses approaches the minimum
level that, under subparagraph (A),
will apply to the eligible State
program upon the expiration of such
period; and
(II) each such annual increase is a
substantially similar amount, to the
extent practicable.
(D) Reduction because of reduced claims-paying
capacity.--
(i) Authority.--Notwithstanding subparagraphs
(A), (B), and (C) or the terms contained in a
contract for reinsurance pursuant to such
subparagraphs, if the Secretary determines that
the claims-paying capacity of an eligible State
program has been reduced because of payment for
losses due to an event, the Secretary may
reduce the minimum level of retained losses for
the State commensurate with the current
capacity of the State program, as determined by
the Secretary, but in no case may such minimum
level be less than the amount determined under
subparagraph (A)(i).
(ii) Term of reduction.--If the minimum level
of retained losses for an eligible State
program is reduced pursuant to clause (i), upon
the expiration of the 5-year period beginning
upon such reduction the minimum level of
retained losses applicable to such State
program under a contract for reinsurance
coverage under section 6 shall be increased to
an amount not less than the amount applicable
to such State program immediately before such
reduction.
(E) Claims-paying capacity.--For purposes of this
paragraph, the claims-paying capacity of a State-
operated insurance or reinsurance program under section
6(a)(1) shall be determined by the Secretary, in
consultation with the Commission, taking into
consideration the claims-paying capacity as determined
by the State program, retained losses to private
insurers in the State in an amount assigned by the
State insurance commissioner, the cash surplus of the
program, and the lines of credit, reinsurance, and
other financing mechanisms of the program established
by law.
(2) Auction contracts.--Subject to paragraphs (3) and (4) and
notwithstanding any other provision of this Act, a contract for
reinsurance coverage may not be made available or sold under
section 7 through a regional auction unless the contract
requires that the insurance industry in the region for which
the auction was conducted sustains a cumulative amount of
retained losses (in covered lines resulting from covered
perils) of not less than the greater of--
(A) an amount between $2,000,000,000 and
$5,000,000,000, that is determined by the Secretary in
accordance with the requirement under section 3(c)(1);
and
(B) an amount, determined by the Secretary in
consultation with the Commission, that is in the range
between the amount equal to the eligible loss projected
to be incurred once every 100 years from a single event
in the region and the amount equal to the eligible loss
projected to be incurred once every 250 years from such
an event.
(3) Initial adjustment based on private market.--The
Secretary may, before making contracts for reinsurance coverage
under this Act initially available under section 6 or 7, raise
the minimum level of retained losses from the amount required
under paragraph (1) for an eligible State program or under
paragraph (2) for a region to ensure, as determined by the
Secretary, that such contracts comply with the principle under
section 3(c)(1).
(4) Annual adjustment.--The Secretary may annually raise the
minimum level of retained losses established under paragraph
(1) for an eligible State program or under paragraph (2) for a
region to reflect, as determined by the Secretary--
(A) in the case of an eligible State program, changes
to the claims-paying capacity of the program;
(B) changes in the capacity of the private insurance
and reinsurance market;
(C) increases in the market value of properties; or
(D) such other situations as the Secretary considers
appropriate.
The Secretary shall consider the minimum level of retained
losses requirements in paragraphs (1) and (2) as minimum
requirements only and shall have full authority, effective on
the date of the enactment of this Act, to establish levels of
required minimum retained losses in any amount greater than the
amounts specified in such paragraphs. In making any
determination under this paragraph in the minimum level of
retained losses, the Secretary shall establish such level at an
amount such that the program under this Act for making
reinsurance coverage available does not displace or compete
with the private insurance or reinsurance markets or capital
markets, as determined by the Secretary after the Secretary has
provided interested parties an opportunity to submit to the
Commission market information relevant to such determination
and has provided the Commission with an opportunity to advise
the Secretary regarding such information and determination.
(5) Optional annual inflationary or exposure adjustment.--The
Secretary may, on an annual basis, raise the minimum level of
retained losses established under paragraph (1) for each
eligible State program and under paragraph(2) for each region
to reflect the annual rate of inflation or growth in exposures,
whichever is greater. Any such raise shall be made in accordance with
an inflation index or exposure index, as appropriate, that the
Secretary determines to be appropriate. The first such raise may be
made one year after contracts for reinsurance coverage under this Act
are first made available for purchase.
(c) Maximum Federal Liability.--
(1) In general.--Notwithstanding any other provision of law,
the Secretary may sell only contracts for reinsurance coverage
under this Act in various amounts which comply with the
following requirements:
(A) Estimate of aggregate liability.--The aggregate
liability for payment of claims under all such
contracts in any single year is unlikely to exceed
$25,000,000,000 (as such amount is adjusted under
paragraph (2)).
(B) Eligible loss coverage sold.--Eligible losses
covered by all contracts sold within a State or region
during a 12-month period do not exceed the difference
between the following amounts (each of which shall be
determined by the Secretary in consultation with the
Commission):
(i) The amount equal to the eligible loss
projected to be incurred once every 500 years
from a single event in the State or region.
(ii) The amount equal to the eligible loss
projected to be incurred once every 100 years
from a single event in the State or region.
(2) Annual adjustments.--The Secretary shall annually adjust
the amount under paragraph (1)(A) (as it may have been
previously adjusted) to provide for inflation in accordance
with an inflation index that the Secretary determines to be
appropriate.
(d) Limitation on Percentage of Risk in Excess of Retained Losses.--
(1) In general.--The Secretary may not make available for
purchase contracts for reinsurance coverage under this Act that
would pay out more than 50 percent of eligible losses in excess
of retained losses--
(A) in the case of a contract under section 6 for an
eligible State program, for such State; and
(B) in the case of a contract made available through
a regional auction under section 7, for such region.
(2) Payout.--For purposes of this subsection, the amount of
payout from a reinsurance contract shall be the amount of
eligible losses in excess of retained losses multiplied by the
percentage under paragraph (1).
SEC. 10. DISASTER REINSURANCE FUND.
(a) Establishment.--There is established within the Treasury of the
United States a fund to be known as the Disaster Reinsurance Fund (in
this section referred to as the ``Fund'').
(b) Credits.--The Fund shall be credited with--
(1) amounts received annually from the sale of contracts for
reinsurance coverage under this Act;
(2) any amounts borrowed under subsection (d);
(3) any amounts earned on investments of the Fund pursuant to
subsection (e); and
(4) such other amounts as may be credited to the Fund.
(c) Uses.--Amounts in the Fund shall be available to the Secretary
only for the following purposes:
(1) Contract payments.--For payments to covered purchasers
under contracts for reinsurance coverage for eligible losses
under such contracts.
(2) Commission costs.--To pay for the operating costs of the
Commission.
(3) Administrative expenses.--To pay for the administrative
expenses incurred by the Secretary in carrying out the
reinsurance program under this Act.
(4) Termination.--Upon termination under section 14, as
provided in such section.
(d) Borrowing.--
(1) Authority.--To the extent that the amounts in the Fund
are insufficient to pay claims and expenses under subsection
(c), the Secretary may issue such obligations of the Fund as
may be necessary to cover the insufficiency and shall purchase
any such obligations issued.
(2) Public debt transaction.--For the purpose of purchasing
any such obligations, the Secretary may use as a public debt
transaction the proceeds from the sale of any securities issued
under chapter 31 of title 31, United States Code, and the
purposes for which securities are issued under such chapter are
hereby extended to include any purchase by the Secretary of
such obligations under this subsection.
(3) Characteristics of obligations.--Obligations issued under
this subsection shall be in such forms and denominations, bear
such maturities, bear interest at such rate, and be subject to
such other terms and conditions, as the Secretary shall
determine.
(4) Treatment.--All redemptions, purchases, and sales by the
Secretary of obligations under this subsection shall be treated
as public debt transactions of the United States.
(5) Repayment.--Any obligations issued under this subsection
shall be repaid, including interest, from the Fund and shall be
recouped from premiums charged for reinsurance coverage
provided under this Act.
(e) Investment.--If the Secretary determines that the amounts in the
Fund are in excess of current needs, the Secretary may invest such
amounts as the Secretary considers advisable in obligations issued or
guaranteed by the United States.
(f) Prohibition of Federal Funds.--Except for amounts made available
pursuant to subsection (d) and section 11(h), no Federal funds shall be
authorized or appropriated for the Fund or for carrying out the
reinsurance program under this Act.
SEC. 11. NATIONAL COMMISSION ON CATASTROPHE RISKS AND INSURANCE LOSS
COSTS.
(a) Establishment.--The Secretary shall establish a commission to be
known as the National Commission on Catastrophe Risks and Insurance
Loss Costs.
(b) Duties.--The Commission shall meet for the sole purpose of
advising the Secretary regarding the estimated loss costs associated
with the contracts for reinsurance coverage available under this Act
and carrying out the functions specified in this Act.
(c) Members.--The Commission shall consist of not more than 5
members, who shall be appointed by the Secretary and shall be broadly
representative of the public interest. Members shall have no personal,
professional, or financial interest at stake in the deliberations of
the Commission. The membership of the Commission shall at all times
include at least 1 representative of a nationally recognized consumer
organization.
(d) Treatment of Non-Federal Members.--Each member of the Commission
who is not otherwise employed by the Federal Government shall be
considered a special Government employee for purposes of sections 202
and 208 of title 18, United States Code.
(e) Experts and Consultants.--The Commission may procure temporary
and intermittent services under section 3109(b) of title 5, United
States Code, but at a rate not in excess of the daily equivalent of the
annual rate of basic pay payable for level V of the Executive Schedule,
for each day during which the individual procured is performing such
services for the Commission.
(f) Compensation.--Each member of the Commission who is not an
officer or employee of the Federal Government shall be compensated at a
rate of basic pay payable for level V of the Executive Schedule, for
each day (including travel time) during which such member is engaged in
the performance of the duties of the Commission. All members of the
Commission who are officers or employees of the United States shall
serve without compensation in addition to that received for their
services as officers or employees of the United States.
(g) Obtaining Data.--The Commission and the Secretary may solicit
loss exposure data and such other information either deems necessary to
carry out its responsibilities from governmental agencies and bodies
and organizations that act as statistical agents for the insurance
industry. The Commission and the Secretary shall take such actions as
are necessary to ensure that information that either deems is
confidential or proprietary is disclosed only to authorized individuals
working for the Commission or the Secretary. No company which refuses
to provide information requested by the Commission or the Secretary may
participate in the program for reinsurance coverage authorized under
this Act, nor may any State insurance or reinsurance program
participate if any governmental agency within that State has refused to
provide information requested by the Commission or the Secretary.
(h) Funding.--
(1) Authorization of appropriations.--There are authorized to
be appropriated--
(A) $1,000,000 for fiscal year 2000 for the initial
expenses in establishing the Commission and the initial
activities of the Commission that cannot timely be
covered by amounts obtained pursuant to sections
6(b)(6)(B)(iii) and 7(a)(3)(C), as determined by the
Secretary;
(B) such additional sums as may be necessary to carry
out subsequent activities of the Commission;
(C) $1,000,000 for fiscal year 2000 for the initial
expenses of the Secretary in carrying out the program
authorized under section 3; and
(D) such additional sums as may be necessary to carry
out subsequent activities of the Secretary under this
Act.
(2) Offset.--The Secretary shall provide, to the maximum
extent practicable, that an amount equal to any amount
appropriated under paragraph (1) is obtained from purchasers of
reinsurance coverage under this Act and deposited in the Fund
established under section 10. Such amounts shall be obtained by
inclusion of a provision for the Secretary's and the
Commission's expenses incorporated into the pricing of the
contracts for such reinsurance coverage, pursuant to sections
6(b)(6)(B)(iii) and 7(a)(3)(C).
(i) Termination.--The Commission shall terminate upon the effective
date of the repeal under section 14(c).
SEC. 12. DEFINITIONS.
For purposes of this Act, the following definitions shall apply:
(1) Commission.--The term ``Commission'' means the National
Commission on Catastrophe Risks and Insurance Loss Costs
established under section 11.
(2) Covered perils.--The term ``covered perils'' means the
natural disaster perils under section 5.
