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STABILIZING INSURANCE MARKETS

FOR COASTAL CONSUMERS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 13, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–119

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

September 13, 2006 .......................................................................................... 1

Appendix: 

September 13, 2006 .......................................................................................... 53

WITNESSES 

WEDNESDAY, SEPTEMBER 13, 2006

Baker, Wendy, President, Lloyd’s America, Inc. ................................................... 23

Chamness, Charles, President and CEO, National Association of Mutual Insurance Companies .............................................................................................. 34

Daniel, David, Daniel & Eustis, on behalf of the Independent Insurance 

Agents and Brokers of America .......................................................................... 26

Heidrich, Gregory W., Senior Vice President, Policy Development and Research, Property Casualty Insurers Association of America ............................ 30

McCarty, Kevin M., Commissioner, State of Florida, on behalf of the National 

Association of Insurance Commissioners ........................................................... 20

Nutter, Franklin W., President Reinsurance Association of America ................. 28

Racicot, Hon. Marc, President, American Insurance Association ........................ 32

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 54

Clay, Hon. Wm. Lacy ....................................................................................... 56

Delahunt, Hon. William D. .............................................................................. 57

Foley, Hon. Mark .............................................................................................. 59

Hinojosa, Hon. Ruben ....................................................................................... 61

Kanjorski, Hon. Paul E. ................................................................................... 62

Shaw, Hon. E. Clay, Jr. ................................................................................... 63

Baker, Wendy ................................................................................................... 65

Chamness, Charles ........................................................................................... 71

Daniel, David .................................................................................................... 76

Heidrich, Gregory W. ....................................................................................... 82

McCarty, Kevin M. ........................................................................................... 89

Nutter, Franklin W. ......................................................................................... 104

Racicot, Hon. Marc ........................................................................................... 110

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Baker, Hon. Richard H.: 

Statement of Mark Drennen, President and CEO, Greater New Orleans, 

Inc. ................................................................................................................. 117

Letter from the Commercial Mortgage Securities Association ..................... 124

Text of Windstorm Conference Call ................................................................ 128

Brown-Waite, Hon. Ginny: 

Statement of the National Association of Realtors ........................................ 158

Hinojosa, Hon. Ruben: 

Assorted materials from the Texas Department of Insurance ...................... 163

Kelly, Hon. Sue: 

Article by Carl Hiaasen, ‘‘Just say no to stronger building code’’ ................ 168

Statement of ProtectingAmerica.Org ..................................................................... 170

(1)

STABILIZING INSURANCE MARKETS 

FOR COASTAL CONSUMERS 

Wednesday, September 13, 2006

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Richard H. Baker 

[chairman of the subcommittee] presiding. 

Present: Representatives Baker, Kelly, Brown-Waite, Feeney, 

Hensarling, Campbell, Foley, Shaw; Kanjorski, Hooley, Moore of 

Kansas, Hinojosa, Israel, Clay, Baca, Lynch, Scott, and 

Wasserman-Schultz. 

Chairman BAKER. I would like to call this meeting of the Subcommittee on Capital Markets to order this morning. 

I am advised that Mr. Kanjorski, the ranking member, is on his 

way, and in order not to keep our distinguished panel waiting unusually long, agreement has been reached to proceed, and we do expect his arrival momentarily. 

The committee meets today to examine and hear witness testimony on the state of readiness of our Nation’s insurance industry 

and the ability of State governments to meet the needs of constituents facing increasing frequency and severity of natural disasters 

of all sorts. 

I wish to make clear that it is not my intention that this meeting 

be viewed as a response merely to a Hurricane Katrina/Rita problem, nor even just as a hurricane response concern. In fact, this 

should be the beginning of a thorough and longstanding examination of all peril risk, including earthquakes, wind, and any other 

calamity which may befall American people, wherever they may be. 

The remedies that have been suggested have been varied, and 

the remedies that are attempted to be put in place at the State 

level have resulted in varying consequences. I note that, in California, with the creation of the California Earthquake Authority, to 

date, I am told, no more than 13 percent of Californians have 

availed themselves of that coverage. 

By contrast, in the State of Florida, with the creation of their 

CAT fund, it has, to some observers, been over-subscribed and, in 

2005, resulted in a $1.4 billion operating deficit. 

2

So the consequences of these market aberrations are significant, 

and the remedies attempted to seek resolution have obtained varying results. 

In order to put a Louisiana perspective on our problem, however, 

I wish to enter into the record a statement from the Greater New 

Orleans, Inc., organization, and particularly their addendum in 

which they give specific examples of what has occurred since the 

storm. For example, a particular restaurant located in the French 

Quarter which did not flood, which did not suffer wind damage, in 

the prior year paid $27,000 for their 2005 coverage, which included 

a 2-percent wind deductible, with a maximum deductible under any 

circumstance of $25,000. The 2006 renewal for the same limits is 

$242,000. That is up from $27,000, and includes a deductible of 5 

percent. That is more than doubling the deductible, with no dollar 

limit on that withholding. The second is with regard to a health care provider with $1.5 billion in property insured. The previous policy had a wind limit of 

$200 million in damages to be paid. The total premium was $1.3 

million. The renewal has a wind limit coverage of $25 million, 

down from $200 million, and the premium stays the same. 

Now, I am not one to inject myself into business operations, nor 

to express concern about someone having to pay increased premiums in light of duly identified risk. In each of these cases, neither business entity made a claim or suffered a loss during the 

course of Katrina. 

One of the remedies I wish to examine is how site-specific the 

risk assessment is by the industry in determining, property by 

property, whether they are likely to suffer loss, which leads us to 

the building code discussion. If we know there is a frame of wood 

constructed to less than adequate standards, it would be understandable for that business owner to pay a higher premium than 

someone built on an elevated site with a steel structure, but yet 

that screening of risk by property does not appear to be effectively 

utilized today. 

Others have suggested various remedies, from the full-scale creation of a Federal backstop to various variations in tax reserving, 

but I do not believe that a clear remedy has yet been identified, 

and this committee’s work will take us through many hours of 

hearings to finally seek that remedy. 

As I have said, this is not a one-State problem, it is not a oneparty problem, it is just a big problem, and I want to commend the 

members of the committee—Ms. Brown-Waite, Mr. Feeney, Ms. 

Wasserman-Schultz, and Ms. Maloney—each of whom have expressed various recommendations about resolution. As well, today, 

we have Mr. Shaw and Mr. Foley joining the committee—and I ask 

unanimous consent that they be considered members of the panel 

for today’s considerations—who have come from their State’s concern with their own perspectives about how resolution might be 

achieved. 

As a result of reading the testimony, and members’ expressions 

of interest, I intend, assuming there is no unforeseen calamity 

befalling political fortunes, early next year to engage in a series of 

roundtable discussions. As the ranking member knows, we have 

done this on other matters of consequence, and we do not get all 

3

stakeholders around the table at one time, but we afford everybody 

a chance to be heard, and I believe, if we begin this process in January, before we get into the difficulties of the storm season next 

year, perhaps the House can come to some resolution on needed reforms, and so, I thank all the members of the panel who have given 

of their time today. 

There are many others who wish to be heard, and as we go forward, we will ensure that all perspectives have been made available to the members, and with that, I would recognize the ranking 

member, Mr. Kanjorski. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

This morning, the Capital Markets Subcommittee returns to an 

issue that we have often reviewed in the past—the availability and 

affordability of insurance in coastal areas. 

From our past work on these matters, we know that the cost of 

reinsurance typically rises after major events, particularly as providers reassess risk. Most recently, this contraction has led to problems in rebuilding along the Gulf Coast after Katrina. 

In addition, 7 of the 12 most costly disasters in our Nation’s history occurred in 2004 and 2005, so others are also affected. 

I share the concerns of my colleague about helping the communities affected by these catastrophes. I also want to ensure that we 

take effective steps to ensure that people who live in less risky 

areas pay appropriate and reasonable rates for their insurance policies. 

While today’s hearing will allow us to gather the additional views 

of a number of experts on these matters, we are still awaiting the 

results of the three catastrophic insurance studies being prepared 

by the Government Accountability Office. 

In the next Congress, we should hear from the GAO about the 

findings on these matters. 

In the meantime, today’s hearing will help us to better discern 

the quality of the adjustment process and consumer confusion in 

the insurance products that they should purchase and at what levels. 

We will additionally look into what, if any, role the Federal Government should play in providing natural catastrophic insurance. I 

have, however, long had deep reservations about inserting the Federal Government into the private markets. 

Finally, I hope that we will explore the interest in creating an 

all-perils policy that would protect homeowners regardless of the 

cause of the damage. This product would cover perils like floods, 

fire, hurricanes, wind damage, and earthquakes in just one policy. 

While this type of product would end consumer confusion about 

what coverage they need and likely result in less litigation about 

insurance settlements, it would also come at a considerable cost. 

In sum, I look forward to hearing from our witnesses. This is a 

topic that deserves Congressional action and review, and I can assure the future ranking member that we will continue it next year. 

Chairman BAKER. I appreciate the gentleman’s optimism. 

Ms. Brown-Waite. 

Ms. BROWN-WAITE. Thank you very much, Mr. Chairman. 

4

Mr. Chairman, I would like to ask unanimous consent to enter 

a statement into the record from the National Association of Realtors. 

Chairman BAKER. Certainly, without objection. 

Ms. BROWN-WAITE. Thank you very much. In this, it highlights 

the fact that it is a national problem, and it certainly is having an 

impact on the cost of rents, as well as a slowdown in the housing 

market. So I think it is certainly very pertinent. 

Thank you. 

I cannot thank the chairman enough for holding this hearing 

today. 

The insurance crisis that Florida and many other States are facing is imminent, and we need to find solutions immediately. 

I also want to thank the witnesses who are here. We certainly 

have an array of them from various areas in our great Nation. 

As many of you know, I have introduced H.R. 4366, the Homeowner’s Insurance Protection Act, with my colleague, Mr. Shaw, 

who is here today, and the bill has many cosponsors. 

As I have been meeting with industry groups and other members, I hear claims that the market is stable, there is enough reinsurance, and that there is no problem. Well, to those people making those claims, I would suggest that they visit Florida, Mississippi, Alabama, South Carolina, New York, and many other 

States. 

Basically, every person living in Florida is a victim of a market 

that is nowhere near stable, and it is not just Florida. I am not 

talking about millionaires who live on the beach, as the cliche goes. 

I am talking about retirees living on Social Security, young families, and people just starting a business, as well as farmers whose 

families have been in Florida for centuries. 

Florida homeowners’ premiums are increasing at double-digit 

rates, or their policies are dropped entirely, and they have to get 

insurance from the State’s insurer of last resort; Citizens is the 

name of the entity that was created. 

This insurer of last resort will soon become the largest insurer 

in our State, which will spell even more of a disaster. 

However, if homeowners are facing affordability questions, business owners are facing a threat far worse: availability. 

Because there is no Citizens insurance property coverage, Florida 

has moved past the initial outrage stage and is now in full-blown 

panic. 

Business owners are no longer scared because their rates will increase. They are having to close their doors and leave the State, 

simply because they cannot get insurance. No area, including Florida, can withstand this type of economic meltdown. 

Congress has to find a solution to this crisis, and I recognize that 

the solution is multi-faceted. 

The solution should include States passing and enforcing strong 

building codes and mitigating disasters before they strike, ensuring 

that companies are writing prudently, that they are purchasing 

adequate amounts of reinsurance, and that they are not over-exposing themselves. 

Also, relieving the market of unnecessary regulatory burdens and 

giving insurers the tools that they need to enhance competition, 

5

such as allowing them to build up tax-free reserves; certainly making sure that the insurers of last resort are the private insurers, 

not the Federal and State Government, as my bill does by creating 

a Federal catastrophic fund, not funded by taxpayer dollars. 

Giving homeowners and business owners the tools that they need 

to prepare for disasters themselves, like my colleague, Mr. Feeney, 

does by creating the catastrophic savings account, is also another 

approach. I hope that all the panelists here today have some innovative suggestions as to what Congress can do to help you better 

provide a more affordable product to our constituents around the 

country, because we should refuse to wait until the next big disaster hits, whether it is a hurricane, earthquake, or tsunami, before Congress wakes up and enacts a solution to a crisis that already is on our doorstep. 

Mr. Chairman, I thank you very much, and I look forward to 

hearing from our speakers today, and I yield back the balance of 

my time. 

Chairman BAKER. I thank the gentlelady and want to commend 

her for her hard work on this subject and assure her and Mr. 

Shaw, the cosponsor of the measure, that the committee will examine carefully those recommendations as we proceed in future 

weeks. 

Mr. Israel? 

Mr. ISRAEL. Thank you, Mr. Chairman, and thanks also to our 

ranking member, for convening this hearing. 

Congresswoman Carolyn McCarthy, my colleague from Long Island, and I sent a letter to the chairman and ranking member 

some time ago requesting this hearing, and we deeply appreciate 

your responsiveness on a very critical issue. 

I’m on the Armed Services Committee, and we’re conducting a 

markup today on the issue of military tribunals. So I am going to 

need to do a lot of shuttling back and forth, but this issue is critically important to my constituents. 

I represent Long Island, New York. In fact, a few months ago, 

I saw a computer model of what would happen to Long Island in 

the event of a Category 3 hurricane, and Mr. Chairman, it was 

good news and bad news. 

The bad news for me was that the entire north shore of my Congressional district, on the Long Island Sound, would be flooded. 

The entire south shore of my district, along the Atlantic Ocean, 

would be flooded. That’s the bad news. 

The good news for me, Mr. Chairman, is that, on Long Island, 

it is the waterfront properties where most Republicans live, because they can afford those properties, and so that is kind of a divine form of redistricting. 

The fact of the matter is that it does not matter, as you said, Mr. 

Chairman; it is not a Democratic problem, it is not a Republican 

problem, it is a big problem, and it is a problem for my constituents 

on Long Island. 

Already two insurance companies have made the decision either 

to provide limited renewals of homeowners policies or not to sell 

any additional homeowners policies at all. This is creating considerable frustration and concern in my district. 

6

I think that there are some sensible solutions to this, and I hope 

to play a constructive and bipartisan role in pursuing those solutions. 

I appreciate the fact that insurance companies need to ensure 

that they can meet their obligations and provide levels of protection 

to my constituents, but we cannot leave anyone literally high and 

dry. We need to develop a national framework for this. 

I am a cosponsor of Ms. Brown-Waite’s bill, and I think it is a 

good step. 

I am absolutely open to all other steps, and look forward to continuing to have a dialogue with industry, with consumers, and with 

my colleagues on this committee to find an ultimate solution that 

is effective, that is sensible, and that is also fair. 

I thank the chairman and yield back the balance of my time. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman, for holding this important hearing to examine the state of the natural catastrophe insurance market. 

Clearly, the 2005 hurricanes wreaked a tremendous loss in 

human lives and in economic loss, live property damage, with over 

$50 billion in insured losses, and so, consequently, we have Congressional interest and public debate on the issue of how to address 

disaster financing. 

A key question before us today is how did the insurance markets 

perform in this catastrophe? Were they successful, or is there clear 

evidence of market failure? As I examine the record, I think the answer is that the market performed reasonably well, at least the private sector did. The insurance industry demonstrated resiliency 

and flexibility in the wakes of these historic devastating hurricanes, and was able to successfully settle most of the Katrina and 

Rita claims, certainly without a significant weakening or disruption 

of the overall financial strength. 

However, not surprisingly, a range of very legitimate issues have 

arisen from wind versus water lawsuits to the question of affordability. 

This has caused insurers at both the State and Federal regulators to reexamine our current market structure, and I know this 

committee will be very actively engaged in this issue in the weeks 

and months ahead, and we should, but if history is our guide, I fear 

there may be a tendency for the Federal Government to overreact 

and respond simply with new Government programs and subsidies 

that may only make the problem worse, and they could certainly 

do so by distorting pricing mechanisms that match premiums to 

the level of risk being assumed and allow realistic capital levels to 

be accumulated by insurers. 