(3) Covered purchaser.--The term ``covered purchaser''
means--
(A) with respect to reinsurance coverage made
available under a contract under section 6, the
eligible State-operated insurance or reinsurance
program that purchases such coverage; and
(B) with respect to reinsurance coverage made
available under a contract under section 7, the
purchaser of the contract auctioned under such section
or any subsequent holder or holders of the contract.
(4) Disaster area.--The term ``disaster area'' means a
geographical area, with respect to which--
(A) a covered peril specified in section 5 has
occurred; and
(B) a declaration that a major disaster exists, as a
result of the occurrence of such peril--
(i) has been made by the President of the
United States; and
(ii) is in effect.
(5) Eligible losses.--The term ``eligible losses'' means
losses in excess of the sustained and retained losses, as
defined by the Secretary after consultation with the
Commission.
(6) Eligible state program.--The term ``eligible State
program'' means a State program that, pursuant to section 6(a),
is eligible to purchase reinsurance coverage made available
through contracts under section 6.
(7) Price gouging.--The term ``price gouging'' means the
providing of any consumer good or service by a supplier for a
price that the supplier knows or has reason to know is greater,
by at least the percentage set forth in a State law or
regulation prohibiting such act (notwithstanding any real cost
increase due to any attendant business risk and other
reasonable expenses that result from the major disaster
involved), than the price charged by the supplier for such
consumer good or service immediately before the disaster.
(8) Qualified lines.--The term ``qualified lines'' means
lines of insurance coverage for which losses are covered under
section 4 by reinsurance coverage under this Act.
(9) Reinsurance coverage.--The term ``reinsurance coverage
under this Act'' includes coverage under contracts made
available under sections 6 and 7.
(10) Secretary.--The term ``Secretary'' means the Secretary
of the Treasury.
(11) State.--The term ``State'' means the States of the
United States, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands,
Guam, the Virgin Islands, American Samoa, and any other
territory or possession of the United States.
SEC. 13. REGULATIONS.
The Secretary shall issue any regulations necessary to carry out the
program for reinsurance coverage under this Act.
SEC. 14. TERMINATION.
(a) In General.--Except as provided in subsection (b), the Secretary
may not provide any reinsurance coverage under this Act covering any
period after the expiration of the 10-year period beginning on the date
of the enactment of this Act.
(b) Extension.--If upon the expiration of the period under subsection
(a) the Secretary, in consultation with the Commission, determines that
continuation of the program for reinsurance coverage under this Act is
necessary to carry out the purpose of this Act under section 3(b)
because of insufficient growth of capacity in the private homeowners'
insurance market, the Secretary shall continue to provide reinsurance
coverage under this Act until the expiration of the 5-year period
beginning upon the expiration of the period under subsection (a).
(c) Repeal.--Effective upon the date that reinsurance coverage under
this Act is no longer available or in force pursuant to subsection (a)
or (b), this Act (except for this section) is repealed.
(d) Deficit Reduction.--The Secretary shall cover into the General
Fund of the Treasury any amounts remaining in the Fund under section 10
upon the repeal of this Act.
SEC. 15. ANNUAL STUDY OF COST AND AVAILABILITY OF DISASTER INSURANCE
AND PROGRAM NEED.
(a) In General.--The Secretary shall, on an annual basis, conduct a
study and submit to the Congress a report on the cost and availability
of homeowners' insurance for losses resulting from catastrophic natural
disasters covered by the reinsurance program under this Act.
(b) Contents.--Each annual study under this section shall determine
and identify, on an aggregate basis--
(1) for each State or region, the capacity of the private
homeowners' insurance market with respect to coverage for
losses from catastrophic natural disasters;
(2) for each State or region, the percentage of homeowners
who have such coverage, the disasters covered, and the average
cost of such coverage;
(3) for each State or region, the progress that private
reinsurers and capital markets have made in providing
reinsurance for such homeowners' insurance;
(4) for each State or region, the effects of the Federal
reinsurance program under this Act on the availability and
affordability of such insurance; and
(5) the appropriate time for termination of the Federal
reinsurance program under this Act.
(c) Timing.--Each annual report under this section shall be submitted
not later than March 30 of the year after the year for which the study
was conducted.
(d) Commencement of Reporting Requirement.--The Secretary shall first
submit an annual report under this section 2 years after the date of
the enactment of this Act.
SEC. 16. GAO STUDY OF HURRICANE RELATED FLOODING.
(a) In General.--The Comptroller General of the United States shall
conduct a study of the availability and adequacy of flood insurance
coverage for losses to residences and other properties caused by
hurricane-related flooding.
(b) Contents.--The study under this section shall determine and
analyze--
(1) the frequency and severity of hurricane-related flooding
during the last 20 years in comparison with flooding that is
not hurricane-related;
(2) the differences between the risks of flood-related losses
to properties located within the 100-year floodplain and those
located outside of such floodplain;
(3) the extent to which insurance coverage referred to in
subsection (a) is available for properties not located within
the 100-year floodplain;
(4) the advantages and disadvantages of making such coverage
for such properties available under the national flood
insurance program;
(5) appropriate methods for establishing premiums for
insurance coverage under such program for such properties that,
based on accepted actuarial and rate making principles, cover
the full costs of providing such coverage;
(6) appropriate eligibility criteria for making flood
insurance coverage under such program available for properties
that are not located within the 100-year floodplain or within a
community participating in the national flood insurance
program;
(7) the appropriateness of the existing deductibles for all
properties eligible for insurance coverage under the national
flood insurance program, including the standard and variable
deductibles for pre-FIRM and post-FIRM properties, and whether
a broader range of deductibles should be established;
(8) income levels of policyholders of insurance made
available under the national flood insurance program whose
properties are pre-FIRM subsidized properties; and
(9) the number of homes that are not primary residences that
are insured under the national flood insurance program and are
pre-FIRM subsidized properties.
(c) Consultation With FEMA.--In conducting the study under this
section, the Comptroller General shall consult with the Director of the
Federal Emergency Management Agency.
(d) Report.--The Comptroller General shall complete the study under
this section and submit a report to the Congress regarding the findings
of the study, not later than 5 months after the date of the enactment
of this Act.
EXPLANATION OF THE LEGISLATION
H.R. 21, the ``Homeowners' Insurance Availability Act of
1999'' creates a voluntary temporary Federal reinsurance \1\
backstop to efforts by states and the private market to make
catastrophic insurance for homeowners living in disaster-prone
regions of the country more available.
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\1\ Reinsurance is a risk transfer mechanism that traditionally has
come in the form of insurance for insurance companies. In the property
casualty business, in particular, the more risk an insurance company
accumulates, the more capital it needs and the more volatile its
earnings become, and the more the need to transfer risk. For example,
in a typical excess of loss reinsurance contract, the reinsurer agrees
to indemnify an insurance company for all or part of losses in excess
of a fixed dollar amount called an attachment point. Once the
attachment point, or trigger, is reached, losses would be covered by
reinsurance purchased by the primary insurance company.
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FINDINGS AND PURPOSES
Major catastrophes, including Hurricane Andrew (1992),
Hurricane Iniki (1992), the Northridge Earthquake (1994), and
others more recently have led to a lack of available
homeowners' insurance coverage in risk-prone areas across the
country. Testimony before the Committee in the 106th Congress
has shown evidence of such availability problems in coastal
regions prone to hurricane losses as well as areas at risk to
seismic activity in the Midwest, West Coast and Pacific
Northwest.
In several states, including Florida, California and
Hawaii, state governments have intervened to prevent a near
total collapse in private insurance markets in the wake of
natural disasters. According to the California Insurance
Department, following the California Northridge earthquake in
1994, 95% of the homeowners' insurance market in the state
would not provide new coverage. The Hawaii and Florida markets
were similarly affected following catastrophes in 1992. In
response, Florida created the Florida Catastrophe Reinsurance
Fund in 1993, followed soon thereafter by the Hawaii Hurricane
Relief Fund (1994) in Hawaii and the California Earthquake
Authority (1996) in California. These programs stabilized local
insurance markets and provided a source of coverage for
homeowners who could otherwise not obtain it. All are capable
of paying loss claims from events of some severity, but cannot
be reasonably expected to handle the worst case events that are
likely to occur infrequently.
In California, for example, the state earthquake authority
has purchased some of the largest private reinsurance contracts
in history, costing more than $350 million out of $394 million
in premiums collected last year to purchase approximately $2.5
billion in private reinsurance. Nevertheless, the state program
has access to only $7.5 billion for payment of claims even
though the program's total liability is $163 billion in
potential losses according to testimony before the California
State Senate Insurance Committee in October 1999. In the event
a natural disaster exceeds the capacity of a state's insurance
program, homeowners would receive only partial claims for
losses, bankrupting the state insurance fund, damaging state
real estate and insurance industries, and ultimately
endangering the health of local economies.
Many other risk-prone states, such as Texas, Louisiana,
North Carolina, Virginia, New Jersey, New York, Maryland,
Delaware, Rhode Island, Connecticut and Massachusetts, as well
as Tennessee, Missouri, Arkansas, Illinois, Indiana, Washington
and Oregon do not have state insurance programs similar to
those in California, Hawaii and Florida. In some of these
areas, however, applications to state FAIR (Fair Access
Insurance Requirements) plans and beach plans (so-called
markets of last resort for homeowners' insurance which
generally provide less coverage at a greater price) increased
dramatically during the last half of the 1990s (California
+309%, Louisiana +741%, Massachusetts +66%, New York +31%,
Mississippi +75%, Florida +533, South Carolina +213%). Even
with state intervention, a worst-case catastrophe would likely
cause considerable insolvencies among private insurers. No
matter where a worst-case disaster may occur, it is reasonable
to expect that under-protected states and unprotected
homeowners will look to the Federal government for the sort of
emergency supplemental relief that history has shown they are
likely to receive.
Despite some improvements since the mid-1990s, information
presented to the Committee indicates that homeowners' insurance
availability problems continue to exist. According to the Swiss
RE Group, recognized as one of the world's leading private
market reinsurers, natural catastrophes made 1998 the third-
worst year on record for catastrophe insurers and reinsurers
worldwide. As a result, some in the industry have begun to
reduce their catastrophic capacity for certain markets and
certain perils. In addition, the Insurance Services Office, a
non-profit corporation that makes available advisory rating,
statistical, actuarial and related services to U.S. property/
casualty insurers, estimates that a catastrophe costing the
insurance industry between $50 and $100 billion could result in
the insolvency of up to 36 percent of all insurers, depending
on where the event occurs, and leave consumers with unfunded
claims of up to $56 billion. According to U.S. RE Group, a
recognized reinsurance broker, ``roughly $24 billion of
aggregate catastrophe excess-of-loss reinsurance is being
provided currently to insurers across the United States. This
represents at best 10 to 15 percent of the worst case scenario.
The global reinsurance market does not have sufficient capital
to meet U.S. catastrophe coverage requirements.''
Should the recent trend of larger losses from natural
disaster continue in the future, together with limited
insurance capacity for large-scale events in the private
marketplace, the consequences could be serious for the Federal
government. Between FY1977 and FY1993, the Federal government
spent $87 billion for post-disaster recovery assistance
according to the Senate bipartisan Task Force on Funding
Disaster Relief. Since FY1993, the Federal Emergency Management
Agency (FEMA) alone, not including the Small Business
Administration or the Departments of Agriculture or Commerce,
spent more than $22 billion on disaster relief.
Forecasters who have testified before the Committee predict
that the East and Gulf Coasts are entering what is likely to be
an even more damaging period of frequent storms. According to
U.S. RE Group, a Category 5 hurricane (wind speeds of 155 miles
per hour or more) could cost more than $110 billion if it hit
the New England coastline. The most costly hurricane in recent
history, Hurricane Andrew, caused $16.5 billion in insured
losses concentrated south of Miami. If Hurricane Andrew had
blown through Miami, only 20 miles north, the losses would have
approached $50 billion. Considering that 75% of the U.S.
population will be living within 100 miles of a U.S. coastline
by the year 2010, according to Department of Commerce
estimates, these potential events could cause even further
erosion in the insurance safety net.
LEGISLATIVE HISTORY
Early in the 104th Congress, in an effort to address the
rising Federal costs of natural disasters and the growing lack
of available homeowners' insurance in vulnerable areas,
Representative Bill Emerson (R-MO), Senator Ted Stevens (R-AL),
Representative Norman Mineta (D-CA), Senator Daniel Inouye (D-
HI) and more than 220 Members of Congress sponsored
comprehensive natural disaster protection legislation. That
legislation ultimately did not proceed to markup, in part
because the bill's all-encompassing approach made it difficult
to achieve consensus.