Compared to private markets, the Federal Government’s track 

record in insurance programs is somewhat suspect, and should give 

anyone pause before considering an expanded Federal role like a 

Federal backstop. Certainly, we should note that the Federal flood 

insurance program is broken and insolvent, and Congress has had 

to increase its borrowing authority three times. 

7

The PPGC has just posted a $23 billion deficit and projects billions in unfunded liabilities, and I need not talk about the future 

of Social Security. 

Federal insurance programs or taxpayer subsidies do not always 

work well, and moreover, they tend to disrupt the private sector 

markets that are functioning reasonably well. 

Instead of examining ways to shut down or displace the private 

markets, I would hope that we would review existing regulatory 

and tax structures to identify and remove obstacles, to strengthen 

the private insurance markets. We need to look at certain State 

and local policies dealing with building codes, code enforcement, 

land use planning, and certainly risk-based pricing is critical. 

So I hope that, as we try to stabilize the market, increasing affordability and availability, that we do not simply make the problem worse, and I hope that the cure does not prove worse than the 

disease, and with that, I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman. 

Ms. Hooley? 

Ms. HOOLEY. Thank you, Mr. Chairman, and Ranking Member 

Kanjorski, for holding this hearing, and I thank our witnesses for 

taking the time to be here today to talk about this really important 

issue. 

At a time when many insurance companies have either stopped 

writing new policies in some areas or withdrawn from the at-risk 

markets entirely, homeowners are having an increasingly hard 

time finding insurance, and if they find it, it’s not always affordable. 

So not only are we facing a greater number of disasters each 

year, but the cost of those disasters is increasing, as well, as more 

people move to high-risk areas and the value of their land continues to rise. 

As a result, I have serious concerns about the availability of 

homeowners and catastrophic insurance in high-risk areas, and I 

question if the private market alone can continue to sustain the 

necessary coverage. At the end of the day, homeowners need to be 

able to find and afford adequate coverage, and we must take whatever steps are necessary to try to achieve that goal. 

In addition to strengthening the insurance market, I also believe 

that we must take a preemptive step to reduce the cost of catastrophic disasters and encourage mitigation whenever possible. 

I worked to pass language that would reinforce existing legislative mandates for FEMA to map the risk of mudslides, which happens in my State, in Oregon. It is provisions like these that will 

help the insurance industry, consumers, and small businesses to 

better judge the dangers posed by flooding or other risk. 

Strengthening building codes and investing in risk-mitigation 

codes are simple ways we can help control the costs from the next 

major disaster. 

The one thing I would urge all of us to remember as we continue 

this discussion is that this is not just an issue that concerns the 

Gulf Coast States, although they have certainly been hit the hardest in recent disasters. 

I am looking forward to hearing the testimony from all of you, 

and particularly your suggestions on how to fix the catastrophic inVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
8

surance system throughout the country and provide greater access 

to homeowner’s insurance, and I thank you for being here today. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentlelady. 

Ms. Kelly? 

Ms. KELLY. No statement. 

Chairman BAKER. Mr. Feeney? 

Mr. FEENEY. Well, Mr. Chairman, I know we share a great interest in natural disasters, and I am really grateful to the chairman 

for having this hearing. I want to thank Commissioner McCarthy 

from Florida ahead of time for his testimony and for the great work 

that he has done in Florida. 

In Florida, obviously, we have a long history of hurricanes. 

Representative Brown-Waite, Representative Foley, and I were 

there in the aftermath of a 1993 storm called Andrew, and we 

learned a great deal about the mistakes we made in terms of 

things like lax building codes. We had companies at the time that 

were 80-percent concentrated in market share in two counties. 

You know, I came from Philadelphia. Benjamin Franklin started 

the first insurance company, and he knew enough not to let three 

or four wood houses on the same block have the same insurer, but 

somehow, prior to 1993, our insurance regulations were lax in that 

regard. We have come a long way, and by the way, there is no 

State that does disaster preparedness and disaster response better 

than Governor Bush’s Florida, and I congratulate you as part of 

that important team. 

I have to tell you that Congressman Shaw has been a leader in 

working Federal tax policy in the aftermath of natural disasters, so 

that people get equitable treatment as they go fix their own problem, as opposed to having the Federal Government come in and do 

it for them, and I agree with much of what my colleague, Jim 

Hensarling said, that the only way to do this right is to get healthy 

markets in the insurance industry up, and we need an almost exclusive provider of insurance, and we have to figure out, at a Federal and State level, although with local help with building codes 

and enforcement, how to do that. 

Having said that, regulation of insurance companies is something 

that the government must do. Whether it’s done at the Federal 

level or the State level is a little bit of an interesting question. 

We have traditionally done it at the State level exclusively, but 

you know, when I go to take out a loan for my home, and when 

the loan company shows up with a check for $200,000 so I can do 

my closing, I do not particularly care at that point, once I have my 

$200,000, about the fiscal health of the mortgage company. I do not 

really care if they go under tomorrow. I have my house, and I do 

not have any loss or threat to myself. 

On the other hand, if I pay life insurance premiums for 60 years, 

for example, and then die, and the insurance company does not 

have reserves to pay the claims to the heirs that I spent a lifetime 

trying to protect, then I have had a big loss there, and especially 

my heirs have had a big loss. The same thing is true in all types 

of insurance. 

So the government’s responsibility is to make sure that companies have adequate reserves to pay for the risks and the claims 

9

that they have assumed, and no other entity—this is not something 

that can be done exclusively by the private sector, in my view. 

There are too many companies that would take our premiums 

and run off to Mexico with the money, or be in flight, or just simply 

mismanage it, and that is why we have to have regulations, and 

we can debate about where those regulations are best handled. 

I will tell you that I do believe, as the ranking member said, that 

insurance must be a risk-based approach to make this successful. 

We do not want people in high and dry safe areas bearing enormous subsidies for people who decide to build a stick home out in 

the Keys of Florida for $5- or $6 million. It is just fundamentally 

unfair to have that sort of cross-subsidy, but having said that, the 

whole idea of insurance is to take advantage of the law of big numbers and to spread the risk, and the further you can spread the 

risk, whether it is health insurance or life insurance or any other 

policy, including property and casualty, the better off we are, and 

there may be an important Federal role in terms of doing that. 

I will end with this: Either tomorrow or the next day—I am sure 

Commissioner McCarthy is going to be there—I understand that 

the Governor, led by Lieutenant Governor Jennings, is going to 

have a statewide summit of all the important parties, probably, in 

the west coast of Florida, as I recall, and the policymakers in Florida understand this. 

There are no easy answers, but this is not a partisan issue. 

Democrats and Republicans alike understand the threat, and let 

me describe it very briefly, and then I will end with that. 

One of two things will happen, if we do not get this right, to the 

State of Florida, and other States along coastal areas, or along the 

Mississippi, or that are threatened by earthquakes. 

Either we will misregulate and companies will pull out of the 

market and people will not be able to get property and casualty insurance—by the way, the crisis in Florida is even greater, in many 

respects, in the commercial markets than in the homeowners market. 

If that happens in Florida, we will see a job loss for virtually all 

of the Realtors in the State, as well as for the people who do surveying; the people who do title insurance; the people who write 

loans; loan officers; and the people who provide concrete for sidewalks. 

The entire construction industry, and all of their suppliers will 

literally shut down, and we will have not a recession but a depression, and that will affect the national economy, since we are about 

8 or 10 percent of the national economy, and by the way, in things 

like job growth, the fastest growing major State. 

The other thing that we will do is that we will have a State that 

mismanages the risk for political reasons. 

They will put everybody in, as Congresswoman Brown-Waite 

said, a government-based insurance company. Citizens is what we 

call ours. 

That is a perfect policy, because everybody gets insurance, and 

things move along nicely, and it works until you have an event, because the reason that State governments have to set up JUA’s is 

that no actuary in their right mind would ever let private capital 

take risks that are unnatural. 

10

We have to de-populate Citizens, and I encourage all States that 

have similar problems, whether it is auto or health or whatever, to 

de-populate the government-backed, because the only reason the 

government is involved is that nobody in their right mind would 

otherwise be doing this. 

Chairman BAKER. Can the gentleman begin to sum up? 

Mr. FEENEY. Yes, I will. 

If you have a JUA like Citizens that is the major insurer, it 

works great until you have an event, and then we will have an economic catastrophe, to include bankrupting an otherwise very 

healthy State, and thank you, Mr. Chairman. As you know, I am 

passionate about some of these issues. I apologize ahead of time for 

being long-winded. 

Chairman BAKER. The gentleman’s passion is clearly understood 

and appreciated. 

Mr. Lynch? 

Mr. LYNCH. Thank you, Chairman Baker, and also, I want to 

thank Ranking Member Kanjorski for the wonderful effort in facilitating, really, a bipartisan discussion of this issue. 

We all understand the threats to consumers generally and families in our district that are located in coastal communities. 

I want to thank the panelists, as well, for coming forward and 

helping the committee with its work. 

I recognize a lot of faces here today that were with us back in 

June when, in the Housing Subcommittee, which I sit on, we also 

had a similar debate about the affordability of insurance to those 

communities generally as a result of natural disasters, and especially in the context of Hurricanes Katrina and Rita, and since hurricane season is in full bore right now, this hearing could not have 

come at a more opportune time. 

I know in the past decade we have seen the rising toll that natural disasters have placed on homeowners insurance markets in 

parts of the country that frequently experience catastrophic events. 

Last year alone, there were a total of 27 storms in the Atlantic 

region, which included 14 hurricanes, and not only that, but in my 

State of Massachusetts—and I live in and represent a coastal community in Massachusetts, a State that is not in the exposed position that many of my colleagues face in southern States along the 

Gulf. In Massachusetts, we actually faced four situations, four Federal disaster declarations in 2005, and I know that the GAO is currently conducting several studies to further assess the need for 

changes in the catastrophic insurance market. I look forward to 

those results coming out. 

In the meantime, I realize there are general problems in the 

quality of the adjustment process, overall insurance policy coverage, and what is most important to all of our constituents is the 

general affordability of coverage. That is where the rubber meets 

the road for a lot of us. Whether it is commercial customers or residential customers, it is simply astounding the burden that some of 

our families are facing in light of these natural disasters. 

I look forward to hearing from the distinguished panel and exploring various ways in which we in Congress can address the 

problem that is arising and we are currently facing in the catastrophe insurance market, and I also have another hearing that is 

11

going on—I did not schedule this—on national security and emerging threats. So I am going to have to shuttle back and forth from 

that hearing, but this is very important, this discussion, and I look 

forward to hearing from the great panel that we have here in terms 

of their suggestions and recommendations on how we address this 

problem. 

Thank you, Mr. Chairman. I yield back. 

Chairman BAKER. I thank the gentleman. 

Mr. Campbell? 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

I represent a coastal district of southern California, no hurricanes, but we have earthquakes, we have mudslides, we have 

floods, potentially, and theoretically, tsunamis, in addition to fires, 

and other various plagues that hit us now and then. 

Mudslides, which recently hit my district, are uninsurable except 

from Lloyd’s, generally. Earthquakes—in California, the State law 

requires that earthquake insurance be offered with homeowners insurance. However, today less than 15 percent of all homes in California are covered with earthquake insurance. A tsunami—you can 

tell me what would happen if that were to occur, and then there 

is obviously the flood problem that we have, and not a lot of people 

have flood insurance either. 

So I am very interested to hear the testimony, with the understanding that the most recent natural disasters that have caused 

great loss of property value and life have been hurricanes, but 

there are others in other parts of the country, and the one thing 

that is constant is that wherever you live in this country, you are 

subject to some natural disaster and not to all, and so, I will be 

interested in your comments on how we can look at risk pools that 

run across the different types of natural disasters that can occur 

in different parts of the country. 

Thank you, very much. 

Chairman BAKER. I thank the gentleman for his statement. 

I recognize Ms. Wasserman-Schultz, and as all other Floridians, 

want to acknowledge her intense interest in this subject and her 

contributions today. 

Ms. WASSERMAN-SCHULTZ. Thank you. Thank you very much, 

Mr. Chairman, and Ranking Member Kanjorski, as well, for convening this important hearing. 

Mr. Chairman, it is particularly important because we are the 

committee of jurisdiction, and I am really pleased to see that we 

have been able to bring such a distinguished panel together. 

We have to come up with a bipartisan solution to this growing 

insurance crisis in our country, and as the gentleman from Florida, 

Mr. Feeney, mentioned, we mostly do things right in Florida when 

it comes to insurance-related disasters, but I would not have quite 

described Florida as Jeb Bush’s Florida. I think Florida can generally be described as Floridians’ Florida, just to add that. We were 

reminded just a few weeks ago—and just so you know, Mr. Feeney 

knows I mean that affectionately. 

We were reminded just a few weeks ago, during the one-year anniversary of Hurricane Katrina, that we, as a Nation, are still illprepared to deal with a catastrophe. We have gone through planning and mitigation efforts and execution of coordinated responses. 

12

We have a long way to go until we can assure Americans that 

we can keep them safe in the face of a catastrophe, but we are here 

today because the economic resonance from disasters like Hurricanes Katrina, Rita, and Wilma have left an indelible fingerprint 

on our Nation. 

Hundreds of thousands of families and small businesses across 

the Gulf coast are struggling to rebuild, and I think that is an important point. 

Mr. Campbell just mentioned that he does not suffer from hurricanes in his community, but I absolutely agree with you, it is a 

very important point to note, we have natural disasters all over 

this country, and this is a national problem that needs a national 

solution. These catastrophes have reshaped our Nation’s personal 

and commercial insurance markets, making it even more difficult 

for affected regions to recover. 

Events of late have led regulators, industry stakeholders, and 

public policymakers to reconsider the efficacy of existing models 

and regulations. 

The market perception of exponential increases in the risk affiliated with catastrophic events has resulted in precipitous declines 

in insurance coverage availability, at astronomical costs to policyholders, and I am using those really major words because there is 

no other way to describe it. 

This is a significant, significant problem. I could tell you story 

after story of individuals who have had gargantuan increases in either their residential property insurance quotes or commercial. 

It is just unbelievable, and it is happening most acutely in Florida, where the issue is not just price but availability. 

The insurance market is literally drying up in front of our eyes, 

and the economic impact, as Mr. Feeney describes, can already be 

felt. This problem is not endemic to Florida, and it is happening 

across the Nation. It is really obvious that our current system is 

broken. There is no silver bullet. There is a patchwork of regulation and state-based risk pooling that is not working. 

We were very fortunate to create a State catastrophe fund in 

Florida, but that is not going to help us survive on our own. 

I mean we cannot continue down the path that we have been 

traveling without having change, and change in the way that we 

think about managing catastrophes nationally in this country. 

These storms do not recognize State boundaries. They do not say, 

okay, I am going to stop at the Florida border, up in north Florida, 

and I am not going to go any further, because there is no CAT fund 

past this line. 

We have to think about that when we consider mechanisms to 

hedge risk affiliated with these events, and at the end of the day, 

all of America’s taxpayers are on the hook, regardless of where the 

disaster strikes. We have already spent more than $100 billion in 

response to Katrina, and the question is, do we plan and prepare 

for events in an effort to minimize cost to the American taxpayer, 

or do we wait around for the next storm and throw astronomical 

sums of money at the problem? 

I mean that is really the question that we have in front of us, 

and I think the lesson learned from Katrina is that the wait-andVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
13

see approach, the, you know, go like this approach—that does not 

work. 

The huge failure of coordination and mismanagement of relief 

funding has resulted in untold losses of hard-earned taxpayer dollars. 

It seems especially foolhardy when we know that there are policies that we can adopt that minimize cost and stabilize markets, 

and we need a comprehensive national solution to this national 

problem. 

I have introduced a bill with my colleague from Delaware, Mr. 

Castle, H.R. 5891, the Catastrophic Disaster Risk and Insurance 

Commission Act of 2006, and Mr. Chairman, we spent a number 

of years when I was in the Florida legislature—and I was elected 

the year that Andrew hit south Florida, and the only way that we 

were able to finally bring all of the stakeholders together around 

the table to develop our State catastrophe fund was when we had 

a statewide commission that our university president sat on, and 

they came together and made objective recommendations to the 

legislature, and with input from all of the stakeholders, and we 

were able to get something accomplished, and I want to thank Mrs. 

McCarthy, Mr. McHenry, Mr. Israel, Mrs. Hooley, Mr. Crowley, 

and Mr. Hinojosa for signing onto that bill. 

I know the chairman is still considering the best approach to this 

problem, and I know that he will agree with me that we cannot 

solve this problem unless we bring all of the stakeholders to the 

table, and I truly appreciate your commitment, Mr. Chairman, to 

roundtable discussions. 

We need to move forward together on this problem, with all of 

the stakeholders. 

Congress has been too slow to respond. 

It is time we had a comprehensive solution to a national problem, and I commend the committee for convening today’s hearing. 

I do hope our panelists will focus on solutions to the problem, but 

it is time for us to act on this problem before the next big storm 

hits, and I do want to close by welcoming our State’s insurance 

commissioner, Kevin McCarty, who has done an absolutely fantastic job on his leadership nationally on this issue. Thank you so 

much. 

I yield back the balance of my time. 

Chairman BAKER. I thank the gentlelady. 

I wish to welcome the senior member of Ways and Means to our 

considerations today, Mr. Shaw, who has made his own contributions on this subject matter, and recognize that, going forward, 

whatever the remedies that might be considered certainly could 

have Ways and Means jurisdictional reciprocity, and I appreciate 

the gentleman’s willingness to participate in our hearing today, 

and look forward to working with him in the future. The gentleman 

is recognized. 

Mr. SHAW. Thank you, Mr. Chairman, and I would ask unanimous consent that my full statement be made a part of the record. 

Chairman BAKER. Without objection. 

Mr. SHAW. Mr. Chairman, Ranking Member Kanjorski, and 

members of the committee, what you are hearing today is a distress call coming out of the State of Florida. We are not going over 

14

the cliff yet, but we are heading toward the cliff, and it is an economic cliff that is going to create tremendous hardship for the people of Florida. 

You have heard several references today to Hurricane Andrew. 

In the aftermath of Hurricane Andrew, I went down to Homestead, and I could not believe the devastation. I came back to 

Washington and studied the insurance plan that the Federal Government had set up for flood protection, and using it for a model, 

I filed the first windstorm insurance program, which recognized the 

fact that it was going to be a dying market for windstorm insurance in the State of Florida. 

What has happened here—I would like to also express to Mr. 

Kanjorski, who made reference to this, as well as my friend from 

the State of Texas, that—reference to the private sector. 

In many parts of the State of Florida, there is no private sector 

when it comes to windstorm insurance. I can assure you that you 

would not be hearing positive things about what we are doing from 

Mr. Feeney if there were, but there is not. 

It is now up to us. 

What we have in the State of Florida is a CAT fund, it is called, 

and many States—I think some eight States have such a fund, and 

what Ms. Brown-Waite and I have developed is a program of reinsurance. 

It is a program that backs up the State CAT funds, that is paid 

into by the insurance companies upon the collection of their premiums. 

This is not a tax that we are going to be spreading all across the 

country. 

The whole theory of insurance is to take a known risk and 

spread it across as wide an area as you possibly can. That is what 

insurance is, but what has happened here—and I can tell you, in 

my own State of Florida, that there is not one square inch of Florida that has not been devastated by some hurricane over the last 

2 years. Listen to it. We had Wilma, Rita, Charlie, Frances, Ivan, 

and Jenny. I am just talking about south Florida here. The whole 

State has been hit. 

So what happens—that risk that is supposed to be spread all 

across a wide area has all felt its share of devastation. 

Now it is time for us to take a close look at bringing it back so 

that we can spread the risk across this country, and what it simply 

does—we have an insurance program in the State of Florida, which 

has been made reference to already, called Citizens Insurance, 

which sets up reserves and is paid into. 

To give you an example of the economic hardships that so many 

of my constituents are having, for a house which is actually under 

the average house in my district of $250,000, the premium is 

$5,000, and the deductible is not affordable for many of the people 

that I represent. If we can have a reinsurance program on the national level—and there is no reinsurance program that is affordable 

at all in the private sector, but if you can have that, then the reserves that would have to be way up here for any one State, being 

backed up by a reinsurance program, this reserve can come down 

and make sure that this is affordable. 

15

I can assure you, Mr. Chairman, that in Louisiana and Alabama, 

Mississippi, Georgia, Florida, South Carolina—go all around the 

coast. 

We are going to be facing a crisis where the private sector has 

pulled out of the market. 

In the State of Florida, so many of the insurance companies, and 

maybe all of them, have formed so-and-so insurance company of 

Florida. So they recognize they do not even want the risk of loss 

for their company to be spread across the country, even these big 

national insurance companies. 

We are going to have to work together, Mr. Chairman, and I look 

forward to—I know Mr. Foley has a bill that he wants to speak 

about which also is not incompatible with the bill that we are talking about, which will also do us a great deal of good, and I will 

leave it to Mr. Foley to explain exactly what that bill does, but it 

would have jurisdiction in front of the Ways and Means Committee. 

Mr. Chairman, I can assure you that, if I have anything to do 

with it next year—and I simply hope—I hope that I do—if I am 

chairman of the Ways and Means Committee, you will have no 

problem with turf battles with my committee, and I hope the same 

would apply here. 

We are going to work together in partnerships next year to see 

that this happens and that windstorm insurance, which is required, together with—I would say to my friend from California, it 

also includes earthquake insurance, which you cannot even buy in 

your area—that we will come back with a bill that will be good for 

the whole coastal nation and other areas, the coast of our Nation, 

together with other areas which are prone to other disasters, even 

earthquakes, and I think even volcanoes are in there, so we can 

say aloha to our friends in Hawaii, and I am hopeful that we can 

come back—and I can assure you you will have my every cooperation in putting this bill together for Louisiana and Florida and all 

of the other States that are affected by this. 

I yield back, and I appreciate your allowing me these few minutes. 

Chairman BAKER. I thank the gentleman for his fine statement 

and assure him of my appreciation for his assistance and my 

pledge to be of assistance to him and the committee going forward 

in the next session and seeking an appropriate resolution. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Chairman Baker. I want to thank you 

and Ranking Member Kanjorski. 

I would like to ask unanimous consent that the following materials from the Texas Department of Insurance be submitted for the 

hearing record. 

Chairman BAKER. Without objection. 

Mr. HINOJOSA. They include summaries of the Texas sea coast 

insurance market for residential property and commercial property 

and lists of the following. One is a list of casualty companies, fire 

and casualty companies, risk and retention groups, and title companies licensed in Texas since January 2005 through August 2006. 

It also includes a list of withdrawal plans filed in Texas since 

Hurricane Rita. 

16

It includes a list of property and casualty carriers operating in 

Texas from the 2005 year-end available data. 

Mr. Chairman, I am very concerned that certain insurance companies have decided not to issue new property and casualty insurance policies in certain areas of my district. I am particularly concerned about the insurance industry’s approach to issuing property 

and casualty insurance in what are known as tier one and tier two 

areas. According to the Texas Department of Insurance, the following counties in my Congressional district fall in tier one areas: 

Refugio and San Patricio County. In tier two areas, they include 

Lee County, Brooks, Goliad, Hidalgo, Jim Wells, and Live Oak 

Counties. 

I respectfully request of each witness to provide in writing an explanation of their understanding of the definition of tier one and 

tier two areas. I also request an explanation as to why the counties 

I have mentioned fall in either tier one or tier two category, and 

also, I ask for an explanation of the impact this designation will 

have on the constituents in my district, both financially and in 

terms of insurance coverage. 

That information is very important to me, as I am sure my 

friends in Florida, Louisiana, and Mississippi are searching for answers to those questions. 

Mr. Chairman, my goal here is not to punish the companies that 

have decided either not to issue new policies in certain areas of my 

district, nor is it to punish them for deciding to restrict the 

issuance of new policies in Texas Congressional District No. 15. 

I merely seek an explanation for their decision. I seek a better 

understanding of the impact Hurricanes Katrina and Rita have had 

on their bottom line. 

I want to ensure that the insurance companies operating in 

Texas have the ways and means to provide property and casualty 

insurance to all my constituents. 

Thank you very much, Chairman Baker, and Ranking Member 

Kanjorski. I appreciate the opportunity to make these comments. 

I yield back the remainder of my time. 

Chairman BAKER. I thank the gentleman. 

I also welcome today a visiting member from the Ways and 

Means Committee who has made his own contribution in the debate with this proposal. 

Mr. Foley is recognized. 

Mr. FOLEY. Thank you very much, Mr. Chairman. I think everything has been said, but not everyone has said it. So let me at least 

belabor what is a very, very important point, and I think what you 

have heard from many of the panelists or the Members of Congress, virtually every State has been, to some degree, impacted by 

natural disaster. 

Mr. Israel mentioned what would happen off of Long Island. 

Max Mayfield showed us drawings this year that indicated the 

northeast may become a victim of a hurricane this year much to 

the same potential and degree of devastation as has hit Florida. 

We had nine hurricanes in the last 2 years, 4 of them back to back, causing $22 billion of losses. My sister received her insurance premium today. It was $8,500 for a home that my parents bought in 1957 for, I believe, $7,500. 

17

The insurance is now more than the original purchase price of 

the home. 

Insurance is causing fiscal calamity in Florida, affecting every 

level of society. 

Homeowners who are in condos will see assessments to the degree that they will simply be unable to continue living in our Sunshine State. 

It is no longer an option of scraping together a few additional 

dollars to pay a premium. It is becoming a sense of urgency that 

I have not witnessed in my entire adult life. 

No question the insurance companies were ravaged. We know 

that. 

When you have had the kind of exposure and experiences in the 

last couple of years, it is impossible to assume an insurance company, under its traditional methods, would be able to weather 

those storms, excuse the pun. 

I think you have also heard from many members that there are 

a lot of collective ideas that have been proposed, a multitude of 

bills that all have merit, which is what this committee and this 

Congress needs to undertake, is to collaborate in a bipartisan fashion to figure out the answers. 

I agree with the gentleman from Texas. I do not want the Federal Government to be the financial backstop for catastrophic problems. We have to find a way for a private sector initiative. 

Since Hurricane Andrew, we have seen so many companies become subsidiaries of themselves—Allstate Florida, State Farm Florida—because if something happens there, then they are able to 

bankrupt that company and not affect the parent, and I am not 

using those two companies pejoratively. It is just examples of the 

latest trend in trying to abrogate a loss to the parent company. 

Yet we will also see mudslides, earthquakes, and tornados. In 

fact, an earthquake occurred off the Gulf of Mexico just the other 

day, an extraordinarily rare occurrence for Florida, but it portends 

calamity for other States, as well. 

My proposal, the Policy Disaster Protection Act, would work to 

correct that. 

It would give insurance companies the option of building up reserves over a 20-year period on a tax-deferred basis, much like an 

IRA account, where the insurance companies can place in this account pre-tax dollars that can be used for disaster mitigation alone. 

If they take it out for any other purpose, it is taxed like it would 

be your IRA, accordingly with a penalty. It would take years to 

build, which is why Ginny Brown-Waite and Clay Shaw’s bill is important as an adjunct to this. 

I thank our State insurance commissioner, because I know he 

has spoken about this bill, both bills, in forums throughout the Nation, but the bottom line for all of us who serve in the Congress, 

the 455 Members of the House, and 100 Members of the U.S. Senate, you may not think this is a problem for you. 

Your insurance companies may be not raising premiums triple 

and quadruple digits, but if you experience what Florida has, and 

New Orleans has, and California has, and Texas has, and the 

wildfires and all the other unanticipated disasters, you, too, will be 

18

facing this difficult, difficult problem. You cannot buy a house without insurance. 

First thing they say is, go get a binder, get a policy, then we will 

insure your mortgage, or we will give you a mortgage. So it will 

set in motion the end, if you will, of Paradise Lost in our State if 

we cannot grapple with this. 

So I appreciate the attention the chairman has placed on this 

issue. 

I appreciate all of the individual members who are grappling 

with solutions, and I just hope we can take pieces of each of these 

proposals and weld together a solution that will help bring down 

this urgent crisis. 

Chairman BAKER. I thank the gentleman for his statement and 

participation. 

Mr. Kanjorski for a unanimous consent request. 

Mr. KANJORSKI. Mr. Chairman, I ask unanimous consent that 

the statement of Congressman Delahunt be included in the record 

at this time. 

Chairman BAKER. Without objection. 

Mr. Clay, did you have a statement? 

Mr. CLAY. Yes. Thank you, Mr. Chairman. Let me thank Ranking Member Kanjorski and the other members of the committee, as 

well as the witnesses. 

Mr. Chairman, I am concerned about the limitations of insurance 

policies and the pay-outs that are left for the government to make 

because of the shortfall in insurance coverage from the private industry. 

These shortfalls could be for various reasons: denial of claims, 

lack of coverage offered, or no insurance coverage, to name a few. 

I am especially concerned by the dismissal of claims by companies because of disagreements of whether the property was damaged by wind or water. 

We have catastrophic losses because of hurricane-force winds and 

the accompanying rains and floods. Yet, families have problems 

getting insurance settlements, although they have insurance for 

these occurrences. 

I am deeply concerned with the methods of reducing losses employed by the insurance industry. We have policies that are being 

issued that settle the water damage versus wind damage dispute 

by stating that if the property was damaged by both, the losses are 

not covered, even if there was wind damage as well as flooding, 

and even if the wind damage occurred prior to the flooding. 

However, I guess that I should feel better about this type of policy, because families are told up front that they will be left up the 

creek. 

I guess we need to ask the proverbial question: Do we need this 

insurance at all? 

If you are not going to cover the losses, do we need it at all? 

Mr. Chairman, I will stop there, and ask unanimous consent to 

insert my statement in the record. 

Chairman BAKER. Without objection. 

Mr. Baca, did you have a statement, sir? 

Mr. BACA. Yes. Thank you very much, Mr. Chairman. 

19

Today’s hearing is especially important given the impact of last 

year’s hurricane both on our consumers and insurance market. 

About $23 billion, or about 25 percent, of the Federal assistance 

following Hurricanes Rita, Wilma, and Katrina is going to compensate persons who did not have insurance coverage for catastrophic events, but many victims are still waiting on their checks. 

I hope this hearing helps us better understand the scope of the 

problem that insurance claims need to be facing. For instance, it 

has been seen and reported that despite being hit with catastrophic 

losses, insurers have been record prices that can handle catastrophic losses in the future, so it still impacts them. 

Yet, we are seeing a trend among insurance to reduce their exposure to losses, with some insurance, like Allstate, reducing the coverage in everyday drastic ways. I am concerned that if this trend 

continues, it will have a serious impact on availability and affordability. Higher rates, declining coverage, and periodic non-renewal 

on large scales will have a negative impact, particularly on low-income consumers in underserved communities. 

I think the discussion today will help us get a better understanding and a handle on these issues and what we can figure out 

for the best course of Federal involvement, and I look forward to 

hearing from the witnesses, especially as it pertain to those that 

cannot, and I know that it was mentioned about wildfires, especially in our area, where those individuals are not covered in the 

San Bernardino and surrounding areas that have been impacted a 

lot in our area. 

So thank you very much, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Scott, do you have a statement? 

Mr. SCOTT. Yes. Thank you, Mr. Chairman. I appreciate this very 

timely and important hearing. It is important, especially given the 

fact that hurricane risks are expected to increase over the coming 

decade, and would have repeats of hurricanes or the level of 

Katrina and Rita that we had back to back last year. 

There is an economic problem. 

As risk increases, losses increase, which will cause rates to increase. 

Natural disasters affect different regions of the country and 

cause a collapse of insurance coverage at the local level, and since 

the States regulate insurance products, it is controversial to create 

Federal regulation of insurance. 

However, it may be necessary to create some form of Federal reinsurance to help States create stronger insurance markets, and 

Congress must improve disaster preparedness. 