On the first day of the 105th Congress, Representative Rick
Lazio (R-NY), the Chairman of the Subcommittee on Housing and
Community Opportunity, joined with Representatives Bill
McCollum (R-FL) and Vic Fazio (D-CA) to introduce H.R. 219, the
``Homeowners' Insurance Availability Act of 1997.'' The
legislation was originally designed to complement only state
efforts to address rising natural disaster costs and the
growing lack of available homeowners' insurance with minimal
Federal involvement to encourage the resuscitation of the
industry. The Subcommittee on Housing and Community Opportunity
held hearings on the legislation on June 25, 1997, and August
25, 1997. On February 4, 1998, H.R. 219 was marked up and
passed the Housing Subcommittee by a vote of 16 to 6. The full
Committee heard testimony on the legislation on April 23, 1998,
including testimony from U.S. Department of Treasury Deputy
Secretary Lawrence Summers. In his testimony, Deputy Secretary
Summers stated that there is an ``urgent need for moving
forward on a timely basis [with Federal disaster reinsurance
legislation, and that] we see great promise in [H.R. 219] as a
means of addressing many of the problems related to the
availability and price of insurance and reinsurance for
disaster risks.'' He went on to note that the capital market
solutions to natural disaster exposure are ``in a relatively
early stage of development, [and] clearly, a serious problem
remains in the interim.'' He concluded that ``[p]rogress on
this issue has been too long in coming [and that] we all share
a clear recognition of the urgent need to move forward on a
timely basis.'' H.R. 219 was marked up in full Committee and
was favorably reported to the House by a vote of 33-12 on July
15, 1998.
On the first day of the 106th Congress, Subcommittee
Chairman Lazio joined with Committee Chairman James A. Leach
(R-IA), Ranking Member John J. LaFalce (D-NY), Vice Chairman
Bill McCollum joined and 43 other House Members to introduce
H.R. 21, the ``Homeowners' Insurance Availability Act of 1998''
as it passed the Committee as H.R. 219 on July 15, 1998. The
Subcommittee on Housing and Community Opportunity held hearings
on the legislation on April 28, 1999, and July 12, 1999. The
full Committee heard testimony on the legislation on July 30,
1999, including testimony from U.S. Department of Treasury
Deputy Secretary Stuart Eizenstat. In his testimony, Deputy
Secretary Eizenstat stated that H.R. 21 ``constructively and
creatively responds to the difficulty faced by both state funds
and private entities in purchasing reinsurance against their
large, but low-probability losses on homeowners' insurance''
and that a ``well-designed reinsurance program for homeowners''
losses could help provide the foundation for communities,
individuals, and the private markets on which they depend to
make a sound recovery in financial terms'' in the aftermath of
a natural disaster. H.R. 21 was marked up in full Committee on
November 9 and 10, 1999, and was favorably reported to the
House by a vote of 34-18 on November 10, 1999.
BACKGROUND AND NEED FOR LEGISLATION
During the 106th Congress, three hearings were held on H.R.
21, two at Subcommittee and one before the full Committee.
Deputy Treasury Secretary Stuart Eizenstat stated in
testimony that H.R. 21 is a ``positive step forward,'' that the
legislation ``constructively and creatively responds to the
difficulty faced by both state funds and private entities in
purchasing reinsurance against their large, but low-probability
losses on homeowners' insurance,'' and that the bill is a
``sound foundation for progress.''
Dr. William M. Gray, Professor of Atmospheric Science at
Colorado State University, stated in testimony that ``trends in
global oceanic and atmospheric observations during recent years
indicate that we are entering (or reverting to) a multi-decadal
period of increased intense or `major' hurricane activity,''
and that ``the cost of U.S. hurricane-spawned destruction will
most certainly rise to unprecedented magnitudes.''
Mr. W. Cloyce Anders, Regional Director of the Volunteer
Firemen's Insurance Services, Inc. in North Carolina and
testifying on behalf of the Independent Insurance Agents of
America stated that ``insurance companies who have done
business in North Carolina for decades are no longer willing to
write windstorm coverage to meet existing demand,'' regardless
of the price of the coverage. Mr. Anders also noted that the
availability condition is not ``limited to beach communities
and the affluent. In North Carolina, many insurance companies
will not write hurricane coverage and many others will not
write property coverage of any kind for any home which is
located east of Interstate 95 [which is] as much as 150 miles
from the Atlantic Ocean. The [North Carolina Insurance
Underwriting Association, a market of last resort] accepts
applications from residents in 18 counties. The vast bulk of
the applications come from middle class families that live up
to an hour's drive from the coast.''
Mr. Arthur Sterbcow, President, Latter and Blum, in New
Orleans, LA and testifying on behalf of the National
Association of Realtors stated that ``the inability to obtain
affordable homeowners' insurance is a serious threat to the
residential real estate market.'' He noted that ``a strong
housing market is a linchpin of a healthy economy, generating
jobs, wages, tax revenues and a demand for goods and services
[and in] order to maintain a strong economic climate, we must
safeguard the vitality of residential real estate.''
Ms. Susanne Murphy, Deputy Insurance Commissioner with the
State of Florida testified that if Hurricane Andrew in 1992 had
``shifted just one degree to the north, slamming into downtown
Miami or Fort Lauderdale, it would have left insured losses of
not $16 billion, but more than $50 billion. The reserves of all
the insurers would not have carried the day; untold thousands
of homeowner claims would have gone unpaid; banks would have
been stuck with abandoned mortgages and would have stopped
making new loans; the state's home-building industry would have
come to a screeching halt; and property values would have
plummeted.''
Dr. Jack E. Nicholson, Chief Operating Officer of the
Florida Hurricane Catastrophe Fund, testified that
``[w]orldwide reinsurance capacity was severely impacted
following HurricaneAndrew. Aggregate reinsurance limits were
only available for $200 million or less per company and the cost many
times exceeded 25% to 30% of the coverage. The terms of reinsurance
contracts were also tightened resulting in less coverage.'' He went on
to note that ``the experience of Hurricane Andrew taught us an
important lesson and exposed the limitations of relying solely on the
private reinsurance market for catastrophic coverage.''
Mr. Roger Joslin, Chairman of the Board of State Farm Fire
and Casualty Company, testified that ``insured losses from
major natural catastrophes in several regions of the country
such as California, the Southeast including but not limited to
Florida, and the Midwestern earthquake zone, could reach as
high as $75 billion to $100 billion. Events of this magnitude
far exceed the claims paying capacity of most private insurers
and all existing state funds.''
Mr. Ronald Hanna, Deputy Commissioner of the Mississippi
Insurance Department, testified that the ``Gulf Coast is a very
volatile insurance market. Many companies are continually
changing their underwriting strategies. This cycle creates a
disruptive market and reflects the underlying issues of
property companies unable to commit to a consistent pattern of
controlled growth. The Mississippi Windstorm Underwriting
Association, a market of last resort for residents unable to
obtain traditional insurance coverage, has more than doubled in
size since 1993.'' He noted that ``several years ago, when a
series of natural disasters occurred both here and abroad,
there was great concern about shrinking reinsurance markets and
the escalating prices primary insurance companies had to pay
for reinsurance coverage. There is no question that a series of
future catastrophes could once again affect the availability
and affordability of reinsurance.''
Mr. Robert W. Pike, Executive Vice President, Secretary and
General Counsel of Allstate Insurance Company, testified that
Allstate claims resulting from Hurricane Andrew ``exceeded all
of the premiums we collected in Florida over 50 years and
consumed 42% of our nationwide surplus.'' He went on to note
that ``Allstate buys more private reinsurance than any property
insurance company in the United States. We want to buy more
reinsurance, but after five years of trying, we still cannot
find coverage in sufficient quantities and at prices which make
it a practical means for managing our worst-case risks.''
PURPOSE AND SUMMARY
A. Overview
H.R. 21, the ``Homeowners' Insurance Availability Act of
1999'' requires the Department of Treasury to offer voluntary,
single peril (hurricane, earthquake, tornado or volcano),
multiple event Federal reinsurance contracts for (1) direct
sale to eligible state-operated insurance and reinsurance
programs (existing and future); and (2) auction by region to
private market participants as well as state-operated programs
for coverage of residential losses reported within three years
of a qualifying natural disaster. Qualifying private market
entities are granted the opportunity to offer state-operated
insurance programs substantially similar reinsurance coverage
in lieu of coverage offered by the Treasury.
In the event Federal reinsurance under a particular
contract is exhausted due to payment for event losses, the
purchaser has an opportunity to purchase additional contracts
at identical terms prorated based upon the remaining term of
the original contract, but which do not become effective until
15 days after the date of purchase.
Reinsurance coverage offered by the Federal government
would cover only a percentage of losses above a deductible, or
trigger, set by state or region by the Secretary of the
Treasury in consultation with the National Commission on
Catastrophe Risks and Insurance Loss Costs established in the
legislation. It is intended that these trigger levels are the
minimum required levels and that Treasury may set the trigger
as high as necessary to achieve program goals.
Minimum trigger levels are as follows:
------------------------------------------------------------------------
State Programs Regional Auctions
------------------------------------------------------------------------
Triggers must be at least the Triggers must be at least the
greater of: greater of:
1. A range between $2 billion 1. A range between $2 billion
and $5 billion in residential and $5 billion in residential
losses, or losses, or
2. State program claims-paying 2. A range between an amount
capacity, or sufficient to cover
3. A range between an amount residential losses resulting
sufficient to cover residential from an event that has a
losses resulting from an event likelihood of occurring once
that has a likelihood of every 100 years and once every
occurring once every 100 years 250 years.
and once every 250 years.
------------------------------------------------------------------------
For existing State programs with claims paying capacity
below the one-in-one-hundred-year event, the Secretary would
have authority to set interim trigger levels over a five year
period to permit the program to achieve the required level of
claims-paying capacity. If necessary, the Secretary could
provide two additional one-year extensions should the State
sustain significant unforeseen losses from covered claims.
For state programs, Treasury may reduce the required
minimum deductible if a state's claims-paying capacity has been
reduced from a natural disaster. Such reduction is allowed only
for a period of up to five years, after which the state program
must return to its original deductible level. Additionally, the
Secretary has the discretion, in consultation with the National
Commission on Catastrophic Risks and Insurance Loss Costs, to
set trigger levels below $2 billion for new state programs for
those states that have a one in 100 year event that is less
than $2 billion in residential losses and at a level sufficient
to cover eligible losses. However, such state programs are
required to transition to a level at least as high as $2
billion over a period of five years.
In establishing program trigger levels, the Treasury is
prohibited from offering Federal coverage at levels that would
compete or displace the private insurance or
reinsurancemarkets. Once the trigger level has been exceeded (i.e., a
state program or the insurance industry by region pays out losses equal
to the deductible level), Federal reinsurance pays 50 cents for every
dollar of eligible losses above the deductible level.
Annual Federal liability is restricted by limitations on
the expected annual payment for coverage of $25 billion or less
and by capping the amount of Federal reinsurance sold by state
and by auction region through formula. The limitation on
estimated payments is accomplished in Section 8(c)(A) by
establishing a ``soft'' cap on the amount of Federal
reinsurance that may be sold by requiring that expected
payments on all outstanding contracts not exceed $25 billion in
any one year. That estimate is made by Treasury as advised by
the Commission (which would likely contract with outside
expects for additional analysis).
Further protection against liability is accomplished
through Section 8(c)(B) by establishing a ``hard'' cap on what
may be sold by state and by auction region through formula.
Simply, Treasury calculates the difference between the one in
500 year-event and the one in 100 year-event for each state and
for each regional auction. That figure is the amount that may
be sold to each above the trigger levels. To illustrate:
The 1/500 year-event for State A is $20 billion and
the 1/100 year-event for State A is $12 billion. The
difference between the two estimates, $20 billion minus
$12 billion, is $8 billion. Assuming State A purchases
the entire amount of coverage it is allowed ($8
billion), if State A suffers a $20 billion loss, it
collects on its entire contract and receives $4 billion
after accounting for the required 50% copay rate (50%
of $8 billion is $4 billion).