We have to find ways to expand the insurance market to cover 

more people, and the Federal and State Governments must coordinate to expand coverage protections, and there are many good 

ideas proposed on how to help provide catastrophic insurance, and 

I am certainly open to discussing them, but I think it is very important that I raise some major concerns and some questions that 

certainly give rise here. 

For example, are there regulatory or legal barriers to allowing 

more foreign reinsurers to enter the U.S. market? 

20

Are American insurance companies at a tax disadvantage when 

compared to foreign reinsurance companies? 

What would be the estimated cost to the Treasury of eliminating 

the current tax on premium reserves, and is there general agreement that there should be incentives to build premium reserves to 

pay for future catastrophes, or has there been any problem with 

credit rating agencies affecting the ability of insurers to finance 

new bonds, very complex, complicated issues here that we must resolve. 

One other important question is why does the Federal Government need to be involved with this issue when many reinsurers 

and insurers have opposed these proposals and stated that the private market can handle natural disaster risks, and then this important one: Is there enough insurance capacity to cover the Nation’s homeowners in the event of a major natural disaster, and has 

the national market been tested sufficiently to give lawmakers here 

in Congress an adequate indication that the market is prepared, 

serious questions, serious issues that will be brought to the forefront. It is important that we make sure that we have all of insurance capable to expand, to cover. 

Are we prepared to do this? 

A very interesting hearing. I’m looking forward to it. I yield back 

my time. 

Chairman BAKER. I thank the gentleman for yielding. 

I believe that concludes all members’ statements. 

Appearing as a witness today and enduring opening statements 

is a bit like being in Louisiana and waiting on the hurricane. 

You do not know when or where, but you know it is coming. 

Well, we finally got to it. 

I wish to welcome each of our witnesses and to thank them for 

their patience in participating today. 

As is the usual practice, your formal statement will be made a 

part of the official record. We ask that, if possible, you limit your 

remarks to 5 minutes, to enable member questions to follow, and 

as you can see from the statement participation, there is broad interest in this matter and a deep and abiding concern, and we appreciate each of you bringing your perspective. 

Our first witness today will be Mr. Kevin M. McCarty, commissioner for the State of Florida but appearing here today on behalf 

of the National Association of Insurance commissioners. 

Please proceed at your leisure. 

STATEMENT OF KEVIN M. McCARTY, COMMISSIONER, STATE 

OF FLORIDA, ON BEHALF OF THE NATIONAL ASSOCIATION 

OF INSURANCE COMMISSIONERS 

Mr. MCCARTY. Chairman Baker, Ranking Member Kanjorski, 

and members of the subcommittee, I really want to thank you for 

the opportunity to be here today to testify on the role of the insurance departments and insurance commissioners in helping to stabilize the coastal insurance market in view of the catastrophes we 

have recently experienced. 

My name is Kevin McCarty, and I am the insurance commissioner of the State of Florida. I am here today representing the National Association of Insurance Commissioners, as the chair of their 

21

property committee, and as the chair of the committee on catastrophe insurance working group. 

As the chairman has already stated, we are not here merely because of the natural disasters of 2004–2005, or because of Hurricane Katrina. 

As I testified in June, catastrophe events are a great equalizer, 

and the hurricanes, earthquakes, floods, and tsunamis do not discriminate against inland people or coastal people, rich people or 

poor people or Republicans or Democrats. The issues in the marketplace today will affect all Americans, regardless of their status in 

life or their political affiliation. 

That is why we need to concentrate on a bipartisan solution. 

I am very proud of the Florida delegation and the number of 

meetings that we have had and the number of bills that have been 

sponsored which I think deal with a very complicated issue that 

has no simple solution. If it were simple, we would have done it 

by now. 

Today, I would like to provide a perspective on some of the 

things we should consider on a national and local and State level 

when we consider managing national catastrophes. 

What I would like to talk about is what mechanisms are in the 

States that have been used that perhaps have helped alleviate the 

problem and, in other cases, have potentially exacerbated the problem. 

We need to look at a number of the things that you have already 

mentioned for pre-catastrophe planning, like tax-deferred catastrophe reserves, allowing insurance companies to accumulate capital to pay, and maximizing the use of the private sector. 

We need to look at mitigation. If you look across the table, everyone at this table will agree that mitigation is a very powerful tool 

for reducing future losses and minimizing cost increases for consumers. 

We need to look at consumer savings accounts and empowering 

consumers so that they can make decisions and save money and 

hopefully mitigate against future losses. 

We need to look at a myriad of State and Federal programs that 

are out there, and once we look at all of these other things, at what 

point do we need to have, if at all, a Federal catastrophe plan? 

The markets have spoken to us over the last couple of years very 

loud and clear. 

The cost of CAT insurance had undergone unprecedented rate increases. 

The cost drivers in the system include many things. 

We have underestimated our losses with our computer models. 

We have increased capital requirements because of changes in 

A.M. Best requirements and stress tests in our insurance marketplace, and quite frankly, our markets are attracted to go other 

places where they can get better rates of return. 

Much has been written and has testified to about the role of regulation, and has actually been referred to as price controls that 

have been widely used as an impediment to the marketplace. 

In actuality, very few States exercise price controls. That does 

not mean that States do not have a role in the review of the cost 

of insurance. As a matter of fact, we have a responsibility to ensure 

22

not only that the rates are not excessive but they are not inadequate or unfairly discriminatory. 

The goal here is to tell insurance companies what they charge is 

within the laws of the State, which means that it fits within that 

State’s statutory guidelines. 

I am very proud to have today, sharing some time with me, my 

colleague from South Carolina, Director Eleanor Kitzman. 

She is here from a State that was not directly impacted by the 

storms of 2004 or 2005. 

As a matter of fact, it has been several decades since her State 

has been hit with storms, but she is seeing in her State some of 

the very things that we are seeing in Louisiana, Texas, and Florida, and this is very, very significant rate increases, but more importantly, we are seeing a contraction in the marketplace, and another contraction in the marketplace in what is called the surplus 

lines. We simply have no more capacity in certain areas of our 

country, including the State of Florida. 

I recently concluded a trade mission with Governor Bush to visit 

the folks in the Lloyd’s syndicate, and they said Florida is a great 

market, you are doing a lot of good things, but we do not have anymore capacity for your State. 

Eleanor has suffered similar situations in her State, and she has 

a State that is widely viewed as a free market State, and despite 

the fact that it is a free market State, there is a very limited 

amount of capacity through those increases in rates, both in the 

primary market as well as in the secondary market. 

The markets have told us they have taken about all the catastrophic risk they can in certain areas. That does not mean there 

is not reinsurance widely available in other places, but in the 

places that need it the most, in the aftermath of these storms, they 

are having grave difficulty securing that coverage. 

While the average cost of reinsurance in the United States rose 

about 76 percent in 2006, most of this catastrophe coverage has not 

gone to the coastal States. 

Price increases in Florida, in South Carolina, and in other parts 

of the Gulf Region have increased 300, and 400, and up to 1,000 

percent, as already been testified to by Members of Congress who 

have experienced that in their own districts. 

As a long-term response, empowering consumers will mean that 

the State and local governments will need to adopt better building 

codes, enforce building codes, and use proper land management 

plans that hopefully will reduce catastrophic exposure. 

We all agree that mitigation techniques will work. Florida has 

embarked on a novel mitigation program which we hope will do a 

lot to reduce the frequency and severity of losses in our States. 

These efforts will take time, and these efforts will require a lot 

of money and resources. 

Unfortunately, we need to do more, and one of the things we 

need to do, I believe, is not necessarily embark on a large Federal 

program. 

I have been a major proponent of Ginny Brown-Waite’s bill, Representative Brown-Waite’s bill, and there have been other bills out 

there looking at a Federal backstop. We looked at—PCI had suggested some funding mechanisms for State pools. 

23

We also have seen auction programs that have been put out 

there to help private and public partnerships, but we can do some 

other things, like, under the current system, we could look to creating some catastrophe reserves, as been proposed by Representative Foley. 

I think that will go a long way toward augmenting the capital 

development within the private sector for a private sector solution. 

Also is to allow consumers to accumulate capital through the catastrophe savings account, as has been proposed by Representative 

Feeney. 

This will allow consumers to accommodate capital, protect them 

from the higher deductibles, but also could be used for them to invest in mitigation devices, which will ultimately save consumers 

money not only on their insurance but on their deductibles. 

Given the wide variety and complexity of the concept of these 

various programs, I would strongly endorse the concept presented 

by Congresswoman Wasserman-Schultz on the creation of a national commission on catastrophe preparation, to look at and weigh 

the myriad of programs and how they can interrelate. 

Clearly, there are a number of forward-thinking ideas we need 

to consider, but they should be framed with the answer with one 

thing in mind: What will it do for the affordability and availability 

of coverage? Ultimately, this is not just an insurance issue; this is 

an economic recovery issue. 

Without the ability for working people in the Gulf Region and 

the Atlantic Region to secure homeowner coverage and business 

coverage, our economic development in this region is in peril, and 

this will dramatically increase costs for all States, even though 

those do not believe they have a catastrophe exposure. 

The lessons of recent CAT’s have only been the warning that we 

have to start making some serious decisions, because it is not a 

matter of if, but when, the next disaster will be here, and the question is, did we learn the lessons of 2004 and 2005, and are we willing to have the vision and the patience and the wherewithal to prevent these economic catastrophes in the future? 

Thank you for your time. 

[The prepared statement of Kevin McCarty can be found on page 

89 of the appendix.] 

Chairman BAKER. I thank the gentleman for his statement. 

Our next witness is Ms. Wendy Baker, the president of Lloyd’s 

of America. 

Welcome. 

STATEMENT OF WENDY BAKER, PRESIDENT LLOYD’S 

AMERICA, INC. 

Ms. BAKER. Good morning, Mr. Chairman, and members of the 

subcommittee. Thank you for inviting me to testify here today on 

behalf of Lloyd’s of London, the world’s leading specialist insurance 

market. 

Last year’s record-breaking storm season presented significant 

challenges to the global insurance market. Although the first half 

of this year’s Atlantic storm season has not proven as deadly nor 

as costly as the early part of the 2005 season, it is nevertheless imVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
24

portant to continue the dialogue on protecting the United States 

economy from large-scale catastrophic losses. 

Lloyd’s is very pleased to participate in today’s hearing, and commends the subcommittee for recognizing the continuing need for 

stability in the coastal markets. 

The United States is the largest overseas market for Lloyd’s underwriters. 

In Florida and the Gulf States, Lloyd’s functions as an eligible 

surplus lines insurer and a reinsurer. 

In this region, Lloyd’s is a significant direct insurer of industrial 

and utility property, particularly in the offshore oil and gas sectors. 

Lloyd’s also insures many other businesses and high-value residential properties. 

Accordingly, we thank the members of this subcommittee, as well 

as the other members of the House Financial Services Committee, 

for leading the way in promoting serious analysis and dialogue on 

the tough issues, such as catastrophe mitigation and regulatory efficient and uniformity, which necessarily impact the stability of 

both the U.S. economy and our global industry. 

Our responsibility to our U.S. policyholders going forward is to 

avoid complacency. 

We realize that we must ensure that we can continue to meet the 

future challenges that the marketplace and Mother Nature will 

present. 

We commend you, Mr. Chairman and the members of the subcommittee, for recognizing that, although markets have recently responded to large-scale disasters, the Federal Government must also 

avoid complacency and anticipate future challenges. 

Specifically, I recognize that the Federal Government’s role is 

broader than simply providing immediate relief for losses and that 

policy initiatives and mitigation measures play a crucial role in stabilizing the markets. 

Regulatory and litigation reform for the underlying direct market 

can have a material beneficial impact on the availability of reinsurance capacity. 

Likewise, land use planning and public policies which affect the 

changing concentration of exposed values in coastal States may be 

an important component of long-term stability. 

While the insurance and reinsurance markets tend to adjust to 

dislocations on their own in time, public policy can and should play 

a role in improving that market response. 

For example, most of the natural disaster bills which have been 

introduced by members of the Financial Services Committee over 

the past year have included mitigation measures such as encouraging the development of mitigation programs by States, as well as 

standards for the construction and maintenance of buildings, to 

protect against future disasters. 

Reinsurers and direct insurers alike are interested in the efficacy 

of these measures. 

As a major U.S. income tax payer, Lloyd’s also notes the dialogue 

initiated by this subcommittee and in the tax writing committees 

regarding the use of tax policy to encourage expansion of natural 

catastrophe risk capacity. 

25

At Lloyd’s, we have our own initiatives to meet future challenges. 

We continue to refine our realistic disaster scenarios, which help 

us anticipate potential losses and ensure that both syndicate level 

and market level exposures will permit us to handle catastrophic 

losses. 

The severity and frequency of catastrophic events is increasing, 

and we must make sure that we stay ahead of them. 

This year, Lloyd’s will add two scenarios with losses of up to $100 billion. 

Also, while the role global climate change plays in recent or future losses may be subject to debate, Lloyd’s is contributing to 

worldwide efforts to find some answers. 

As we consider our responsibility to our policyholders here and 

how to continue meeting them, U.S. lawmakers and regulators 

might also consider their responsibilities to help ensure that the 

global insurance market is well positioned to handle increasingly 

severe and costly natural disasters in the United States. 

In this regard, we would like to raise two specific issues with you 

today. 

First, we believe it to be important to create greater uniformity, 

simplicity, and efficiency in State regulation of the surplus lines insurance to streamline placements for large commercial policyholders and to modernize State regulation of reinsurance. 

We, therefore, commend your leadership, Chairman Baker, and 

that of Mrs. Brown-Waite, and all cosponsors and supporters of 

H.R. 5637, the Non-Admitted and Reinsurance Reform Act of 2006. 

We were gratified to see the Financial Services Committee take 

such a strong bipartisan stand in favor of these goals, with invaluable leadership from you all and Chairman Oxley. 

We pledge to continue to work with you and your colleagues on 

both sides of the aisle, State insurance regulators, and other interested stakeholders to continue to build consensus for greater uniformity in surplus lines and reinsurance regulation, as well in all 

aspects of insurance regulation. 

We also recognize the efforts of Representatives Shaw and Foley 

and other members of the Ways and Means Committee to examine 

how tax policy might be used to address capacity issues. 

Second, it is important to recognize that most of the reinsurance 

protection provided to the United States market comes from reinsurers based outside of the United States. It is altogether appropriate to use global capacity, as this provides a buffering effect to 

a blow that would otherwise have to be sustained entirely by the 

local economy. 

Data from the Insurance Information Institute demonstrates the 

significance of the foreign reinsurance market to economic recovery 

in the Gulf and southeast coast. 

In 2005, some primary insurers with exposure in those regions 

had up to 60 percent of their gross losses covered by reinsurance. 

Approximately one-third of the insurance industry’s $60 billion loss 

from last year’s three hurricanes was paid by reinsurers based outside of the United States, including Lloyd’s. 

One way to address the capacity issues before us today is to 

maximize the participation of the world’s strongest and most stable 

reinsurers in the U.S. catastrophe risk market. This can be accomVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
26

plished by reorienting U.S. credit for reinsurance rules to focus on 

soundness and security. Specifically, the rules should focus on the 

financial quality of reinsurers and the security that they provide, 

rather than the geographic location of their headquarters. Appropriate weight should be given to external valuators, such as the financial ratings assigned to reinsurers by third-party rating services, and the actual claims paying records of those reinsurers. 

Once again, we thank you for your leadership. We also urge you 

to continue efforts to ensure that the global reinsurance market, as 

a whole, is in the best position to meet the insurance needs of the 

United States consumers, especially in high-risk coastal areas, 

where specialist overseas insurers such as Lloyd’s provide a critical 

source of insurance and reinsurance capacity. 

I thank you for your attention. 

[The prepared statement of Ms. Baker can be found on page 65 

of the appendix.] 

Chairman BAKER. I thank the gentlelady for her statement. 

I take pleasure in introducing a Baton Rouge constituent. 

Mr. David Daniel is a principal in Daniel & Eustis, who appears 

here today as a representative of the Independent Insurance 

Agents and Brokers. 

Welcome, sir. 

STATEMENT OF DAVID DANIEL, DANIEL & EUSTIS, ON BEHALF 

OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS 

OF AMERICA 

Mr. DANIEL. Thank you, Mr. Chairman, and members of the committee. 

My name is David Daniel, and I am pleased to be here on behalf 

of the Independent Insurance Agents and Brokers of America to 

provide my association’s perspective on the issue of natural disasters. I currently serve on our national association’s executive committee. 

I am also the head of Daniel & Eustis Insurance Agency in Baton 

Rouge, and am partnered with the Eustis Insurance Agency in New 

Orleans. 

As a Louisianian, I first want to thank you, Chairman Baker, 

and Members of Congress, for the assistance that has been given 

to the Gulf Coast, and for holding this important hearing. 

This issue has impacted my own family, friends, and coworkers, 

not to mention millions of Americans and many other communities 

across the country. 

The Big I is extremely grateful for your continued work on this 

issue and for the opportunity to share its views on what we feel 

is a matter of critical importance. 

I could not be more proud of the members of our association for 

their efforts after Katrina. 

Many of our members had their own homes and businesses destroyed, but they set up makeshift offices in order to serve consumers and ensure that their claims were being properly handled. 

Employees from my own partner agency in New Orleans had to 

move to my office in Baton Rouge, where we set up a double-wide 

office trailer with 42 work-stations. Employees arrived at my office 

27

one by one, often in tears, with no home and no possessions, but 

they went right to work to serve the customers. 

Now, more than a year later, there are many employees in my 

own agency who are still displaced and living in trailers. 

My point is that independent insurance agents are truly on the 

front lines, and that we offer a unique and balanced perspective on 

the issue of natural disasters. 

We understand the capabilities and challenges of the insurance 

market that both insurers and consumers face when it comes to insuring against catastrophic risks. 

Our approach to the issue of natural disaster insurance comes 

from a very simple perspective. We are here to serve consumers’ 

needs. 

We strongly believe that our industry must come together with 

policy makers to find a common solution that will encourage insurer participation in at-risk markets. In short, we welcome all 

proposals and will consider all reasonable ideas that lead us to a 

healthy and competitive insurance marketplace. 

Recently, substantial insured losses from natural disasters have 

diminished insurers’ capacity and, more importantly, their appetite 

for catastrophic losses in general. 

The cost of coverage has greatly increased. Wind deductibles 

have skyrocketed, and adequate limits of coverage are not always 

available. 

The Big I believes it is no longer enough to say that the private 

market can handle catastrophic risks when coverage is not sufficiently available at affordable rates. 

In fact, it is our experience that private market coverage is 

scarcely available at any rate in some areas. This is fact becoming 

an availability problem, rather than an affordability problem. 

The reality is that many insurers have stopped writing homeowners and other property coverages in at-risk markets. With another difficult hurricane season upon us, something needs to be 

done to ensure that residents of these areas can find adequate insurance coverage. 

With these experiences in mind, I would like to stress that this 

issue is not simply a Gulf Coast problem, it is a national problem, 

as Chairman Baker and several of you have already recognized. 

Thank you for that recognition, and we strongly agree. 

Regardless of our exposure to natural disasters, we are all impacted as taxpayers, and history has proven that more tax dollars 

are going to be spent by the Federal Government in ad hoc postdisaster funding if there is not a structure in place to encourage 

the private sector to take on additional risk. 

Only a program that is national in scope will be able to generate 

enough capacity to cover the most devastating events. 

The Big I believes the best solution is for a Federal role to be 

in place before the events happen, to have a clear, well-structured 

mechanism that encourages the private sector to handle as much 

of the risk as possible, and to only trigger Federal involvement as 

a last resort upon private marketplace failure. 

Specifically, the Big I supports a Federal catastrophe reinsurance 

program to serve consumers and protect taxpayers living in all 

areas across the country. We are also open to a number of potential 

28

solutions, with limited Federal involvement, including tax-free reserving and catastrophe savings accounts, among others. 

Further, Big I supports efforts to reduce the cost of disasters, 

whether it is through mitigation, enhanced building codes, or financial incentives to mitigate risks. 

Finally, we support the creation of a national commission to 

study all of these proposals and make recommendations to Congress. In conclusion, I commend you, Mr. Chairman, for convening 

today’s hearing. 

We also thank the Members of Congress who have displayed 

leadership and initiative by proposing legislative solutions to these 

difficult issues. 

Achieving a consensus within the insurance industry for a solution to this growing problem has been elusive, but we hope your 

continued focus on this issue will encourage the public and private 

sector to develop new and innovative solutions. 

We stand ready to assist you in any way we can, and we urge 

you to see this fight through to the finish. 

Thank you. 

[The prepared statement of Mr. Daniel can be found on page 76 

of the appendix.] 

Chairman BAKER. Thank you for your statement and your participation here today. 

Our next witness is Mr. Franklin W. Nutter, president of the Reinsurance Association of America. 

Welcome, sir. 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA 

Mr. NUTTER. Mr. Chairman, thank you very much, and thanks 

to the members of this committee, many of whom have been active 

in this discussion and have offered very creative ideas for addressing this issue. We look forward to working with the committee in 

the form of the roundtable discussions you mentioned, or in the 

form of a commission, if that’s what the Congress should do, in addressing the various ideas and trying to solve this problem. 

The Reinsurance Association is a national trade association representing property and casualty insurers that specialize in reinsurance. 

All of our member companies are either domiciled here in the 

United States or are the U.S. subsidiaries of foreign companies. 

The concept and role of reinsurance is well understood by this 

committee and has been mentioned several times by members of 

the committee and by other witnesses. Reinsurers have participated in assisting the recovery from natural catastrophes for well 

over a century in this country. 

Typically, reinsurers will ultimately bear about one-third of the 

cost of natural disasters. In the case of the events of September 

11th, two-thirds of those losses ultimately were absorbed by the reinsurance industry. 

The role that reinsurance plays in this risk transfer mechanism 

was highlighted in a report issued in August 2006 by A.M. Best, 

the rating organization, that stated several factors contributed to 

the insurance industry’s stability in 2004–2005, noting the transfer 

29

of risk to the global reinsurance market and greater use of capital 

market solutions. 

It is quite clear from the information presented to this committee 

that 2004 was a dramatic year of hurricane activity and insured 

losses in this country. 

In that year, the global reinsurance market paid about a third 

of the losses that were ultimately borne by the insurance industry. 

As is also well-documented, 2005 was an unprecedented year for 

losses. 

Again, the reinsurance industry played a critical role. Estimates 

are that 60 percent of these losses from 2005’s hurricane season in 

the United States will ultimately be borne by reinsurers. 

It is therefore clear that the reinsurance market served to supply 

global reinsurance capacity to the United States. 

Estimates are that insurers and reinsurers in Bermuda will bear 

$11 billion of the losses from 2005 alone; U.S. reinsurers, $7 billion 

of losses; London and the Lloyd’s market, $6 billion; and European 

reinsurers, $6 billion. 

The 2004–2005 hurricane seasons are clearly indicative of the 

risk transfer that exists between insurers and reinsurers in the 

country. 

Despite these heavy losses, estimates are that reinsurance capacity committed and in place in the United States in 2006 has increased by 30 percent. As in 1993, after Hurricane Andrew, and in 

2001, after the terrorism losses of 9/11, the capital markets 

promptly provided new reinsurance capital and capacity. The same 

dynamic appears to have happened after 2005. Since Hurricane Katrina, approximately $24 billion in new capital has been raised to support underwriting needs, notably for U.S. 

catastrophe risk. Of that, nearly $8 billion was invested in new, 

start-up reinsurance companies. The remainder was replenishment 

of capital positions of existing reinsurers. An additional $4 billion has been invested in special purpose reinsurance vehicles, whose investors collaborate to provide extra underwriting capacity to existing reinsurers. Market reports are that 

nearly $4- to $6 billion of catastrophe bonds were invested in U.S. 

catastrophe exposure since Hurricane Katrina. 

Despite this new capacity, there are still insurance market dislocations in Florida and in some areas of the Gulf coast. 

Demand for reinsurance increased in these peak zones in 2006 

at a greater rate than the reinsurance supply was able to meet. 

The reasons for this should be highlighted. 

Certainly the rating agencies—notably, Standard & Poor’s and 

A.M. Best—have made additional capital requirements associated 

with insurance companies to support their catastrophe exposure. 

In addition, the insurance catastrophe models, which are widely 

used by State officials, as well as by insurance companies, have 

been revised for the hurricane season in 2006. Based upon new 

data, an assessment of increased frequency and severity was added 

to these models. 

Reports are that the Florida catastrophe models—and by that, I 

do not mean the State of Florida but models associated with Florida risk—increased 60 percent for frequency of hurricanes and 40 

percent for severity of those hurricanes. 

30

In the Gulf Coast, those catastrophe models were revised for an 

additional 20 percent increase in frequency and 15 percent for severity. Insurance company managements obviously reacted to the 

increased perception of risk in these areas, as well. 

This confluence of development has resulted in demand for catastrophe protection in peak catastrophe zones greater than supply. 

The RAA believes that this imbalance will be temporary, however. 

It has been typical in the insurance and reinsurance cycles that, 

following major cases, spikes in reinsurance rates are followed by 

new market participants, leading to increased competition and 

price moderation. Ultimately, free markets will create a more diversified insurance and reinsurance market that will spread risk 

widely, increasing capacity and price competition. 

We recognize that reinsurance plays a critical role in this debate, 

and we look forward to working with the committee and the members who have offered ideas to solve this problem in finding an appropriate solution. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Nutter can be found on page 104 

of the appendix.] 

Chairman BAKER. I thank the gentleman for his statement. 

Our next witness is Mr. Gregory W. Heidrich, senior vice president, policy development and research, representing the Property 

Casualty Insurers Association of America. 

Welcome. 

STATEMENT OF GREGORY W. HEIDRICH, SENIOR VICE PRESIDENT, POLICY DEVELOPMENT AND RESEARCH, PROPERTY 

CASUALTY INSURERS ASSOCIATION OF AMERICA 

Mr. HEIDRICH. Thank you, Mr. Chairman, Ranking Member Kanjorski, and members of the committee, for the opportunity to 

present our views and to address the issues of this hearing. 

I am here representing the 1,000-plus members of PCI who write 

some 40 percent of the Nation’s homeowner’s insurance. Because of 

that business, our members are deeply interested in the work you 

are doing. 

Our members commend you and your colleagues for examining 

this issue, not just for the hearing today but in the work you are 

doing every day. 

There are a number of interesting and important proposals that 

many of your colleagues have offered to address the catastrophe 

issue: Homeowner’s Insurance Protection Act, Policyholder Disaster 

Protection Act, Catastrophe Savings Account Act, Catastrophic Disaster Risk and Insurance Commission Act, and many others. 

These proposals deserve discussion and debate, but we commend 

you most of all for offering concrete ideas and for being willing to 

hear our views. 

From our standpoint, the problem we face is straightforward: 

more hurricanes of greater intensity and no less exposure to other 

natural disasters, more development and population growth and 

much higher property values in catastrophe-prone areas, more 

Americans with more of their net worth exposed, building codes 

31

and code enforcement that are not strong enough, and we are still 

letting people build in areas that are at even more risk. 

As insurers, we strongly prefer to use market solutions to the 

problem, but as you know, we do not operate in a free market for 

rates, for product development, or many other aspects of our business, and obviously, people already live in catastrophe-prone areas, 

so we have to deal with that, as well. 

Our members have identified a number of ideas that we would 

like to offer for your consideration. 

First, State and local governments need to review and, where 

necessary, strengthen building codes, code enforcement, and land 

use policies. 

To help with this process, our organization will suggest and support legislation, wherever we can, to strengthen existing codes or 

adopt new ones. 

The solution should be tailored to local needs, in some areas perhaps strengthening the wind-borne debris requirements in an existing code, in other area perhaps new statewide minimum building 

standards. 

Second, new investments in loss prevention and mitigation are 

important. 

To help with that, we will support new Federal funding for community loss prevention and mitigation projects or training new 

code inspectors. 

Third, we think more should be done to expand private market 

capacity. 

We will suggest and support a variety of ideas to reduce market 

restrictions, including unnecessary controls on prices, product design, or other measures. We know change of this type is hard, but 

we also know it is the only way this problem can be solved in the 

long term. 

We understand some have concerns about this approach, but 

we’ve seen great success from market reforms in solving other serious availability and affordability problems. 

Most notable recently are the reports from New Jersey, where 

car insurance reform has made a tremendous difference, and we 

think the same can happen in property markets over time. 

Fourth, we are looking carefully at the idea of letting insurers 

create voluntary tax-deferred catastrophe reserves in advance of an 

event. As has been mentioned this morning, Representative Foley 

has a bill that would do that, and our member tax committee is 

discussing his proposal right now. In concept, many of our members like the idea a lot, and we hope to give him constructive feedback very soon. 

Finally, we have also looked at the role of the State and Federal 

Governments in financing catastrophe risk. 

We see the inevitability of extraordinarily large natural disasters 

or mega-catastrophes, and that is why we have looked at possible 

financing roles for both the State and Federal Governments. 

With respect to the States, we think some States may ultimately 

need catastrophe funds for additional access to reinsurance. 

We will look very carefully at proposals on a State-by-State basis 

to decide if we will support them. We will look at whether private 

markets have freedom to respond, the effects of a catastrophe fund 

32

on the private market, and whether there are cross-subsidies involved. 

With respect to the Federal Government, we are looking at a different approach. 

Again, we think there are potential natural disasters so large 

and so damaging that they may require some Federal involvement, 

although we believe markets should address events below the level 

of true mega-catastrophes. 

We think there could be benefits in offering well-managed State 

catastrophe funds the opportunity to borrow from a Federal facility 

to meet immediate liquidity needs after a very severe event. 

We think a line of credit for State catastrophe funds could be set 

up in advance, would need to be based on sound credit standards, 

and would need to be the obligation of the citizens in the State borrowing the money. In addition, we think a line of credit should be 

tied to a demonstration that a State is doing everything it can to 

free up its markets and attract as much private capital as possible 

so this does not become a permanent solution. 

In conclusion, I would like to express again our members’ appreciation to you, Mr. Chairman, and your colleagues, for the opportunity to discuss our ideas with you, and finally, if you will indulge 

me one personal observation, I wanted to add that your subcommittee and your subcommittee staff, with whom I have worked 

personally, have been the leaders in Congress on these issues. Your 

committee staff is known personally by me and by our member 

companies. We deeply respect their knowledge of our industry and 

the issues we face, and we look forward to continuing to work with 

them. 

Thank you. 

[The prepared statement of Mr. Heidrich can be found on page 

82 of the appendix.] 

Chairman BAKER. I appreciate the gentleman’s kind compliments. 

I would represent to him there is extreme division of opinion on 

that observation, however. 

Our next witness is the Honorable Marc Racicot, appearing here 

today as president of the American Insurance Association. 

Welcome, sir. 

STATEMENT OF HON. MARC RACICOT, PRESIDENT, AMERICAN 

INSURANCE ASSOCIATION 

Mr. RACICOT. Thank you, Mr. Chairman, and members of the 

committee. 

AIA represents major property and casualty insurers doing business across the country and around the world, and we appreciate 

very much the opportunity to testify this morning on a matter of 

extraordinary importance to our members, and to the Nation as a 

whole, namely insuring natural catastrophic risk, and I commend 

the committee and its members and your leadership, Mr. Chairman, in examining proactive approaches to the management of this 

risk. 

The first anniversary, of course, all of us know, of Hurricane 

Katrina devastating the Gulf Coast was just 2 weeks ago, and during the past year, we have seen firsthand the terrible destruction 

33

this unprecedented storm inflicted, and it has been both breathtaking and heartbreaking, at the same time, for us to witness all 

of the calamity that has visited people along the Gulf coast. 

Today, I would like to briefly address how AIA believes we can 

and must both rebuild the Gulf coast safely and take steps to prevent future catastrophic loss in communities from Texas to Maine. 