Participating state programs and private market entities
pay premiums established by the Secretary based upon the
recommendations of the Commission of at least twice the
actuarial risk of the coverage to ensure that the program would
be cost neutral. Auction participants competitively bid for
contracts above the minimum premium established by Treasury
that includes the above minimum requirement as well as a
component taking into account mitigation efforts in the
particular region. Such premiums are designed to provide for
program self-sufficiency. Private market purchasers must pay an
additional amount determined by the Secretary in consultation
with the Director of the Federal Emergency Management Agency
(FEMA) of up to five percent of the contract purchase price to
designated communities for mitigation activities. The Committee
expects the Treasury, in consultation with FEMA, to develop
through regulations the process in which the mitigation funds
are held in independent escrow until the designated community
submits an approvable plan for use of the funds.
H.R. 21 imposes reasonable consumer safeguards as a
condition for State participation in the federal reinsurance
program. It instructs the Secretary to develop regulations to
insure that state programs have public members on their board
of directors. Insurance policies covering the peril insured by
the program must be generally unavailable elsewhere in the
private market. Insurance policies available from state
programs should be reasonably available and affordable to
consumers and made available on a nondiscriminatory basis.
States and localities covered by a state program must implement
mitigation measures, such as effective building fire and safety
codes, for all new construction, substantial rehabilitation and
substantial renovation insured by the program and insurance
policies must be priced to reflect these mitigation efforts.
Two years after enactment and annually thereafter
throughout the life of the program, Treasury must conduct and
submit to Congress a study on the cost and availability of
catastrophic homeowners' insurance, including an identification
of an appropriate time for program termination.
In addition, the General Accounting Office, in consultation
with FEMA, is required to submit to Congress a study of the
availability and adequacy of flood insurance coverage for
losses to residences and other properties caused by hurricane-
related flooding.
The program sunsets after 10 years unless Treasury
determines there has been insufficient growth in private market
capacity. In such a case, Treasury may extend the program for
up to five additional years. Any revenue remaining in the
program is transferred into the General Fund of the Treasury
for purposes of deficit reduction.
B. Minimal Federal complement to State and private sector efforts
Paramount among the Committee's concerns has been
developing a solution to a very real and urgent need for
available catastrophic homeowners' insurance without excessive
or unnecessary Federal involvement. The Committee believes such
balance has been achieved in H.R. 21 by establishing
prohibitions against offering Federal coverage at levels that
would compete or displace the private sector, by requiring that
program participants either self-insure or purchase private
reinsurance for an amount equal to the total of Federal
coverage purchased, and by terminating the Federal program
after 10 years unless the Secretary determines that there has
been insufficient growth in private market capacity, in which
case, the program may be extended for a period of up to five
years.
Section 3(c) of the bill provides that the contracts of
Federal reinsurance provided under the bill for either state
programs under Section 6, or as auctioned by Treasury under
Section 7, not displace or compete with insurance, reinsurance
or capital markets, but instead provide catastrophe capacity
above the levels the private sector already provides.
As an additional protection against unnecessary Federal
involvement with state-operated programs, Section 6(c) requires
the Secretary to give private market reinsurance entities a
``right of first refusal'' in Federal reinsurance offered for
direct sale to state-operated programs. If qualifying private
market entities are willing to offer coverage at rates and
terms that would be substantially similar to coverage offered
by the Federal governmentas approved by the Secretary, Treasury
may not offer such coverage during the relevant contract cycle.
Section 9 of the Committee bill requires that the stated
retained losses at which the Federal reinsurance attaches or
triggers are to be understood as minimum levels only. Section
9(b)(4) provides that the Secretary shall adjust the attachment
points based on a number of criteria, including an assessment
of capacity to retain catastrophe risk in the private
insurance, reinsurance and capital markets or in the state
programs, and the requirement that the Federal program not
displace or compete with those markets. The Committee expects
that the Secretary would first determine the private market's
capacity to retain risk and then set the attachment points
above those minimums, consistent with the analysis of private
market capacity.
In Section 9(d) of the Committee bill, Treasury is
restricted from offering Federal coverage for more than 50% of
the risk of insured losses in excess of minimum retained
losses. More simply, the Federal reinsurance will pay only 50
cents for every dollar in eligible losses. The Committee agreed
to this limitation at the request of the Administration and in
recognition of the need to avoid discouraging the development
of private market capacity to absorb catastrophic losses. The
Committee believes that the risk-sharing/co-payment requirement
will, in fact, encourage and accelerate the development of
private market financing mechanisms.
Additionally, the Committee approved an amendment to sunset
the Federal program after 10 years unless Treasury determines
there has been insufficient growth in private market capacity.
In such a case, Treasury may extend the program for up to five
additional years. The Committee included this provision to
clearly establish that the most effective and efficient
mechanisms for protecting against catastrophic loss ultimately
reside in the private market. It is intended that the temporary
Federal presence envisioned in H.R. 21 simply provide for
continuity and relative calm through private market disruption,
and in no way replace or compete with the private sector.
C. States with less risk exposure
The Committee would note that while the legislation
requires Treasury to conduct no less than six regional auctions
of Federal reinsurance contracts across the country, the
Committee does not intend to require that each and every state
be included in one region or another. In particular, for those
few states in the northern Great Plains, including Nebraska,
Montana, North Dakota and South Dakota, among others, that
suffer from relatively small risk of hurricane, earthquake or
volcano exposure, the Committee would not expect that Treasury
would determine such states necessarily be included in the
regional auction component of the legislation. In addition, in
Section 7(a)(2) the Secretary is directed to attempt to create
regions of similar risk, and not combine states at less risk of
losses to covered perils with states at higher risk.
Finally, the legislation includes a provision providing the
Secretary discretion to allow new state-operated insurance
programs five years to reach a minimum trigger level of $2
billion if, according to the National Commission on Catastrophe
Risks and Insurance Loss Costs, an event likely to occur in the
state once every 100 years causes losses which are less than $2
billion. It should be noted that in considering such a
reduction in minimum triggers as set forth in the legislation,
the Secretary should not displace or otherwise compete with
reinsurance coverage available in the private reinsurance
market. The purpose of the provision is to assure that all
states are treated fairly and equitably by the Federal program,
considering differences in the frequency and severity of
natural catastrophes among states as well as the relative size
and financial capacity of the local insurance and reinsurance
markets
D. Transferability of reinsurance contracts
The Committee strongly believes that Federal reinsurance
contracts should be fully transferable, assignable and
divisible so that a secondary market for these instruments will
develop. This secondary market should allow a more efficient
distribution of reinsurance contracts, particularly among
insurers too small to bid in the primary auction. It will also
guide the Secretary in gauging the true value of federal
contracts and setting the reserve prices for future auctions.
It is the Committee's intent for this provision to be
broadly interpreted. In section 7(b)(2), the words ``at all
times'' mean that a contract holder may transfer ownership of
any or all of a contract to another owner either before or
after any catastrophic loss event. It is to be understood that
``transferable'' means that the new owner(s) of a contract
accede to the same rights under the contract, as acquired by
and vested in the original owner. It is further understood that
``assignable'' provides that an owner of a contract may
transfer all or any part of its interest or rights in a
contract over to another. It is still further understood that
``divisible'' allows for any division, partition or
apportionment of contracts as may be agreed upon by the buyer
and seller.
E. Additional background and explanation
Pursuant to an amendment adopted by the Committee, H.R. 21
would require, as a condition for an insurer entering into a
reinsurance contract under the legislation, that the purchasing
insurer certify that, neither it nor any of its affiliates have
either (i) been adjudicated in any federal court under the Fair
Housing Act and, (ii) subsequent to the date of enactment,
violated any consent decree or settlement agreement (as
determined by a court of competent jurisdiction or the agency
with which the decree or agreement was entered into) premised
upon a violation of the Fair Housing Act. A similar
certification requirement would apply with respect to State
contracts under the legislation for insurers participating in
State-operated programs.
With regard to this amendment, the Committee takes no
position regarding the legitimacy or appropriateness of
judicial or administrative applications of the Fair Housing Act
tothe business of insurance. The Committee notes that other
Committees have expressed adverse views about such applications of the
statute, and have determined that the Department of Housing and Urban
Development's pursuit of regulatory authority over the property
insurance industry through the Fair Housing Act is not within the ambit
of the law.\2\ This Committee intends that this legislation have no
legal significance with respect to determinations regarding the scope
and proper application of the Fair Housing Act.
---------------------------------------------------------------------------
\2\ See, e.g., S. Rep. No. 106-161, at 54 (1999) (``the Committee
remains concerned that [the Department of Housing and Urban
Development] continues to pursue regulatory authority over the property
insurance industry through the Fair Housing Act. This activity is not
within the ambit of the law.''). See also H.R. Rep. 106-286, at 34
(1999); S. Rep. No. 105-216, at 49-50 (1998); H.R. 105-610, at 39
(1998); S. Rep. No. 105-53, at 42-43 (1997); H.R. Rep. 105-175, at 43
(1997) (similar statements).
---------------------------------------------------------------------------
Pursuant to an amendment adopted by the Committee in a
previous version of the bill, Section 10(h) of the Committee
bill authorizes the Commission and Treasury to solicit loss
exposure data, and such other information deemed necessary to
carry out the program responsibilities under this Act, from
governmental agencies and bodies and organizations that act as
statistical agents for the insurance industry. It is
anticipated that the data will be solicited from statistical
agents, which collect data on the insurance industry, such as
the Insurance Services Office, the National Association of
Independent Insurers and the American Association of Insurance
Services. These data are maintained in aggregate form to
preserve individual company confidentiality. The Committee
recognizes that individual company loss data and related
information constitute trade secrets and their disclosure is
prohibited by law. Section 10(h) of the bill contains language
intended to protect even the aggregate data to be solicited
from statistical agents by specifically requiring the Secretary
and the Commission to take such steps as are necessary to
ensure that the information remains confidential and is not
disclosed to any one other than authorized individuals working
for the Commission or Treasury.
Section 10(h) also provides that if a company or a state
refuses to provide information requested by the Commission or
Treasury, it shall be ineligible to participate in the programs
authorized by the Act. It is anticipated that this section
would be enforced in situations where a statistical agent,
which has collected industry information and provided it in an
aggregated form to the Commission of the Treasury, notifies
either of these bodies that a company or other entity had
refused to provide the needed information for transmission, in
an aggregate form, to the Commission or Treasury.
hearings
The Subcommittee on Housing and community Opportunity held
two hearings on the ``Homeowners' Insurance Availability Act of
1999.''
The first hearing was held on Wednesday, April 28, 1999, in
Room 2128 Rayburn House Office Building. Testifying before the
Subcommittee were: Dr. Bill Gray, Ph.D., Professor of
Atmospheric Science, Colorado State University, CO; Mr. W.
Cloyce Anders, President and Regional Director, Volunteer
Firemen's Insurance Service of North Carolina, Raleigh, NC on
behalf of the Independent Insurance Agents of America; Mr.
Roger M. Singer, Senior Vice President and General Counsel of
the CGU Insurance Companies, Boston, MA; and Mr. Arthur
Sterbcow, President, Latter and Blum, New Orleans, LA on behalf
of the National Association of Realtors.
The second hearing was held on Monday, July 12, 1999, at
Hillsborough County Aviation Authority at the Tampa
International Airport in Tampa, Florida. Testifying before the
Subcommittee were: Ms. Susanne Murphy, Deputy Insurance
Commissioner, Department of Insurance, State of Florida; The
Honorable Leslie Waters, Vice-Chairman, Committee on Insurance,
Florida State House of Representatives; Mr. Rade Musulin, Vice-
President, Florida Farm Bureau Insurance Company; Mr. Jack
Nicholson, Chief Operating Officer, Florida Hurricane
Catastrophe Fund; Mr. Larry Gispert, Director of Emergency
Management, Hillsborough County; and Ms. Pamela Duncan,
Director, Department of Community Affairs' Office of
Legislative Affairs, State of Florida.