The Gulf and Atlantic coasts are beautiful places to visit and to 

live, unquestionably, but they also present undeniable dangers. 

Contrary to what some insurance critics believe, the threat to 

coastal populations and property is not insurance; it’s hurricanes. 

Mother Nature is the problem, and she is relentless. We should be 

honest about those risks. 

Insurance is one mechanism that helps us be honest about those 

risks. It provides consumers an alert to the relative risk and cost 

of coastal development. Insurance also is a critical tool to protect 

and restore some of what Mother Nature takes away. 

The historic devastation from the 2005 hurricanes was met with 

an unprecedented deployment of insurance industry resources. The 

good news is that well over 90 percent of the Katrina-related 

claims in Louisiana and Mississippi have been settled. 

AIA member companies will not be satisfied, however, until 

every single claim is resolved. Insurers to committed to paying all 

damages that fall within their insurance contracts with customers. 

In the wake of Katrina, our members have set about to work 

very hard with State and Federal officials to strengthen the financial safety net for both homeowners and businesses. We believe 

that we must expand these efforts, both in scope and depth. We 

have arrived, we believe, at a historic moment for the U.S. property 

protection system and that we must examine all of the interdependent elements of this system to make sure they support rather than undercut each other. 

To that end, AIA has developed a holistic national hurricane 

preparation and response agenda. The goal is to keep our integrated, multi-faceted, risk-bearing financial mechanisms working 

for the benefit of all Americans. 

The AIA natural catastrophe agenda includes proposals designed 

to have immediate positive effects on the market, as well as proposals for longer-term benefits. The agenda includes, first, protective measures to keep people out of harm’s way, and to strengthen 

their ability to resist future hurricanes; second, regulatory and 

legal reforms to improve the stability of insurers’ operating environments; third, tax incentives that encourage individuals to take 

more responsibility for hurricane preparation and response; and finally, national flood insurance program reforms to ensure that the 

NFIP continues its vital role in protecting homes and businesses. 

I would like to take a moment to highlight the importance of loss 

prevention and reduction. 

Mitigation works. The evidence is in. It is absolutely true that 

mitigation works. Strong and well-administered building codes, 

policies to encourage retro-fitting of existing structures, like the 

new program in Florida, and sensible land use planning are effective. 

These and other loss prevention tools can make the difference between a community recovering relatively quickly from disaster, 

34

with citizens returning to homes and jobs, and a community remaining devastated and an economy remaining stagnant for many 

months or longer. 

I would also like to highlight the role of regulatory and legal reforms in improving the stability of insurers’ operating environments. 

Too often, State regulation of insurance has become captive to 

political pressures that hold down premiums in risk coastal areas. 

True risk-based pricing encourages responsible behavior and discourages dangerous behavior among consumers. It also meets the 

test of basic fairness. 

Mr. Chairman, we have heard many good ideas presented here 

this morning for further inspection and review and scrutiny, and 

we very much look forward to participating in that opportunity for 

discussion with our colleagues, our friends and neighbors, and our 

fellow citizens across the country to address the problems that confront all Americans and the U.S. property protection system, and 

we thank you very much for allowing us this opportunity to participate in today’s hearing. 

[The prepared statement of Mr. Racicot can be found on page 110 

of the appendix.] 

Chairman BAKER. I thank the gentleman for his statement. 

Our next witness is Mr. Charles Chamness, president and CEO 

of the National Association of Mutual Insurance Companies. 

Welcome. 

STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CEO, 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Mr. CHAMNESS. Good morning, Chairman Baker, Ranking Member Kanjorski, and members of the committee. 

My name is Chuck Chamness, and I am the president of the National Association of Mutual Insurance Companies. NAMIC’s members underwrite more than 40 percent of the property casualty insurance premium in the United States. 

NAMIC is pleased that you, Mr. Chairman, and the members of 

this committee, are making a serious effort to understand the nature of catastrophic risk and the role the insurance industry and 

the Federal Government can and should play to better prepare for 

and manage future large-scale natural disasters. 

With respect to the subject of this hearing, which is contained in 

its title, ‘‘Stabilizing insurance markets for coastal consumers,’’ I 

have good news and bad news. 

The good news is that, despite the enormous challenges property 

insurers have faced in the wake of last year’s hurricanes, I can report that almost all claims have been paid. 

Take-up rates for the flood insurance program have increased 

significantly. 

People in the affected regions are rebuilding at record rates, and 

a recent study found that nearly 90 percent of those who filed 

claims in Mississippi and Louisiana are satisfied with their insurance company. 

As we all know, 2005 was one of the worst years for natural disasters in American history. Hurricane Katrina alone caused approximately $40.6 billion in insured losses and 1.7 million claims. 

35

Yet, one year later, roughly 95 percent of homeowners’ claims 

and 99 percent of auto insurance claims have been settled. 

As a result, while residential building permits decline nationwide, Louisiana and Mississippi actually saw building permits increase. 

Despite the magnitude of insurers’ losses in 2005, their prudent 

risk-management strategies have enabled them to stand ready to 

respond to future catastrophes. 

While the insurance industry has done a good job weathering the 

2005 storms, the bad news is that most forecasters predict the 2005 

storm cycle will be the norm for the next several years. 

It was recently estimated that a level five hurricane hitting Miami could cause over $130 billion in insured losses. 

It also is estimated that there is a 20-percent chance that a $100 

billion event will occur within the next 10 years. 

Despite these dire forecasts, NAMIC believes that the private insurance market is well equipped to provide coverage for most types 

of natural disaster under most circumstances. That said, we also 

recognize that a true mega-catastrophe such as a high category 

hurricane striking heavily populated areas could potential exceed 

private market capacity. 

While NAMIC supports several Federal proposals that could help 

stabilize the market, we must be careful not to create government 

programs that disrupt the private insurance market. 

With that cautionary note about the use of government interventions, I will offer a few observations. 

First, it is an unfortunate fact that rate suppression forces lowrisk property owners to subsidize the insurance costs of high-risk 

buyers by paying inflated premiums. In addition, heavy regulation 

of pricing inevitably reduces supply. 

Second, government-sponsored or government-imposed rate suppression can have the effect of distorting public perceptions of risk. 

Federal and State Governments bear the cost of the economically 

irrational decisions that result by paying for disaster aid to repair 

of properties that should not have been built in the first place. 

Third, it is important for lawmakers, judges, and the general 

public to understand the cyclical nature of property insurer profits, 

how profits relate to surplus, and the role of surplus in ensuring 

that insurers are able to meet their contractual obligations to policyholders. 

Finally, the Nation’s courts must preserve the sanctity of contracts, and with respect to insurance contracts, this often means 

deferring to the authority of State insurance regulators that approved the contract language as part of the rigorous form-filing 

process that insurers must follow. If trial lawyers or others succeed 

in retroactively rewriting insurance contracts that were approved 

by insurance regulators, they will undermine the predictability 

upon which the healthy insurance system is based. 

These observations aside, we believe there are several measures 

that Congress should consider. 

First, NAMIC supports financial incentives to encourage States 

to adopt and enforce strong statewide building codes. 

Second, we support the concept of amending the Federal tax code 

to allow insurers to set aside a portion of premium tax in tax-exVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
36

empt policyholder disaster protection funds. We also support the 

concept of allowing homeowners to create tax-free catastrophic savings accounts which could be used to pay hurricane deductibles and 

costs associated with retro-fitting properties. 

Third, we believe that the national flood insurance program 

should be reformed. This is an area in which NAMIC strongly 

praises the work of this committee and all the work that you have 

accomplished in this area. 

We believe that H.R. 4973 goes a long way in addressing some 

of the shortcomings that currently exist within the NFIP. 

Specifically, we strongly support moving all second homes to actuarial rates and stronger enforcement measures in the bill. 

In conclusion, NAMIC realizes that those who live and do business in catastrophe-prone areas will face serious challenges in the 

years ahead. We believe the most effective mechanism for addressing these challenges is a private insurance market whose defining 

characteristics are open competition and pricing freedom. 

Congress can play a constructive role by reforming the national 

food insurance program, offering tax incentives for companies to reserve funds for future disasters, and providing incentives for States 

to enact and enforce effective statewide building codes. 

Thank you for giving me the opportunity to testify on this issue 

of vital importance to NAMIC member companies and the U.S. 

economy. 

I look forward to working with you and to helping consumers in 

coastal areas meet the challenges involved in effectively managing 

the risk of natural catastrophes. 

[The prepared statement of Mr. Chamness can be found on page 

71 of the appendix.] 

Chairman BAKER. Thank you for your statement. Thanks to each 

of you. 

I would like to engage in fairly extensive questioning today, but 

the schedule is not going to permit that. Therefore, I am just going 

to make a statement before Ms. Brown-Waite takes the chair in my 

absence, leaving you at the mercy of the Florida delegation. 

I wish to make clear that this committee will work very diligently, that this is—the announcement of our intended roundtable 

discussion process will only be a supplement to the committee’s formal inquiries. 

Accordingly, to each of you who have testified, and to the broader 

audience who are interested in this matter, I would request that 

any statements, papers, studies, findings, recommendations, or observations that you would choose to forward to the committee in 

the coming days and weeks—between now and our return next 

year, there will be a lot of staff work preceding members’ return 

to engage in the meaningful discussion. 

I do not wish to have an environment in which any stakeholder 

feels their perspectives have not been very carefully considered. 

Mr. Nutter, with regard to the reinsurance matters and the data 

which you provided to the committee today, I would like to have 

more extensive analysis of that role of the industry in meeting the 

identified need. I do believe that we should observe whatever needed reforms that may be considered that it is in the backdrop of the 

broader insurance regulatory world that natural catastrophe reVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
37

sponses are, indeed, a critical and pivotal State, but in order to 

seek an appropriate remedy, we should examine the broader elements that constraint investment, whether it be Lloyd’s global investment in the United States or whether it be a regional firm trying to reach across the Louisiana boundary to Mississippi. 

Accordingly, I have strong interest in seeing uniformity of building code. 

Perhaps there should be a Federal minimum standard beyond 

which locals can exceed or choose to do as they see fit. There 

should be some Federal leadership with regard to pricing. When I 

understand a State reviews a rate application, they look only to the 

jurisdiction over which they have responsibility. 

If the company works in 12 States, how does that relate to the 

overall company solvency and risk profile in the remaining 10 or 

11 States in which they operate? 

We need to have a much better risk analysis of where companies 

are highly concentrated in unique lines of business and to understand the make-up of the industry’s risk profile at this window of 

opportunity. 

Hence, I see this as a significant problem, but I also see it as the 

first real opportunity in my entirety of service in the Congress 

where we can get everybody in a room, talk about this, and perhaps come together with some conclusion, realizing that not everybody is going to be happy, but this has to get done, and I, as would 

not be a surprise to anyone, am a very free-market supporter and 

have the strongest of beliefs that this can be reconciled without 

draconian Federal intervention. 

However, it may be necessary, under some set of very difficult 

triggers that get pulled, much like our terrorism reinsurance matter, for that to be a remedy that should be properly contemplated. 

I haven’t reached any conclusion at all. 

What I do know is we need a great deal more information to get 

to a studied, defensible resolution that does not aggravate an already difficult circumstance, and so, I make a sincere request of 

each of you, and those who may be listening who have an interest 

in helping to educate this committee, because I do not intend to let 

the committee’s jurisdiction be farmed away. 

We are going to do this work, we are going to come up with a 

recommendation, and we are going to get it to the House floor next 

year for the House’s consideration, and this is far too important for 

us not to fully understand the full range and scope of our problem 

and all the potential remedies that might be available to us, and 

I appreciate your courtesy in participating here, and Ms. BrownWaite will assume the chair. 

Thank you. 

Ms. BROWN-WAITE. [presiding] I think everyone heard the chairman say that we are going to be acting next year on a proposal. 

It may be a combination of many of the ideas that have been put 

forth by so many Members of Congress whose States are impacted. 

We have heard terms such as risk-based pricing and catastrophic 

prone areas. I would venture to guess that there are probably only 

one or two States that are not in catastrophic-prone areas. 

I would like to—because we have so—so many of our members 

had other committees to go to, and I have one later and might not 

38

be able to ask the questions that—I have several questions, but I 

would only like to ask just one, and that would be to Mr. Nutter 

and also Ms. Baker. 

I have met with various groups and been told that there is capacity out there to cover a large-scale natural catastrophe, but you 

know, there is more to this crisis than just capacity issues. I am 

hearing more and more from primary insurers that reinsurance 

rates are just becoming unaffordable, and of course, we all know 

that those rates are passed on to the consumers, be it a business 

owner with property and casualty or whether it be a homeowner. 

So what actually do you believe can be done to make the reinsurance market more affordable, and I would ask either Mr. Nutter 

or Ms. Baker. 

Mr. NUTTER. I would be glad to answer first. I assume that Ms. 

Baker would also join me in this. The spikes in reinsurance rates 

are clearly driven by a variety of things. As has been discussed by 

the committee, the losses of the last 2 years, particularly in Florida 

but in the Gulf Coast, as well, have fallen across the insurance sector but largely into the reinsurance community. Indeed, the last 2 

years in the global reinsurance market have been an unprofitable 

market as far as catastrophe losses are concerned. 

One of the things that took place following 2005 is that the catastrophe modeling firms have revised their assessment of both frequency and severity in Florida and in the Gulf Coast. This has 

caused companies to reassess what their catastrophe exposure is. 

In addition, the rating agencies, notably A.M. Best and Standard 

& Poor’s, revised the capital charges that they apply to these companies, insurance and reinsurance companies, for the catastrophe 

risks that they face. This confluence of factors has spiked reinsurance rates, even at a time when there is increased capacity being 

committed into the United States by U.S. and non-U.S. reinsurance 

companies. 

One of the things that clearly needs to take place, as several of 

the witnesses have mentioned, is a recognition that it is not insurance companies or reinsurance companies that pay losses; it is consumers, and in the case of some States, taxpayers and policyholders who have not had these losses. 

The funding mechanism into the system clearly needs a period 

of adjustment. 

We would encourage the committee, as you do look at this over 

time, not to take a snapshot of July 1, 2006, and look at the reinsurance market but to look at it through this hurricane season and 

to look at the historical pattern of some spike in pricing followed 

by new capital coming in, and tend to be moderation in pricing. 

That is what I would expect to take place. That is the historical 

trend in the market. 

Ms. BROWN-WAITE. Ms. Baker? 

Ms. BAKER. Yes. I would certainly agree with what Mr. Nutter 

has said. 

In terms of Lloyd’s specifically, I could make a few comments. 

Mr. McCarty mentioned earlier that he had been in London and 

was told that, in terms of Florida, basically, we’re full-up. 

What we have seen over the last few years—and you can call it 

global warming, climate change, or whatever—is certainly an inVerDate 0ct 09 2002 17:47 Mar 29, 2007 Jkt 031548 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\31548.TXT HFIN PsN: TERRIE
39

creased severity and increased frequency, and we looked at our 

RDS, our realistic disaster scenarios, about 2 years ago, certainly 

pre-Katrina, and we thought there could be something that was a 

$6 billion Gulf coast storm, and, you know, in fact, we came pretty 

close to that. 

We then looked at other coastal areas. We looked at Florida. We, 

as I had mentioned earlier, have a scenario for a $100 billion loss; 

for instance, a category four into Miami. 

We then, as a marketplace, have to look at ourselves and make 

sure that we can pay those claims. So we have to stress-test our 

market on a syndicate level to make sure that our individual syndicates that write reinsurance—and not just the United States. I 

mean we write worldwide, so we have to protect a lot of policyholders. 

We looked at that and said if we have $100 billion in a loss, what 

do we need to do to be able to make sure that the market can bear 

that loss, and in some cases, that would mean that a syndicate that 

at some point might write $500 million of business in Florida may 

then have to only write $400 million, so that, as a whole, the market can bear the losses. 

So in short, I would say we have an issue with capital, we have 

an issue with frequency and severity of the hurricanes certainly in 

the last few years, and maybe it is climate change, but it could be 

one of these, you know, current trends that you get every 40 years, 

that you have a sort of change in surface temperature of the Atlantic. 

So we could maybe hope it might be that, but those are a lot of 

the other, I think, issues that come to bear when you deal with 

Gulf Coast exposures. 

Ms. BROWN-WAITE. Just a follow-up question. While, so far, we 

are at the—almost the middle of September, the projected hurricanes have not struck. How long does the market take to adjust? 

I know you do certainly more than one-year forecasting. 

How long does it take to adjust, and if there are no major hits 

hit year, what sort of price adjustment will there be, or will the reinsurance rates still remain high and continue to severely affect 

our constituents, not just in Florida? 

Ms. BAKER. I am sure that Mr. Nutter will have a comment on 

this, as well, but I would venture to say that the rates probably 

will not climb, but they will become static if we do not have another hurricane. We have 21⁄2 months to go, and we certainly have, 

as I said, other exposures around this continent. 

I mean we could have an earthquake in California tomorrow, but 

barring any large catastrophic loss, I would venture to say that the 

rates on catastrophe reinsurance business would probably start to 

flatten out in the next year or so. 

Mr. NUTTER. Madam Chairwoman, I would add that if you 

looked at Hurricane Andrew in 1991 and asked that question, looking in retrospect, what you would see is new capital coming into 

the reinsurance market, and the spike that occurred in pricing 

after Hurricane Andrew moderated. 

Admittedly, we had quite a few years without any significant 

hurricane activity, which would affect that, but the prices, the rate 

on-line, if you will, moderated dramatically, really, until this year. 

40

There was no spike in rates, not even after 2004, notwithstanding 

the losses. 

The other thing to keep in mind about reinsurance pricing is that 

it is a factor in insurance rates, but it is not passed through directly in the rates. 

So numbers that sound extraordinarily high in the reinsurance 

pricing become a consideration in the rate filings that insurance 

companies do. It is not the only driver of consumer prices. 

There are clearly other considerations, many of which have been 

mentioned here, about increased perception of risk and increased 

assessment of risk and severity and frequency. 

Ms. BROWN-WAITE. David? 

Mr. DANIEL. I would just like to add that, of course, we are not 

just talking about regional hurricanes here. We are talking about 

anywhere in the country, and no place is immune. 

Everyone has skin in the game, whether you are an insured in 

Florida or Louisiana, or you are a taxpayer in a central State. 

You either pay your insurance premium or you pay billions out 

in tax dollars, and we just continue to suggest that it is far better 

to have a mechanism in place to encourage the voluntary marketplace to provide as much coverage as possible rather than to have 

the taxpayers pay much more on the back end. 

Ms. BROWN-WAITE. Mr. McCarty. 

Mr. MCCARTY. I just have a little different perspective on the potential in terms of the long-term rates. 

I believe we are in for a—this is a long-term transitory period of 

upward pricing in rates. Even after Hurricane Andrew, when we 

had millions, billions of dollars recapitalized, we had the creation 

of the Bermuda market, we did not see prices go down in Florida. 

Prices continually have gone up to Florida, even though we had enjoyed a relative period of calm in terms of storms. Coupled with 

that, we had, actually, in some cases, if you talk individually with 

the reinsurance underwriters, there was an excess of capital in the 

marketplace, so they actually were providing quota share reinsurance which would allow participation through the primary writers 

and the reinsurers, so that there was additional capacity, for sure, 

but that did not reduce prices. 

When I was visiting in Bermuda and in London, it was made 

very clear to me that the expectation in Florida is that you are a 

very good writer, you are a very good market for us, you have—

your insurers have probably the best detailed information, you 

have the best data collection. The problem is you continue to have 

exposure that outstrips their ability to have capacity. 

The other thing you have to remember—we are $1 trillion of exposure. 

They can only take so much of that. When you have increased 

capacity in the world—and they do—that is great for hurricanes in 

Hawaii, because there is additional capacity there, but because of 

the exposure of a Florida, of a New York, my belief is, with increased frequency and severity of storms, with increased seismic 

activities—we witnessed a earthquake in the Gulf of Mexico. I 

mean there is an increased potential of economic disasters around 

the world that is going to continue to cause strain in the marketplace. 

41

Even though we have additional capacity in Florida, we will not 

see those rates go down. I think that is going to be generally true 

of the Gulf States and generally true of the Atlantic States. 

Now, that may not—that is what I have been told by individual 

writers who write 85 percent of the market in Florida. 

Ms. BROWN-WAITE. If you could provide to my office, and the 

other Florida members’ offices, the various company rate increases 

and what percentage of that rate increase you believe is due to the 

escalating cost of reinsurance, then we will also have it entered 

into the record, if you would be so kind. 

Mr. MCCARTY. I think that is a very important point, Madam 

Chairwoman, because if an insurance company has to pay ‘‘X’’ million dollars in premium for risk transfer and I do not provide that 

with that rate relief, then they are not going to collect enough premium to pay their reinsurance bill. So I am jeopardizing the solvency of an insurance company. 

Obviously, one of my responsibilities as the insurance commissioner is to ensure that insurance companies have capital reserves 

and risk transfer mechanisms to ensure that they have the wherewithal to pay claims, and if a company has a 80-to-90-percent rate 

increase with regard to that, they do pass that on. 

Suppressing that rate would only put Florida in a position of rendering its insurance companies insolvent, and that is not an option. 

Ms. BROWN-WAITE. Ms. Wasserman-Schultz, I believe you have 

some questions. 

Ms. WASSERMAN-SCHULTZ. Thank you, Madam Chairwoman. 

Commissioner McCarty, I know you referred in your testimony to 

the situation in South Carolina, and in spite of the fact that that 

it is a State that has what is viewed in the industry as a relatively 

good regulatory market, in spite of that fact, even with the competitive rating that they have, they still have significant increases 

in their property insurance and availability issues. 

So why, in spite of the regulatory environment there being at 

least favorable to the industry, are they still experiencing the same 

problems? 

Mr. MCCARTY. You know, first of all, I think Director Kitzman 

and myself would agree that we need to have risk-based premiums. 

It should not be people who have—live in higher-risk areas should 

not be subsidized by people—having said that, we believe that 

there is a balance that you need to strike. 

South Carolina is simply evidence to the fact that the exposure 

or risk of exposure—there is a limit in the capacity of worldwide 

insurance. 

They have surplus lines companies—those are companies that 

are unregulated, they get to charge whatever premium they want—

are telling the director of South Carolina they do not have any additional capacity for her State at this time. 

That may change over time. I do not question that. More capital 

markets are wonderful things, but I think what I am suggesting is 

that we used kind of politically charged terms sometimes, like price 

controls, when, in fact, what we have is a regulatory regime that 

reviews those rates to ensure that those rates are not excessive but 

also not inadequate. 

42

I mean we want to make sure the company is charging enough 

premium, buying reinsurance. I had to encourage five or six companies in Florida to raise their rates, much to the chagrin of constituents of Florida, because I wanted them to purchase the reinsurance. 

So that is what we do. That is part of our job. 

The point I was trying to make with Eleanor, and why she is 

here, because they do have a very—what is considered favorable to 

the insurance industry, so that they get the kind of rate relief that 

they want. 

I am going to tell you, I have sat down privately with insurance 

companies, and so has the director of South Carolina, and said, 

frankly, it does not matter what the rate is. I cannot buy the coverage, or I am a large company, large companies that we know that 

make up 20, 30 percent of the market share, cannot take anymore 

exposure at any price. 

So while we want to be sensitive to pricing and ensure that there 

is price adequacy and ensure that they are going to be able to collect the premium for—to purchase the reinsurance or other alternative reinsurance mechanisms that are coming into the marketplace from the venture capital markets, which is great, but I just 

do not want us to believe that somehow the regulatory framework, 

in and of itself, which in most States, 32 States, is use and file, 

which means they charge the rate first and then justify it 30 days 

later, and they still have the regulatory—an administrative procedure system where we have to demonstrate that the rate is not excessive. 

So I think that we sometimes put a disproportionate amount of 

emphasis on the regulatory framework. 

I think we all should work towards modernizing our regulatory 

frameworks to provide incentives for companies to come into our 

States. 

At the same time, I think our consumers, when they get a 90-

percent—I know people in your districts have gotten 400 and 500 

percent rate increases, and they want to know that somebody is 

looking at this, and I think there was a case that you will recall 

after Hurricane Andrew, an internal memorandum from a company 

that said we just had a huge devastating hurricane in Florida, this 

is a great time for us to take advantage of this situation, and I 

think you might recall that situation, and those kinds of things 

really cause consumers to be very frustrated and angry, and they 

want to have some sense that there is some regulatory framework 

there that ensures that consumers, understanding they have to pay 

more for premiums, understanding, to the extent we can explain it, 

the costs of global reinsurance, want to make sure that somebody 

is looking out that they are not being gouged. 

Ms. WASSERMAN-SCHULTZ. Madam Chairwoman, you know this—

we were both in the legislature when Andrew hit, and one of the 

most frustrating aspects of the issue of rating was that, for years 

and years before Andrew hit, the insurance industry was low-balling rates. 

I mean they were competing down here, so that they were not 

adequately charging their customers, so that they could build more 

of a customer base, and when we lost, I think, seven insurance 

43

companies after Andrew, it became very clear that they were not 

capitalized enough, that they did not have enough reinsurance. 

There were a host of problems, and those have been addressed, 

and I agree, a regulatory environment that might be different could 

be helpful, but Governor Racicot, you mentioned in your testimony, 

which is part of the reason I asked Commissioner McCarty this 

question, that tougher and more uniform building codes, greater 

enforcement of those codes, more rating freedom, mitigation, that 

those are things that would be part of a solution for you and your 

industry representatives for the Gulf Coast insurance crisis, and I 

assume on down to Florida as well, but what I want to know from 

you, because I do not think you are being disingenuous, but I have 

a hard time believing that if all of those things happened, that at 

that point—what I want to know from you is could you represent 

that your industry would offer both residential and commercial 

property insurance at reasonable rates if the things that you say 

need to happen actually happened? 

Mr. RACICOT. I can tell you that our companies would offer coverage at rates that were actuarially sound and that reflected the 

real cost. 

I mean the fact of the matter is that— 

Ms. WASSERMAN-SCHULTZ. Well, let me just interrupt you for one 

second, because I just got over my Blackberry that Nationwide Insurance in Florida just asked for a 106-percent increase in residential property insurance. 

I mean I do not know anyone that would define that as a reasonable— 

Mr. RACICOT. I do not think that you can isolate one single thing 

that we are recommending and say that it would be the solution 

all by itself. 

There needs to be protective and mitigation methods that are 

employed and undertaken. There needs to be regulatory reform. 

There needs to be legal reform. 

Ms. WASSERMAN-SCHULTZ. Let us say that all of those things 

happened. 

Mr. RACICOT. At the end of the day, it is our belief that is where 

you should proceed first. 

Now, the fact of the matter—other solutions have been proposed, 

but free market principles have served this country particularly 

well with its insurance and private property protection system over 

the course of the last 150 years, and when you think about the fact 

that we are talking about an industry, a private industry that 

makes claims payments in the neighborhood of about $300 billion 

a year to its consumers or customers, you have to recognize that 

it is a vital and critical part of the fabric of our American existence, 

and to preserve it and to keep it strong and not to compromise its 

infrastructure, its architecture, is extremely important, because I 

do not think the government at any level is inclined or is in a posture to be able to take over that responsibility. 

So what we are saying is that obviously there are situations that 

may require bridge mechanisms that have been undertaken in the 

past and may need to be explored by this particular committee, but 

there is no panacea that is available here, and at the end of the 

day, risk-based pricing, regulatory control— 

44

Ms. WASSERMAN-SCHULTZ. Governor, what I am not hearing you 

say is that the answer is not yes. 

So you say that you need these elements in order to be able to 

make insurance, commercial and residential, available and affordable, but you are not saying unequivocally that if those things occurred— 

Mr. RACICOT. If all of the things that we are recommending to 

you occur, then it is our belief and we can say confidently that, at 

the end of the day, if there is a risk-based system in place and actuarially sound method and formula of determining premium, that 

that coverage will be available. 

Ms. WASSERMAN-SCHULTZ. Who determines that? The industry? 

I mean it is a moving target. 

Mr. RACICOT. Nothing subject to our human affairs is capable of 

absolute definition, but what I am telling you is that, based upon 

150 years of doing business and representations that we are able 

to confidentially make before the committee, that other scenario I 

described, we can address the issues, the private property protection issues that are existing in this country. 

Ms. BROWN-WAITE. I appreciate the gentlelady’s questions, and 

we will be able to come back to you, but we have other members 

who also have meetings to go to. So what I would like to do is, you 

know, come back to you, because your time is up. 

I would like to recognize the gentlelady from New York, Ms. 

Kelly. 

Ms. Kelly? 

Ms. KELLY. Thank you, Madam Chairwoman. 

I request unanimous consent to insert in the record this article 

from Carl Hiaasen, ‘‘Just say no to stronger building code.’’ It is 

from the Miami Herald. 

Ms. BROWN-WAITE. Without objection, so ordered. 

Ms. KELLY. Thank you very much. 

Commissioner McCarty, it has been noted that part of the problem in Florida’s insurance market is that the capitalization requirements are less than in States like New York, even though the 

risk of catastrophic loss is so much higher. 

What steps has Florida been taking to encourage higher capital 

requirements among Florida insurers and a greater ability to withstand the risks of your market? 

Mr. MCCARTY. Florida has a minimum capital surplus requirement for a property market to be $5 million, which, frankly, is less 

than some States and is greater than others, and is within the national standards for the National Association of Insurance Commissioners. 

$5 million for some property coverage is adequate. 

Clearly, in a State with $1.9 trillion of property exposure, $5 million capital in surplus does not provide much in the area of coverage. 

Part of the regulatory process that we go through is that a company is required to demonstrate through their business plan that 

they have adequate reserves or adequate capital to—adequate risk 

transfer mechanisms. 

As I testified earlier before, before the hurricane season 2004, 

quota share insurance was readily available, which would allow 

45

that $5 million to be leveraged. With $5 million, you cannot write 

very much coverage, many policies in Florida. 

One of the other things that the legislature has done is provided 

a surplus build-up program so that they provided matching funds 

of up to a half-a-billion dollars, so that we would raise the capital 

of some of these small surplus companies from $5- to $10 million 

to about $50 million, which puts them in, of course, a much better 

position to purchase reinsurance and leverage across the State. 

We would, as part of our regulatory framework and our solvency 

surveillance—most companies would not be able to write very 

many policies with $5 million. 

Additionally, I would like to see the standard for that to go to $20 million. 

Unfortunately, the signal that sends to the investment market is 

that Florida already has a difficult time attracting capital; certainly attracting $5 million, $10 million, when you leverage that 

against writing ratios with reinsurance, now they are setting this 

bar at $20 million, but I certainly would agree with you that higher 

minimum capital surplus standards would be beneficial, particularly since those very small cap companies write such a de minimis 

amount of coverage in Florida, it really does not have much of an 

impact on the capacity problem we have. 

Ms. KELLY. Mr. McCarty, why should Florida try to exempt itself 

from the rules that help prevent insurance loss? 

Other States, like my State, New York, are shoring up their 

building codes. 

So why should Florida exempt itself from that? Does that make 

any sense to you? 

Mr. MCCARTY. Florida has the strongest building code in the 

country, by far. 

We have a small exception that was made in the panhandle of 

Florida, from Franklin County to Alabama, that was—that building 

code is stronger than the building code that was in there before. 

My guess is when they conclude the study that is expected to be 

completed at the end of this year, that they will go up to the international standard. 

Florida has the strongest building codes overall. A very small 

portion of our population lives in that panhandle. 

Florida has the strongest building code. Dade County and 

Broward County have an advanced building code, above the international standard, and— 

Ms. KELLY. Excuse me, but we are talking not about those counties. I am focused, really, on the issue here, which is the panhandle. 