The Committee on Banking and Financial Services held one
hearing on July 30, 1999, in Room 2128 Rayburn House Office
Building. Testifying before the Committee were: The Honorable
Stuart E. Eizenstat, Deputy Secretary, U.S. Department of
Treasury; Mr. Roger Joslin, Chairman of the Board, State Farm
Fire and Casualty Co., Bloomington, Illinois; Mr. Ronald E.
Hanna, Deputy Commissioner, Mississippi Insurance Department;
Mr. Frank Nutter, President, Reinsurance Association of America
Mr. Don Beery, Vice President of Eustis Insurance Inc., New
Orleans, Louisiana on behalf of The Independent Insurance
Agents of America; Ms. Mary Fran Myers, Co-Director, Natural
Hazards Research and Applications Information Center,
University of Colorado; Mr. Travis Plunkett, Legislative
Director, Consumer Federation of America on behalf of Mr. J.
Robert Hunter, Director of Insurance, Consumer Federation of
America; Mr. Jack Weber, President, Home Insurance Federation
of America; Mr. Robert W. Pike, Executive Vice-President,
Administration, Allstate Insurance Company, Northbrook,
Illinois; Mr. Darryl D. Hansen, Chairman, President and CEO,
Guide One Insurance Group, West Des Moines, Iowa on behalf of
The National Association of Independent Insurers; Mr. Tom
Miller, Director of Economic Policy Studies, Competitive
Enterprise Institute; Ms. Barbara Connery, Member of the North
Carolina Association of Realtors on behalf of the National
Association of Realtors; and Mr. Scott A. Gilliam, Assistant
Secretary, Director of Government Relations, The Cincinnati
Insurance Companies.
Committee consideration and votes (rule XI, clause 2(l)(2)(B))
The Committee met in open session to markup H.R. 21,
``Homeowners' Insurance Act of 1999'' on November 9 and 10,
1999. The Committee considered, as original text for purposes
of amendments, a Committee Print, which incorporated H.R. 21 as
introduced.
During the markup, the Committee approved 11 amendments,
including a managers amendment by voice vote. The Committee
also defeated 5 amendments by voice vote. The Committee
approved 1 amendment by recorded vote. The Committee defeated 9
amendments by recorded vote. Pursuant to the provisions of
clause 2(l)(2)(B) of rule XI of the House of Representatives,
the results of each rollcall vote and the motion to report,
together with the names of those voting for and those against
are printed below:
Rollcall No. 1
Date: November 9, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Lazio.
Description of Motion: Caps reinsurance liability at $25
billion.
Results: Defeated: Ayes 18, Nays 27.
YEAS NAYS
Mr. Leach Mr. McCollum
Mrs. Roukema Mr. Campbell
Mr. Bereuter Dr. Paul
Mr. Baker Dr. Weldon
Mr. Lazio Mr. Riley
Mr. Bachus Mr. Hill
Mr. Royce Mr. LaFalce
Mr. Lucas Mr. Vento
Mr. Barr Mr. Frank
Mrs. Kelly Mr. Sanders
Mr. Cook Mrs. Maloney
Mr. LaTourette Mr. Gutierrez
Mr. Jones Mr. Watt
Mr. Ose Mr. Ackerman
Mr. Sweeney Mr. Bentsen
Mrs. Biggert Mr. Maloney
Mr. Green Ms. Hooley
Mr. Toomey Mr. Weygand
Mr. Sherman
Mr. Sandlin
Mr. Meeks
Mr. Goode
Ms. Schakowsky
Mr. Moore
Mr. Gonzalez
Mr. Capuano
Mr. Forbes
Rollcall No. 2
Date: November 9, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Hill.
Description of Motion: Removes fire ensuing from an
earthquake from the list of covered perils.
Results: Defeated: Ayes 13, Nays 23.
YEAS NAYS
Mr. Bereuter Mr. Leach
Mr. Bachus Mr. McCollum
Mr. Royce Mrs. Roukema
Mr. Barr Mr. Baker
Dr. Paul Mr. Lazio
Mr. Hill Mr. Campbell
Mr. Ose Mr. Lucas
Mr. Green Mrs. Kelly
Mr. Toomey Dr. Weldon
Mr. LaFalce Mr. Cook
Ms. Schakowsky Mr. Riley
Mr. Moore Mr. Jones
Mr. Gonzalez Mrs. Biggert
Mr. Gutierrez
Mr. Watt
Mr. Maloney
Ms. Hooley
Mr. Weygand
Mr. Sherman
Mr. Sandlin
Mr. Goode
Mr. Capuano
Mr. Forbes
Rollcall No. 3
Date: November 9, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Vento.
Description of Motion: Requires the purchasers of a
contract to contribute an amount that is not less than 10% of
the contract price to state agencies to implement disaster
prevention measures and to ensure the enforcement of any codes
or standards that offer disaster resistance at least as strong
as that issued by the Federal Emergency Management Agency
(FEMA).
Results: Defeated: Ayes 15, Nays 20.
YEAS NAYS
Dr. Paul Mr. Leach
Mr. Hill Mr. McCollum
Mr. Toomey Mrs. Roukema
Mr. LaFalce Mr. Baker
Mr. Vento Mr. Lazio
Mr. Sanders Mr. Campbell
Mrs. Maloney Mr. Royce
Mr. Watt Mr. Lucas
Ms. Hooley Mr. Barr
Mr. Weygand Mrs. Kelly
Mr. Sherman Dr. Weldon
Mr. Inslee Mr. Ryun
Ms. Schakowsky Mr. Cook
Mr. Moore Mr. Riley
Mr. Capuano Mr. Ryan
Mr. Ose
Mr. Sweeney
Mr. Terry
Mr. Green
Mr. Bentsen
Rollcall No. 4
Date: November 9, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Capuano.
Description of Motion: Requires insurance companies that
participate in the program to meet the insurance needs of the
communities they serve.
Results: Defeated: Ayes 22, Nays 22.
YEAS NAYS
Mr. Campbell Mr. Leach
Mr. LaFalce Mr. McCollum
Mr. Vento Mrs. Roukema
Mr. Frank Mr. Baker
Mr. Kanjorski Mr. Lazio
Mr. Sanders Mr. Castle
Mrs. Maloney Mr. Royce
Mr. Gutierrez Mr. Ney
Ms. Velazquez Mrs. Kelly
Mr. Watt Dr. Weldon
Mr. Ackerman Mr. Ryun
Mr. Bentsen Mr. Cook
Ms. Hooley Mr. Riley
Ms. Carson Mr. Ryan
Mr. Sandlin Mr. Ose
Mr. Meeks Mr. Sweeney
Mr. Inslee Mrs. Biggert
Ms. Schakowsky Mr. Terry
Mr. Moore Mr. Toomey
Mrs. Jones Mr. Maloney
Mr. Capuano Mr. Sherman
Mr. Forbes Mr. Goode
Rollcall No. 5
Date: November 9, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Royce.
Description of Motion: Deletes entire section 6 of the
bill. Section 6 provides for the direct purchase of federal
reinsurance contracts by eligible state funds.
Results: Defeated: Ayes: 19, Nays 22.
YEAS NAYS
Mr. Bachus Mr. Leach
Mr. Castle Mr. McCollum
Mr. Royce Mr. Bereuter
Mr. Metcalf Mr. Baker
Mr. Barr Mr. Lazio
Dr. Paul Mr. King
Mr. Ryun Mr. Campbell
Mr. Hill Mrs. Kelly
Mr. Ryan Mr. Cook
Mr. Ose Mr. Riley
Mr. Toomey Mrs. Biggert
Mr. LaFalce Mr. Terry
Mr. Vento Mr. Bentsen
Mr. Kanjorski Mr. Maloney
Mrs. Maloney Ms. Hooley
Mr. Watt Mr. Weygand
Mr. Meeks Mr. Sherman
Ms. Schakowsky Mr. Sandlin
Mr. Capuano Mr. Goode
Mr. Inslee
Mr. Moore
Mr. Forbes
Rollcall No. 6
Date: November 10, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Dr. Paul.
Description of Measure: Adds a ``market pricing of
premiums'' requirement to the eligibility section for
participation in the new federal program.
Results: Defeated: Ayes 13, Nays 22.
YEAS NAYS
Mr. Bachus Mr. Leach
Mr. Castle Mr. McCollum
Mr. Royce Mr. Bereuter
Mr. Barr Mr. Baker
Dr. Paul Mr. Lazio
Mr. Ryun Mr. King
Mr. Ryan Mr. Campbell
Mr. Toomey Mr. Lucas
Mr. LaFalce Mr. Ney
Mr. Frank Mrs. Kelly
Mr. Kanjorski Dr. Weldon
Mr. Sanders Mr. Riley
Mr. Moore Mrs. Biggert
Mr. Terry
Mr. Green
Ms. Waters
Mr. Watt
Ms. Hooley
Mr. Sherman
Ms. Schakowsky
Mr. Capuano
Mr. Forbes
Rollcall No. 7
Date: November 10, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Hill.
Description of Measure: Requires that 80 percent of
coverage from the reinsurance authorized in this legislation be
applied towards underwriting new businesses.
Results: Defeated: Ayes 8, Nays 19.
YEAS NAYS
Mr. Royce Mr. Leach
Mr. Barr Mr. McCollum
Mr. Hill Mrs. Roukema
Mr. Toomey Mr. Bereuter
Mr. LaFalce Mr. Baker
Ms. Schakowsky Mr. Lazio
Mr. Moore Mr. Campbell
Mr. Gonzalez Mr. Lucas
Mr. Ryun
Mr. Sweeney
Mrs. Biggert
Mr. Green
Mr. Bentsen
Mr. Maloney
Ms. Hooley
Mr. Weygand
Mr. Goode
Mr. Capuano
Mr. Forbes
Rollcall No. 8
Date: November 10, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Capuano.
Description of Measure: Requires, as a condition for an
insurance company entering into a contract for federal natural
disaster reinsurance, to compile and submit information on
insurance applicants' and insurance policyholders' race,
gender, and other information to make it possible to compare
the availability and affordability of insurance coverage in a
Metropolitan Statistical Area.
Results: Defeated: Ayes 13, Nays 20.
YEAS NAYS
Mr. LaFalce Mr. Leach
Ms. Waters Mr. McCollum
Mr. Sanders Mrs. Roukema
Ms. Velazquez Mr. Bereuter
Mr. Watt Mr. Baker
Mr. Bentsen Mr. Lazio
Ms. Hooley Mr. Campbell
Mr. Weygand Mr. Royce
Mr. Inslee Mr. Lucas
Ms. Schakowsky Mr. Barr
Mr. Moore Mrs. Kelly
Mr. Gonzalez Dr. Weldon
Mr. Capuano Mr. Cook
Mr. Sweeney
Mrs. Biggert
Mr. Green
Mr. Toomey
Mr. Maloney
Mr. Goode
Mr. Forbes
Rollcall No. 9
Date: November 10, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Mr. Capuano.
Description of Measure: Prohibits Treasury from making
reinsurance contracts available for purchase to state-operated
programs or through regional auction if participating insurers
or reinsurers have been found in violation of the Fair Housing
Act either through adjudication or through a consent decree.
Results: Passed: Ayes 25, Nays 22.
YEAS NAYS
Mr. Campbell Mr. Leach
Mr. LaFalce Mr. McCollum
Mr. Vento Mrs. Roukema
Mr. Kanjorski Mr. Bereuter
Ms. Waters Mr. Baker
Mr. Sanders Mr. Lazio
Mrs. Maloney Mr. Castle
Mr. Gutierrez Mr. King
Ms. Velazquez Mr. Royce
Mr. Watt Mr. Lucas
Mr. Ackerman Mr. Barr
Mr. Bentsen Mrs. Kelly
Mr. Maloney Dr. Weldon
Ms. Hooley Mr. Ryun
Ms. Carson Mr. Cook
Mr. Weygand Mr. Riley
Mr. Sandlin Mr. Ryan
Mr. Meeks Mr. Sweeney
Mr. Mascara Mrs. Biggert
Ms. Schakowsky Mr. Green
Mr. Moore Mr. Toomey
Mr. Gonzalez Mr. Goode
Mrs. Jones
Mr. Capuano
Mr. Forbes
Rollcall No. 10
Date: November 10, 1999.
Measure: Homeowners' Insurance Availability Act of 1999.
Motion by: Messrs. Sanders, Royce, and Hill.
Description: (Substitutes Amendment) Strikes entire
legislation, and in its place, requires the Department of the
Treasury to conduct a study on the availability and
affordability of homeowners' insurance for natural disasters
including an analysis of legislative proposals and
recommendations.
Results: Defeated: Ayes 23, Nays 31.
YEAS NAYS
Mr. Bachus Mr. Leach
Mr. Castle Mr. McCollum
Mr. Royce Mrs. Roukema
Mr. Barr Mr. Bereuter
Dr. Paul Mr. Baker
Mr. Ryun Mr. Lazio
Mr. Hill Mr. King
Mr. Ryan Mr. Campbell
Mr. Toomey Mr. Lucas
Mr. LaFalce Mr. Ney
Mr. Vento Mrs. Kelly
Mr. Frank Dr. Weldon
Mr. Kanjorski Mr. Cook
Ms. Waters Mr. Riley
Mr. Sanders Mr. Jones
Mrs. Maloney Mr. Sweeney
Mr. Gutierrez Mrs. Biggert
Mr. Watt Mr. Terry
Mr. Inslee Mr. Green
Ms. Schakowsky Mr. Ackerman
Mr. Gonzalez Mr. Bentsen
Mrs. Jones Mr. Maloney
Mr. Capuano Ms. Hooley
Mr. Weygand
Mr. Sherman
Mr. Sandlin
Mr. Meeks
Mr. Goode
Mr. Mascara
Mr. Moore
Mr. Forbes
After the Committee Print, as amended, was adopted by voice
vote, H.R. 21 was called up for Committee consideration. A
motion to strike everything after the enacting clause in H.R.
21 and insert in lieu thereof the Committee Print was approved
by voice vote. A motion to adopt H.R. 21 and favorably report
the bill, as amended, to the House was approved by a recorded
vote of 34 Ayes and 18 Nays on November 10, 1999.
YEAS NAYS
Mr. Leach Mr. Bachus
Mr. McCollum Mr. Castle
Mrs. Roukema Mr. Royce
Mr. Bereuter Mr. Barr
Mr. Baker Dr. Paul
Mr. Lazio Mr. Ryun
Mr. King Mr. Hill
Mr. Campbell Mr. Toomey
Mr. Ney Mr. LaFalce
Mrs. Kelly Mr. Frank
Dr. Weldon Mr. Kanjorski
Mr. Cook Ms. Waters
Mr. Riley Mr. Sanders
Mr. Jones Ms. Carson
Mr. Ryan Mr. Inslee
Mr. Sweeney Ms. Schakowsky
Mrs. Biggert Mr. Gonzalez
Mr. Terry Mrs. Jones
Mr. Green
Mr. Vento
Mrs. Maloney
Mr. Watt
Mr. Ackerman
Mr. Bentsen
Mr. Maloney
Ms. Hooley
Mr. Weygand
Mr. Sherman
Mr. Meeks
Mr. Goode
Mr. Mascara
Mr. Moore
Mr. Capuano
Mr. Forbes
Committee Oversight Findings
In compliance with clause 2(l)(3)(A) of rule XI of the
Rules of the House of Representatives, the Committee reports
that the findings and recommendations of the Committee, based
on oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
Committee on Government Reform and Oversight Findings
No findings and recommendations of the Committee on
Government Reform and Oversight were received as referred to in
clause 2(l)(3)(D) of rule XI (and clause 4(c)(2) of rule X) of
the Rules of the House of Representatives.
Constitutional Authority
In compliance with clause 2(l)(4) of rule XI of the Rules
of the House of Representatives, the constitutional authority
for Congress to enact this legislation is derived from the
general welfare clause (Article I, Sec. 8).
New Budget Authority and Tax Expenditures
Clause 2(l)(3)(B) of rule XI of the Rules of the House of
Representatives is inapplicable because this legislation does
not provide new budgetary authority for increased tax
expenditures.
Congressional Budget Office Costs Estimate and Unfunded Mandate
Analysis
The cost estimate pursuant to clause 3(c)(3) of rule XIII
of the Rules of the House of Representatives and section 402 of
the Congressional Budget Act of 1974 is attached herewith:
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 9, 2000.
Hon. James A. Leach,
Chairman, Committee on Banking and Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 21, the
Homeowners' Insurance Availability Act of 1999.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Megan
Carroll.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
H.R. 21--Homeowners' Insurance Availability Act of 1999
Summary
The purpose of H.R. 21 is to increase the availability and
affordability of homeowners' insurance for natural disasters by
creating a federal disaster reinsurance program. Reinsurance is
insurance for insurers; it allows insurers to transfer risk to
other entities. H.R. 21 would require the Secretary of the
Treasury to offer reinsurance to eligible state-sponsored
insurance organizations and private parties (such as insurance
companies). The reinsurance program would expire in 10 years
unless the Secretary determined that continuation of the
program was necessary, in which case the Secretary could extend
the program for five additional years.
While the budgetary impact of this 10- to 15-year
legislation is uncertain, CBO estimates that enacting the bill
would probably increase direct spending over the 2000-2010
period on an expected value basis. Over the 10- to 15-year life
of this program, we expect that federal payments for disaster
insurance claims would exceed the premiums collected from state
programs and private insurance companies for providing disaster
reinsurance. Because the bill would affect direct spending,
pay-as-you-go procedures would apply.
Two factors make the budgetary impact of H.R. 21 highly
uncertain. First, under this bill the Secretary of the Treasury
would have considerable discretion to implement the program.
Because of that discretion, it is not possible to determine the
total amount of reinsurance coverage that might be sold, and
thus the potential liability for disaster coverage that the
Treasury might face. Although the bill would direct the
Secretary to attempt to limit the government's total liability
to $25 billion annually, there would be no enforcement of this
limitation. Second, because the frequency and severity of
future catastrophic events are exceedingly difficult to
estimate, it is unlikely that the federal government would be
able to establish prices for disaster reinsurance that would
fully cover the potential future costs of these financial
obligations.
H.R. 21 also would affect discretionary spending. The
reinsurance program might reduce discretionary spending by
eliminating the need for some potential future federal payments
to homeowners for disaster assistance, but probably not by
enough to offset the large payments for which the federal
government could be liable. H.R. 21 would authorize the
appropriation of $2 million in fiscal year 2000 and additional
sums necessary to cover the costs of establishing and operating
an advisory commission and the Secretary's initial
administrative expenses. Assuming the appropriation of the
necessary amounts, CBO estimates that implementing these and
other provisions of the bill would increase discretionary
spending by $1 million in each of fiscal years 2000 and 2001
and by less than $500,000 annually in the remaining years of
the program.
H.R. 21 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
Any costs incurred by state governments would result from the
voluntary purchase of the federal disaster reinsurance that
would be established by this bill.
Description of the bill's major provisions
Under H.R. 21, the Secretary of the Treasury would offer to
sell reinsurance both to eligible state insurance organizations
and private parties (such as insurance companies). Private
parties could bid for reinsurance through annual auctions
conducted in at least six regions of the country to be defined
by the Secretary. Reinsurance would cover damage to residential
property from earthquakes, fire, tsunami, cyclones (including
hurricanes and typhoons), tornadoes, and volcanic eruptions,
but only if the total damage within the state or region exceeds
certain thresholds. in general, the reinsurance would cover
relatively rare and very damaging natural catastrophes.
The reinsurance would cover only a single peril and last
for a term determined by the Secretary. All payments would be
made from the reinsurance trust fund established under the
bill. If accumulated sales receipts and investment income are
insufficient to pay claims and expenses, H.R. 21 would
authorize the Secretary to borrow such sums as would be
necessary to cover any shortfall. The bill would require the
Secretary to repay any borrowing with receipts from future
sales of reinsurance contracts.
H.R. 21 contains several provisions intended to control
federal spending under the reinsurance program. These
provisions would:
Establish a goal of limiting the federal government's
maximum liability to pay reinsurance claims;
Define thresholds for minimum insured losses that
must be sustained in each state or region before
contract holders could receive payments; and
Require prices for reinsurance to include risk loads.
Maximum Federal liability to pay reinsurance claims
Two provisions in the bill attempt to limit the
government's liability to pay reinsurance claims. First,
section 9 would set a goal of limiting the aggregate liability
under all reinsurance sold in any single year to $25 billion.
The bill would not, however, provide a means to enforce the
goal. Second, section 9 would establish an upper limit on the
amount of reinsurance that could be sold, and therefore, would
limit potential payments. For each state or region, the amount
of eligible losses that could be reinsured would be limited to
half of the difference between the Secretary's estimates of
losses projected from a one-in-500-year event and those
projected from a one-in-100-year event. Regardless of the
uncertainty the Secretary would face in making these estimates,
whatever levels he or she sets under this provision would
define an upper limit on reinsurance payments in each state or
region.
Minimum insured loss thresholds
Under H.R. 21, payments for reinsurance coverage would
begin once certain thresholds of insured losses, determined by
the Secretary of the Treasury, have been reached. In the case
of reinsurance sold directly to eligible state-sponsored
disaster insurance organizations, the threshold would equal the
greatest of (1) an amount between $2 billion and $5 billion (as
specified by the Secretary), (2) the claims-paying capacity of
the organization, or (3) an amount within the range defined by
the Secretary's estimates of insured losses from a one-in-100-
year event and a one-in-250-year event. The Secretary would
specify one of these thresholds in each state or region where
reinsurance is sold. In general, the highest of these three
thresholds would apply, but the Secretary could set a lower
threshold under certain circumstances.
For contracts sold at regional auctions, federal payments
on reinsurance contracts would begin once aggregate losses to
the insurance industry in the region where the auction took
place exceed the greater of an amount between $2 billion and $5
billion (as specified by the Secretary) or an amount between
the Secretary's estimate of losses projected from a one-in-100-
year event and a one-in-250-year event. Under certain
conditions, the Secretary could adjust the damage threshold
established for each region.
Adding risk loads to the price of reinsurance
H.R. 21 would establish the National Commission on
Catastrophe Risks and Insurance Losses to perform actuarial
analyses and recommend prices for reinsurance to the Secretary.
Prices would include a risk-based price, a risk load at least
equal to the risk-based price, and an amount to cover
administrative costs. The risk-based price would reflect the
estimate of the average annual payout of the reinsurance
contract, taking into account the estimated probabilities of
catastrophic events of the relevant sizes. In private disaster
reinsurance markets, a risk load is an amount added to the
risk-based price to compensate the reinsurer for the
variability of payments in any given year around the long-run
average, and for the uncertainty surrounding available
estimates of the average annual payout itself. H.R. 21 would
require a minimum risk load for each contract of at least 100
percent of its risk-based price.
Cost to the Federal Government
CBO estimates that enacting H.R. 21 probably would increase
direct spending over the 10- to 15-year life of the program. We
cannot quantify the amount nor the timing of this expected
additional spending.
Assuming appropriation of the necessary amounts,
implementing the bill would increase discretionary spending by
$1 million in each of fiscal years 2000 and 2001 and by less
than $500,000 annually over the remaining years of the program.
Other discretionary federal payments for disaster assistance
might be reduced somewhat as a result of enacting H.R. 21, but
probably not by enough to offset the large payments for which
the federal government could be liable.
Direct spending (including offsetting receipts)
Over the life of the program, CBO estimates that enacting
the bill would likely result in a net increase in direct
spending. Because of the lack of historical data on which to
base actuarial estimates of losses from catastrophic events and
the potential for political and consumer pressures to keep
reinsurance coverage affordable, CBO expects that reinsurance
probably would be priced too low. CBO also expects that
authorizing the Secretary to require lower loss thresholds in
the first several years of the program and conducting the
program on a regional basis would increase the probability that
the contracts would yield one or more payments during the
program's lifetime.
Likelihood That Reinsurance Would Be Priced Too Low.--If
the Secretary had all relevant information needed to price
reinsurance to break even, the expected cost of the program
would be zero, or it would generate net receipts, even though
the actual cost could be higher or lower depending on the
random occurrence of covered events. The actuarial estimates of
catastrophe risk that would be used under the bill as the basis
for setting minimum prices, however, do not provide sufficient
information to accurately price contracts.
Actuarial estimates of catastrophic risk are backward-
looking, based on available historical data. Because
catastrophic events are infrequent, historical data used by
models that estimate losses from these events, are very
limited. Thus, CBO has little confidence in he accuracy of
actuarial estimates of catastrophe losses that would be used to
set prices for reinsurance.
Private reinsurers respond to the uncertainty surrounding
actuarial estimates of losses by including substantial ``risk
loads'' in their prices, in part to account for the likelihood
that available historical data do not fully capture current
catastrophe risks. Risk loads observed in private transactions
for disaster reinsurance against infrequent events, similar to
those that would be covered under H.R. 21, are typically four
to six times but sometimes exceed 10 times actuarially expected
losses. Although beliefs about the inaccuracy of actuarial
estimates are not the only factors driving such high risk
loads, evidence suggests that the additional compensation that
private reinsurers require for taking on catastrophic risk is
much larger than 100-percent risk load required as a minimum in
the bill.
Moreover, consumer and political pressures probably would
create a strong incentive to keep reinsurance prices low to
address the perceived price and availability problems in the
market for homeowners' insurance. Similarly, although bidding
could drive the prices of contracts sold at auctions to their
true break-even value even if their minimum prices were set too
low, CBO cannot be confident that the contracts would attract
sufficient demand to drive up their prices.
Finally, even if the government were just as likely to set
some contract prices too high as too low, the implications for
the budget would not be symmetric. This is because low contract
prices would encourage sales while high contract prices would
discourage sales. Because the government would tend to sell
more reinsurance at a loss than at a gain, the result would be
a net loss.
Likelihood of Reinsurance Payments.--Although the Secretary
would have the authority to set lower thresholds for minimum
insured losses during the first few years of the program,
payments under H.R. 21 generally would cover only insured
losses that exceed those expected from a one-in-100-year event.
It is possible, however, that the claims-paying capacity of
state disaster insurance organizations may fall well short of
this level. Since the Secretary would be authorized to lower
the loss thresholds required for payouts from thestate
contracts in the first five to seven years of the program if claims-
paying capacities are too low, reinsurance sold to state organizations
during that time would be likely to cover events that occur more
frequently than once every 100 years.
In addition, the annual probability of a one-in-100-year
event may be more than 1 percent, either because the historical
data underlying the estimates of the frequency of events are
inadequate or because the timing of such events is affected by
cyclical factors. Furthermore, by dividing the nation into at
least six regions, the bill could increase the probability that
the federal government would make reinsurance payments. Events
with an annual probability of 1 percent or more annual
probability would have at least 60 chances to occur over the
life of the program--one per year in each of the six or more
regions created. For these reasons, CBO believes that there is
a significant probability of one or more payments during the
program's lifetime.
Spending subject to appropriation
The bill would authorize additional discretionary spending
in 2000 and 2001. The reinsurance program also could lead to a
reduction in the demand for some discretionary spending in
future years, but CBO cannot estimate the timing or magnitude
of any such impact. Any reduction in discretionary spending
would depend on future appropriation actions.
Estimated Discretionary Costs.--H.R. 21 would authorize the
appropriation of $2 million in 2000 and such sums as may be
necessary in later years to establish and operate the federal
advisory commission and to cover the Secretary's administrative
expenses. Assuming appropriation of the authorized amounts, CBO
estimates that these activities would cost $1 million in each
of fiscal years 2000 and 2001, but would not significantly
affect federal spending thereafter.
H.R. 21 also would direct the General Accounting Office
(GAO) to perform an annual audit of the auctions for disaster
reinsurance contracts established under the bill and to prepare
a study on the availability and cost of insurance against
flooding resulting from hurricanes. Based on information from
GAO, CBO estimates that the cost of these activities would be
less than $500,000 in any given year.
Potential Discretionary Savings.--Implementing the
reinsurance program established under the bill could reduce the
need for future appropriations to the Federal Emergency
Management Agency (FEMA) to provide disaster relief to
homeowners for two reasons. First, the program would help
private insurers manage more catastrophe risk at less cost. If
insurers translate this lower risk into either lower premiums
or more generous policies for homeowners, the amount of private
disaster coverage could expand and fewer homeowners may need
assistance from FEMA in the event of a catastrophe. CBO cannot
estimate the likelihood or magnitude of any such savings
because we cannot predict the extent that homeowners coverage
might expand or how any such expansion might reduce spending by
FEMA.
Second, H.R. 21 would increase funding for programs to
mitigate natural disasters in the communities where reinsurance
is sold. This emphasis on mitigation might reduce homeowners'
need for disaster assistance in the future, but CBO cannot
estimate the timing or size of any such savings. Though recent
studies have provided evidence that certain mitigation efforts
can be effective, the magnitude of any such savings to the
federal government remains speculative.
The homeowners' disaster reinsurance program established
under H.R. 21 would not affect federal spending for other
disaster assistance programs, such as catastrophic crop
insurance, the Emergency Conservation Program, the Small
Business Administration's disaster loan program, and FEMA's
public assistance program to replace and repair damages to
bridges, roads, and other infrastructure. These programs
benefit individuals or organizations that would not be affected
by the homeowner reinsurance offered under H.R. 21.
Pay-as-you-go considerations
The Balanced Budget and Emergency Deficit Control Act
specifies pay-as-you-go procedures for legislation affecting
direct spending or receipts. CBO expects that enacting H.R. 21
would increase direct spending, but we cannot estimate the
magnitude or timing of such spending.
Estimated impact on state, local, and tribal governments
H.R. 21 contains no intergovernmental mandates as defined
in UMRA and would benefit states that choose to participate in
the reinsurance program established by this bill. Eligible
state-sponsored insurance organizations could purchase federal
reinsurance at an established price or at regional auctions.
Other state insurance organizations could purchase federal
reinsurance only at regional auctions. Purchasing the federal
reinsurance would transfer some of the risk associated with
large-scale natural disasters to the federal government. Any
costs incurred by state governments would result from voluntary
participation in this program.
Estimated impact on the private sector
This bill would impose no new private-sector mandates as
defined in UMRA.
Estimate prepared by: Federal Costs: Mega Carroll, Perry
Beider, Timothy VandenBerg, Kim Kowalewski, and David
Torregrosa. Impact on State, Local, and Tribal Governments:
Shelley Finlayson. Impact on the Private Sector: Jean Wooster.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis.
Advisory Committee Statement
No advisory committees within the meaning of Section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Congressional Accountability Act
The reporting requirement under Section 102(b)(3) of the
Congressional Accountability Act (P.L. 104-1) is inapplicable
because this legislation does not relate to terms and
conditions of employment or access to public services or
accommodations.
Section-by-Section
Section 1: Title cited as ``Homeowners' Insurance
Availability Act of 1999''.
Section 2: Congressional Findings that rising costs from
natural disasters have placed a strain on the homeowners'
insurance market impacting the ability of consumers to
adequately insure their homes, and that it is necessary to
provide, on a temporary basis, a Federal reinsurance programs
that will promote stability in the private homeowners'
insurance market in the short term and encourage the growth of
reinsurance capacity by the private and capital markets as soon
as possible.
Section 3: Program Authority to the Secretary of Treasury
to provide a Federal reinsurance program through reinsurance
contracts to eligible purchasers under section 6 (state
programs) and section 7 (regional contracts) so long as the
private sector is not displaced.
Section 4: Qualified Lines of Coverage provide specifically
for residential property losses to homes, condominiums,
cooperatives and contents of apartment buildings.
Section 5: Covered Perils include (i) earthquakes, (ii)
perils ensuing from earthquakes (fire and tsunami), (iii)
tropical cyclones (including hurricanes and typhoons) where the
maximum sustained winds are equal to or greater than 74 miles
per hour, (iv) tornadoes, and (v) volcanic eruptions.
Section 6: Contracts for Reinsurance Coverage for Eligible
State Programs are made available to state-operated insurance
and reinsurance programs if the state program covers
residential losses; is structured to be exempt from Federal
taxation; covers a single peril; does not provide for profit to
any insurer; and, includes a mitigation investment of not less
than 10% of the program's net investment income (5% if the
Secretary determines, pursuant to a request from the state
insurance commissioner, that a 10% requirement would jeopardize
the actuarial soundness of the state program). For state
programs beginning after January 1, 1999 (all other state
programs two years after date of enactment) state programs must
not cross-subsidize between separate property and casualty
lines unless the elimination of such activity for an existing
program would negatively impact program eligibility under
section 6(a)(2); must provide that for coverage under the
program, premium rates must be, at a minimum, sufficient to
cover the full actuarial costs of such coverage; and, must
provide authorization to the State insurance commissioner to
terminate the state program when it is no longer necessary to
ensure availability of homeowners' insurance.
The state programs shall certify to the Secretary and
follow regulations promulgated by the Secretary, in
consultation with the National Commission. The regulations
shall include requirements that state programs have public
members on its board of directors or advisory board; ensure
that state coverage does not supplant the private insurance
market; provide adequate deductibles; provide a non-
discriminatory clause; provide that new construction meet
applicable building, fire, and safety codes; ensure consistency
with the Federal Emergency Management Agency guidelines;
programs take into account mitigation efforts; and other
requirements considered necessary by the Secretary.
Terms of the contracts may not exceed one year or other
term determined by the Secretary, with claim payments only to
eligible state programs and a payout at the occurrence and
level where disaster costs exceed the retained losses noted in
Section 8.
The contract shall cover eligible losses from multiple
events during the term of the contract. Qualified losses
include only property covered under the contract that is
reported to the state program within a 3 year period from the
natural disaster event. Pricing is established by the
Secretary, in consultation with the National Independent
Commission on Catastrophe Risks and Insurance Loss Costs,
established at a level designed to fairly compensate taxpayers
for the risks borne, taking into consideration the
developmental stage of models and private market capacity, and
designed to provide for program self-sufficiency. The price of
the contracts shall consist of a risk-based price not less than
the anticipated payout of the contract according to the
Commission's actuarial analysis and recommendations, a risk
load at least equal to the risk-based price and administrative
costs. The contract shall provide purchasers an opportunity to
purchase additional contracts for identical coverage for the
remaining term of the initial contract if the coverage under
the initial contract is exhausted to become effective 15 days
after the date of purchase.
Section 6(c) requires the Secretary to give private market
reinsurance entities a ``right of first refusal'' in Federal
reinsurance offered for direct sale to state-operated programs.
If qualifying private market entities are willing to offer
coverage at rates and terms that would be substantially similar
to coverage offered by the Federal government as approved by
the Secretary, Treasury may not offer such coverage during the
relevant contract cycle.
Section 7: Auction of Contracts for Reinsurance Coverage
shall be carried out by Treasury to provide for auctioning of
contracts to private insurers, reinsurers and state insurance
and reinsurance programs. Auctions shall provide for coverage
on a regional basis, in no less than six, with separate regions
including all or part of Florida, and all or part of
California. The Secretary is directed to attempt to create
regions of similar risk, and not combine state at less risk of
losses to covered perils with states at higher risk.
In auctioning the contracts, Treasury shall set a reserve
price as the lowest base price of the contract based on the
Commission's recommendations to include a risk-based price not
less than the anticipated payout of the contract according to
the Commission's actuarial analysis and recommendations, a risk
load at least equal to the risk-based price and administrative
costs also taking into account administrative costs and
mitigation efforts.
Each contract purchaser, other than state-operated
programs, are required to provide an additional amount of up to
5% of the contract purchase price for mitigation activities to
communities located located within the covered state.
Terms of the contract may not exceed one year or other term
determined by the Secretary, are fully transferable and
divisible, cover eligible losses from multiple events during
the term of the contract, provide for payment above the minimum
level of retained losses by region as specified in section 8,
provide purchasers an opportunity to purchase additional
contracts for identical coverage for the remaining term of the
initial contract if the coverage under the initial contract is
exhausted to become effective 15 days after the date of
purchase, and require the purchaser to notify the Secretary of
any resale, transfer, assignment or division and the subsequent
compensation paid.
GAO is required to conduct an audit of prices for contracts
made available under the auction program.
Section 8: Anti-Redlining Requirement prohibits the
Secretary from making Federal reinsurance contracts available
for purchase unless the purchaser certifies that the insurer or
reinsurer has not been adjudicated in a Federal court premised
upon a violation of the Fair Housing Act.
Section 9: Minimum Level of Retained Losses and Maximum
Federal Liability require minimum levels of retained losses for
state programs at a level that is not less than the greater of
an amount between $2 billion and $5 billion in residential
losses, the current claims paying capacity or an amount that is
within a range between an amount that equal to a loss
associated with an event occurring once in 100 years and once
in 250 years. In cases of existing state programs that have a
claims paying capacity greater than $2 billion but less than an
amount equal to a loss associated with a one in 100 year event,
the state shall provide a written agreement to transition an
increase of retained losses during a five year period, with an
extension for 2 additional one year periods.
For state programs created after January 1, 1999, the
Secretary, in consultation with the National Commission on
Catastrophe Risks and Insurance Loss Costs, may establish
minimum retained loss levels below $2 billion in an amount
equal to losses associated with a one in 100 year event, except
adjustments shall be made for a five year period to increase to
the minimum level of $2 billion.
In cases where a state program experiences an accumulation
of events that exceed the claims paying capacity in that state,
the Secretary may reduce retained loss triggers, but not less
than $2 billion, so long as the retained loss levels are
increased within 5 years.
Auction contracts will not be available through any region
unless the auction conducted sustains a cumulative amount of
losses greater than an amount between $2 billion and $5 billion
or an amount that is within a range between an amount that
equal to a loss associated with an event occurring once in 100
years and once in 250 years
Treasury may annually raise the minimum level of retained
losses for state programs or regions to reflect the growth in a
state program's claims paying capacity or the growth of
capacity in the private market.
The claims paying capacity is defined by taking into
consideration the claims paying capacity as determined by the
state program; retained losses to private insurers assigned by
the State insurance commissioner; the cash surplus of the
program; and the lines of credit, reinsurance, and other
financing mechanisms of the program established by law.
In all cases, the Secretary may sell no more contracts than
would likely accumulate in excess of an annual liability of $25
billion. States or regions may annually purchase no more than
an amount that is greater than the difference between losses
likely to occur from a one in 500 year event and losses from a
one in 100 year event.
Treasury may not make available for purchase reinsurance
contracts that would pay out more than 50 percent of eligible
losses under contract for state programs or by region.
Section 10: Disaster Reinsurance Fund is established within
the Treasury Department to accept proceeds from the sale of
contracts, borrowed funds, investments or other amounts.
Section 11: National Commission of Catastrophe Risks and
Insurance Loss Costs is established with the sole purpose of
advising the Secretary regarding estimating the loss costs
associated with reinsurance contracts under the Act. The Act
provides an appropriation of $1 million for Commission startup
costs and $1 million for program operations, with cost offsets
derived from contract proceeds. Five (5) members are to be
appointed to the Commission, by the Secretary. Commission
members will have no personal, professional, or financial
interest at stake in the deliberations of the Commission. At
least one member shall represent a nationally recognized
consumer organization.
Section 12: Definitions to provide definitions for certain
terms in the Act.
Section 13: Regulation.
Section 14: Termination is required of this Act after 10
years from enactment. In the event that the Secretary, in
consultation with the Commission, determines that there is
insufficient growth of capacity in the private homeowners'
insurance market, this Act may be extended for an additional
five year term.
Section 15: Annual Study of Cost and Availability of
Disaster Insurance and Program Need is required of the
Secretary on an annual basis reporting the cost and
availability of homeowners' insurance for losses resulting from
catastrophic natural disasters. The first report shall be due
two years after the date of enactment.
Section 16: GAO Study of Hurricane Related Flooding is
required on the availability and adequacy of flood insurance
coverage for residential losses and other properties caused by
hurricane-related flooding to be submitted to Congress not
later than 5 months from the date of enactment.
Changes In Existing Law Made By The Bill
This bill does not contain changes to existing law and
therefore no comparative print of how this bill affects current
law is included, pursuant to clause 3 of rule XIII of the Rules
of the House of Representatives.
DISSENTING VIEWS
Mr. Chairman, I regrettably must express my dissenting
comments on H.R. 21, the ``Homeowners' Insurance Availability
Act of 1999.'' This is a complicated legislative proposal on
which Members of good will on both sides of the aisle disagree.
I believe the division of opinion among members is a product of
legitimate differences on whether there is a catastrophic
insurance availability crisis and whether there should be a
federal role in providing reinsurance.
I agree with the Chairman that an implicit liability
already exists for the federal government should a catastrophic
disaster strike a vital area of our nation. To the extent this
bill would make that liability explicit and introduce private
dollars in the form of premiums to assist in a federal relief
effort, I applaud the approach. However, the fundamental
question is whether H.R. 21 is truly a federal backstop or
whether it would interfere with and subsidize existing private
insurance markets. I have come to the conclusion that there is
more independent evidence that the latter is true.
A 1999 Wharton School Catastrophe Risk Management Study
analyzing the capacity of the U.S. property insurance
industry's ability to pay for a catastrophe concluded that
surpluses among the primary insurers alone could pay at least
98.6% of a $20 billion loss. For a catastrophe of $100 billion,
the industry could pay for at least 92.8% of that loss. The
report concludes that the gaps in catastrophic risk financing
are presently not sufficient to justify federal government
intervention in private insurance markets in the form of
catastrophe reinsurance. Furthermore, according to A.M. Best,
the insurance industry surplus stands at $332.3 billion, an
increase from 77% since 1994 after the insurance industry
suffered losses from Hurricane Andrew and the Northridge
Earthquake. The policy holder surplus from the top three
homeowners insurers (State Farm, Allstate, and Farmers
Insurance) currently stands at $69.7 billion, more than
doubling their surpluses over the last 6 years. These same
three companies are still making a sizable profit. In 1997,
they netted $9.5 billion and in 1998, they netted $10 billion.
Putting aside the resources available among primary insurers,
the reinsurance industry believes they have the capacity to
handle a $20 billion loss in any region of the country. These
capacity figures demonstrate that a 1 in 100 year catastrophic
event is well within the range of the private sector to insure.
If a federal backstop is needed, we should be focusing on the 1
in 500 or 1 in 1,000 year event.
Aside from the issue of the existing private sector
capacity, I believe the approach in H.R. 21 is flawed because
it fails to erect adequate safeguards for the disaster premiums
it would collect. Throughout our nation's history, the Congress
and the Executive Branch have demonstrated a propensity for
funding short term spending priorities at the expense of long
term commitments it has already made.
Congress should focus more attention on alternative
proposals including, but not limited to, removing barriers in
current accounting and tax laws that prohibit insurers from
setting money aside for future catastrophic events. Such
legislation has been introduced and referred to the House Ways
and Means Committee. I encourage the House Ways and Means
Committee to complete its review of this proposal so at a
minimum both approaches can be debated on the house floor.
H.R. 21 could increase the federal government's liability
by as much as $25 billion annually. That is almost as much as
the federal government spends annually on programs operated by
the U.S. Department of Housing and Urban Development. Members
need to have a full understanding of their options before they
commit taxpayer funds to H.R. 21's venture. H.R. 21 has drawn
opposition from countless taxpayer groups, environmental
groups, consumer groups, the reinsurance industry, and many in
the property and casualty industry. The Congressional Budget
Office has expressed concerns about the underpricing of these
federal reinsurance contracts by as much as one-third what
private reinsurers would charge. Furthermore, Congress does not
have the benefit of the National Association of Insurance
Commissioners' opinion. In my home state of Delaware, the
Delaware Insurance Commissioner's office was unable to render
an opinion of the proposal. Clearly, there is not sufficient
consensus to justify this $25 billion federal expenditure.
Mr. Chairman, you have always shown tremendous regard for
fairness in the legislative process. As H.R. 21 moves forward,
I hope you will continue to provide an opportunity for Members
of your caucus and the Democratic Caucus to express their
concerns about this bill.
Michael N. Castle.
DISSENTING VIEWS OF HON. RON PAUL
The sponsors of the bill have brought to light problems
some people have acquiring disaster insurance. There are
several causes and different approaches to a solution. HR 2749,
Policyholder Disaster Protection Act of 1999, which establishes
tax-deferred catastrophe reserves, is probably the best
federal, governmental approach. HR 21 is not only unnecessary
but would contribute to rather than solve the alleged problem
of insufficient reinsurance capacity.
``There is currently an overabundance of reinsurance in the
U.S. * * * The capacity or reinsurance has risen and insurance
companies can now purchase traditional catastrophe excess
coverage above $500 million per event [Nov. 1998], as compared
to $200 million in 1992,'' testified Franklin W. Nutter,
Reinsurance Association of America, at the July 30, 1999
hearing. ``The cost of catastrophe reinsurance is very low and
has in fact dropped for five years in a row * * * Paragon's
[Risk Management Services] report concludes that global
catastrophe pricing remains under pressure as capacity exceeds
demands in all regions.''
``This `capacity gap' [scarcity of private reinsurance to
cover worst-case disasters] can best be described as an
affordability problem. In simplest terms, the cost of capital--
which governs the price of private reinsurance--is considerably
higher than the premiums that can be collected from homeowners
based on the actuarial probability of loss. As a result, there
is a limit to how much reinsurance that primary insurers can
realistically purchase,'' concurred Jack F. Weber, Home
Insurance Federation of America. ``In the case of mortgage
markets, this fear of catastrophic loss is kept in check
because of support from the U.S. government in the form of
credit guarantees [which ultimately] keeps the system operating
at maximum efficiency.''
Since there are several causes for the lack of adequate
availability of insurance in some areas, I tried to address one
cause for the lack of availability of insurance that may have
been overlooked when drafting the bill. Roger Joslin, State
Farm Fire and Casualty Company, testified at the July 30, 1999
hearing, ``One factor discouraging companies from writing in
these [high risk `break the bank'] areas is politically
motivated rate suppression.'' My amendment addressed the
``politically motivated rate suppression'' reason for the lack
of availability insurance that concerns many of our
constituents.
I offered an amendment adding a requirement to eligibility
concerning the market pricing of premiums such that no state
would be eligible if it requires prior approval of the amount
of premiums charged for insurance coverage. The amendment aimed
to lessen the incentives to ``politicize'' the process and
increase the incentives to offer disaster insurance to our
constituents.
More importantly, federal reinsurance fails to address
underlying regulatory and tax policies that have limited the
amount of coverage that can be offered and underwritten by
natural disaster insurers in the private market. This initial
government intervention in the price market is the cause of
much of the problem, and it is what must be addressed.
Florida, for example, restricts the premium rates that
insurers may charge for homeowners insurance. Though perhaps
intended to benefit consumers living in disaster-prone areas,
this type of governmental rate regulation often discourages
insurers from offering greater coverage to potential
policyholders. Federal reinsurance would only help states
disguise some of the consequences of such adverse regulatory
policies. Congress should, of course, recognize Constitutional
restraints and not interfere in state regulation of insurance.
It should also resist the impulse to relieve these same
states from the consequences of their own misguided regulation.
Federal tax policies have likewise added to the funding
problems for private insurers covering natural disaster risks.
Federal tax policy ignores the nature of disasters as long-term
risks. Currently, all insurer income in excess of annual
expenses is considered profit and is subject to federal income
tax. This undermines the ability of insurers to set aside money
for that very rainy day when a hurricane causes unusually
costly damages.
By subsidizing insurance in high risk areas, the bill would
have unintended consequences both environmental and human. High
risk areas are often in environmentally fragile areas which
would be put in greater environmental jeopardy under this bill
than under a free market. The human toll could be great: since
people judge the risks they will take using insurance rates as
a guide, the distortion of this pricing system would have the
effect of encouraging families to remain in or move to high
risk areas and add a marginal disincentive to move to or remain
in lower risk areas; thus, when the next natural disaster hits,
more people will be put in danger and the casualties will
likely be higher. A situation which will undoubtedly be used to
justify the next ``round'' of intervention!
A better solution to the problem that government
intervention caused would be to reduce or remove the initial
artificial intervention in the market. Encouraging the further
growth and development of the private insurance markets would,
in the end, be the best way to address the problems currently
facing homeowners in disaster-prone areas. To improve the
private market for disaster insurance, one must alleviate or
eliminate the governmental regulatory intervention distorting
the conditions under which private insurers must operate.
A new federal reinsurance program would move us in the
wrong direction. Such a new federal regulatory intervention
would only distort the market further and excerbate the
problems presented by natural disasters.
Ron Paul.