Mr. MCCARTY. I fully agree with you. I am embarrassed by the 

fact that that the Florida Building Commission, after I testified on 

two occasions—all of the insurance trade associations at this table 

were participating in that discussion, and they opted to do something. My guess, ma’am, I believe, in the next couple of months, the 

Florida legislature will overturn that decision and those building 

codes will be strengthened. 

Ms. KELLY. Mr. Nutter, I would like to ask you a question, because your testimony suggests that, for hurricane risk, there is sufficient reinsurance available at market rates, but many people 

46

have commented that those companies have reduced coverage in 

areas—reduced coverage in areas that—what I am essentially focusing on is the fact that Allstate has dropped out of the hurricane 

insurance market in my home county, and what we have done is—

people have commented—other people here have commented about 

the fact that companies are reducing coverages—the ones that are 

reducing the coverages the most are those that refused to buy reinsurance in the past, and they have kept all the risk for themselves, 

rather than hedging against the risk. 

I would like to know if you could explain to the committee how 

the low hurricane decades of the 1980’s and most of the 1990’s encouraged that kind of behavior and the role that insurance should 

have been playing for those companies—it is puzzling that they 

would have pulled out, and I know that is kind of a disjointed question, but I hope you can figure out what I am asking, which is basically, can you explain how that happened and perhaps offer a correction? 

Mr. NUTTER. Mrs. Kelly, I do not represent Allstate, and I would 

not presume to speak on behalf of that company. Let me try to answer your question without any specific reference to Allstate or any 

other company. 

Clearly, insurance companies assess the risk that they are willing to retain. 

They look at their capital base. They look at their own internal 

analysis of their catastrophe exposure, and then they choose 

whether or not to engage in buying reinsurance and transfer that 

risk into other markets. 

In periods of low activity, hurricane or earthquake activity, those 

companies are likely to determine that they can retain risk and not 

pay the cost of reinsurance to transfer the risk. 

Some companies, particularly major personal lines companies, 

are very large in terms of their capital base and their ability to absorb risk. They may have made determinations that they would retain risk; a business judgement that may or may not have been 

right in any given year. 

Certainly, Allstate is now a major buyer of reinsurance in 2006 

relative to their prior position, as reported in the marketplace. 

I mentioned in the testimony that, in fact— 

Ms. BROWN-WAITE. If you could please sum up— 

Mr. NUTTER.—rating organizations, in particular—Standard & 

Poor’s, A.M. Best—have put these companies under greater scrutiny to assess their risk, as have the insurance departments. You 

see a greater demand for reinsurance than in the past. Just to clarify something you said; in peak zones, it is fairly clear that the reinsurance marketplace, while having added capacity this year, is 

still inadequate for the demands that are being made. 

Ms. KELLY. Thank you. 

Ms. BROWN-WAITE. Mr. Clay Shaw, you are recognized. 

Mr. SHAW. Mr. Nutter, I would like to follow up on Ms. Kelly’s 

line of questioning, talking about the reinsurance is available now. 

We are only talking about windstorm here. 

In the coast of south Florida, the reinsurance is available in all 

parts of that area? 

47

Mr. NUTTER. I cannot speak about individual companies in south 

Florida, but what I can say is that every insurance company in the 

State of Florida is required by law to purchase reinsurance from 

the Florida Hurricane Catastrophe Fund. 

So they certainly are reinsured through the Florida CAT fund, as 

we call it. They may have purchased reinsurance in the private— 

Mr. SHAW. I am talking about the private sector. 

Mr. NUTTER. They may have purchased reinsurance in the private market if they deemed that their catastrophe exposure exceeds what the CAT fund can provide them. 

I do not have access to the individual reinsurance programs of 

companies, so I cannot answer your question directly. 

Mr. SHAW. Is that a common practice? 

Mr. NUTTER. A common practice to— 

Mr. SHAW. Can it be bought at competitive rates? I am talking 

about the reinsurance, because that is what we are here to talk 

about. 

Mr. NUTTER. Well, the reinsurance market is a competitive global market. 

Other than the catastrophe fund in Florida, which sets its own 

rates, the reinsurance market is globally competitive. 

So yes, it is a competitive rating environment. 

Mr. SHAW. Do you see a need for a national catastrophic fund? 

Mr. NUTTER. The private market, both insurance and reinsurance, have, to date, handled the catastrophes we have had, including the events of 9/11 and certainly the events of 2004 and 2005. 

I just want to emphasize something I said a couple of times. 

We recognize that the market—the reinsurance market probably 

is not meeting the demands for reinsurance in peak zones—south 

Florida— 

Mr. SHAW. Mr. Nutter, the Florida legislature just had to put 

over a billion dollars into the CAT fund in order to keep Citizens 

afloat. 

That is not the marketplace working, believe me, and Citizens is 

not part of the free market system. It is an insurance of last resort 

that was the creation of the Florida legislature, and we have huge 

problems. 

Now, I am sure you can insure anything if you are willing to pay 

enough for it, but the problem is that the premiums have actually 

gone through the roof. 

The private markets have failed us in regard to windstorm insurance. 

If it had not, we would not have Citizens. We have no need for 

even being here at this particular hearing, but the people at home 

are suffering. It is like getting an unwanted second mortgage on 

their house, and we have to get some results, and we have to get 

some relief, because I can tell you right now, the rates that we are 

experiencing throughout the State of Florida and throughout the 

Gulf coast are going to exceed our ability to pay, and when that 

happens, the economy starts to fall through, people start walking 

away, the insurance—the real estate market will fall through the 

floor. 

48

It is a question of whether or not the mortgages are going to continue to require catastrophic insurance or windstorm insurance, 

which has been viewed now as a catastrophic insurance. 

Insurance companies have limited their exposure on a State-byState basis. 

That is not what insurance is about. That is not what we want. 

That is not the free enterprise system working. This is wrong. Mr. 

McCarty, can I talk to you a little bit about that? How did that 

happen? 

How did it happen that the insurance companies were able to 

form subsidiaries of such-and-such insurance company of Florida? 

We all see it on our premium notices. How did that happen? 

Mr. MCCARTY. Well, sir, that occurred before my time. 

Mr. SHAW. I know it did, but you know how it happened. 

Mr. MCCARTY. Well, the insurance industry was under a tremendous amount of pressure after Hurricane Andrew, particularly 

those that were stock traded companies. 

In order for them to maintain their A.M. Best ratings, which we 

readily admit is a driving force in a lot of decisions made in the 

industry, they had to limit their exposure in Florida. 

So large companies set up subsidiary—we refer to them as pup 

companies—so that they could limit their exposure in Florida. 

When I was educated on my trade mission to London, one of the 

underwriters said, you know, if you were purchasing this on a national basis, you could leverage this against a national account and 

would be in a better position to purchase it. 

Now, it may not reduce it, but it would have put them in a better 

position to purchase it. 

So in some ways, having this separation of these companies and 

limiting their exposure—it is a benefit to the company, to the 

stockholders of the company. There is no question about it. Was it 

a prudent business decision to make? Absolutely. Was it helpful to 

Florida? Not generally. 

Mr. SHAW. Yes, sir. 

Ms. BROWN-WAITE. The gentleman’s time is up, but I will allow 

Mr. Daniel to have one minute. 

Mr. DANIEL. Thank you. 

Just to support your point that there is a void in the free market, 

in Louisiana, we are insuring many companies with—many insureds with unaffordable deductibles that could put them out of 

business if a storm came along, inadequate coverage, because it is 

not available. Just this week, I renewed a policy in a surplus lines 

company for a small business, happens to be a sausage manufacturer in Lafayette, Louisiana. 

They have no wind coverage. We could not find anything that 

was affordable to them. That was in the surplus lines market. It 

is unregulated for rates, and it is, as I recall, a concrete block 

building. 

So mitigation is great, rate flexibility is great, we support those 

things, but it is not the only answer. 

Thank you. 

Mr. SHAW. Thank you, Madam Chairwoman, and I thank the 

committee for allowing some of our interlopers here to take part in 

49

today’s hearing. This is terribly important to the people of the 

State of Florida. 

Ms. BROWN-WAITE. You are very welcome, Mr. Shaw. 

Before I recognize Representative Mark Foley, I would like to ask 

Kevin McCarty a question. 

Kevin, you were not the insurance commissioner at the time—it 

was an elected post—when the Florida legislature—and Mr. Foley 

was in the legislature at the time, as was Representative 

Wasserman-Schultz. 

When the pup companies were created, it was at a time after 

Hurricane Andrew, when the companies were fleeing the State. 

So it almost was a way—a stop-gap measure, by creating the pup 

companies. First of all, many of us had the opportunity to vote on 

it. 

It was something done by the then-insurance commissioner, but 

I had been told at the time that there was an implied consideration, an implied—I do not want to use the word ‘‘promise,’’ but 

some language that was given to the insurance commissioner that 

the parent companies would serve as the guarantor, even though 

these pup companies were created. 

May I have your comments on that, first of all, and again, I 

would request that we be informed how much of the insurance rate 

increase—and by the way, Mr. McCarty just told me that the company I am insured with just asked for a sizeable rate increase, also. 

You know, every Member of Congress is hearing from their constituents on it, but if you would just answer the question about any 

consideration of parent company guarantor, and also, have any 

other States set up these pup companies? 

Mr. MCCARTY. I will just backtrack just a little bit. 

In the immediate aftermath of Hurricane Andrew, as you know, 

the insurance commissioner, Tom Gallagher, at the time, implement a moratorium to prevent the cancellation of non-renewable 

policies, in particularly preventing the shedding of the policies 

through creation of a subsidiary. That was subsequently codified by 

the Florida legislature, allowing for a run-off of the moratorium 

over time, so that we can build some stability in the marketplace 

as we were ramping up some of the other programs, including the 

Florida Hurricane Catastrophe Fund and the creation of a residual 

market so that we could continue to have land sale contracts and 

bank could issue loans, etc., because it was critical to the stability 

of Florida to do that. 

It was subsequent to that that the insurance industry argued, 

these companies, that in order to—particularly those that are traded in the stock market—that they needed to limit their exposure. 

I was not privy to any conversations about the guarantees or any 

guarantees by those companies. 

Legally, you set up a separate legal entity through corporate law 

to limit your exposure. That is the purpose of setting up a corporation, is to limit your exposure. 

Ms. BROWN-WAITE. I would like the record to reflect that when 

you say ‘‘you’’ set it up, you did not mean the Florida legislature. 

Mr. MCCARTY. Oh, no, the Florida legislature— 

Ms. BROWN-WAITE. Okay. 

Mr. MCCARTY. The Florida legislature— 

50

Ms. BROWN-WAITE. I just want the record to clearly indicate— 

Mr. MCCARTY. This was done through petitioning, through the 

department of insurance, at that time, and creation of those companies were licensed, then, by the insurance department at that time, 

and they were granted through a consent order, which is generally 

a mechanism for the agreements of the terms and conditions for establishing of these pup companies. 

Ms. BROWN-WAITE. Do any other States have them? Yes or no? 

Mr. MCCARTY. Yes, they do. Other States have had them. 

Louisiana has subsequently had them. New York has historically 

had separate companies, separate entities. 

It was because of the different regulatory framework that New 

York had that was separate and distinct for limitation of their exposure. 

Ms. BROWN-WAITE. I thank the gentleman. 

The gentleman from south Florida, Representative Foley, you are 

recognized. 

Mr. FOLEY. Thank you very much. 

Maybe if FEMA had not given away so many generators in Florida and so many gift cards, we probably could have created a reinsurance market. 

Let me first thank Mr. Daniel for the comment about employees, 

because despite all of the tragedies we experienced in hurricanes, 

the one thing that became apparent, whether it was your agents, 

firefighters, police officers, linesmen for utility companies, who had 

their own damage at home, left their families to be of aid and assistance to fellow Floridians, and that is important to be noted. We 

all can complain. 

There are a lot of reasons to be upset, but in our bleakest times, 

it was the average citizen who strode to the front of the line to say 

how can I help, and that is something I think is commendable. 

As Mr. Shaw said, insurance rates are completely and totally out 

of control, and it is going to start having a dramatic impact on the 

economy of Florida. 

I cannot underscore it enough, why the urgency of the situation 

is now, and I cannot underscore enough that it has to be a solutionbased free market concept with some Federal entity. 

Mr. Kanjorski mentioned a multi-peril—because that is the one 

oddity of the insurance business that I do not quite understand, because you know, flood and wind and this and that—everything is 

different. You have to buy a separate policy. 

It is like going to a cafeteria to select from menu items, because 

you cannot buy a universal policy to cover, and a lot of people are 

finding out, well, the policy they have even spent a lot of money 

on does not cover it, because it came in through the wind—no, does 

not work. If it came up by flood, we can cover you. 

If it is a flood resulting from the wind coming through your window, well, that is a flood that is not covered, because that is wind, 

and you did not have wind. 

Even though there is 4 feet of water in your house, which would 

be typically thought of as a flood, the fact remains it came sideways through wind and is no longer coverable. 

51

So we have to figure out some of these dynamics of the insurance 

markets, so there is a universality of coverage. I agree there has 

to be more competition. How do you bring it in? $22 billion of losses in Florida alone makes it very untenable for 

an entity to say let us keep going through this based on projections 

that show for the next 20 years our exposure and experience may 

be comparable. So it is a difficult thing. 

Mr. Heidrich, you mentioned this great miracle of New Jersey 

car insurance. How would that relate to homeowners insurance in 

Florida? 

Mr. HEIDRICH. My point there is that, in New Jersey, you had 

a long history of highly regulated markets. You had a very difficult 

auto insurance market that was recognized generally across the 

Nation as one of the more difficult places to do business, and for 

years and years and years, the legislature was reluctant to try deregulation of that market and opening up that market. 

That was done 3 years ago by Governor McGreevey and the legislature at the time, and the early results are very promising in 

terms of companies that previously were unwilling to commit capital being now willing to commit capital, insureds getting coverage 

that was not available to them before, in a number of cases at 

lower prices. 

So my point simply is that these can be very difficult transitions. 

People in New Jersey certainly feared that it would be a very difficult transition, but we have seen successes, and so, it was really 

a point to say that we—that is among the policy prescriptions we 

ought to be looking at for Florida and other catastrophe-prone 

areas. 

Mr. FOLEY. Do you see Florida as heavily regulated in the context of what New Jersey was? 

Mr. HEIDRICH. Our members have told us that, historically, it 

has been heavily regulated. I want to comment on what Commissioner McCarty has done. We certainly passed rate relief last year, 

with the flex rating bill. Florida has taken very aggressive steps to 

improve its mitigation environment. 

They are doing many, many things well, but historically, it has 

been a very difficult market to do business in, according to our 

member companies. 

Mr. FOLEY. Can’t that be, to some degree, some of the maybe flyby-night insurance companies that set up, collect premiums, then 

do not pay, where the regulations have had to be strict in order to 

ensure fulfillment of obligation? 

Mr. HEIDRICH. Let me be clear. We are not arguing for no regulation. We are arguing for not being very, very careful about the capital position of insurance companies, and I would certainly endorse 

Commissioner McCarty’s comments earlier about the need for insurance regulators to always assure that the capital is available to 

pay the claims that are owed down the road. 

So please do not misunderstand my comments to be arguing for 

no regulation. 

We believe in solid, good, safe, sound regulation of insurance 

companies, but we also know that the answer to some of the more 

difficult availability and affordability problems are more free market solutions. 

52

As I indicated in my testimony, not the only solution, but one of 

the solutions. 

Mr. FOLEY. Let me make the final observation, because I think 

it is important relative to construction standards. Andrew proved 

to us that if building officials do not look for compliance with building codes, it does not matter, because the storm will blow down the 

house, and that seems to have been the huge casualty loss in Dade 

County, was that no one was watching. 

Our roofs were strapped. You know, it was just a fly-by-night operation, and those were the areas of deep devastation. 

When Governor Jeb Bush and I flew over Charlotte County, it 

was interesting to see almost pre-1970 construction that remained 

fairly intact, post-1994 construction after the new south Florida 

building codes took effect after Andrew, 1994–1996. 

I mean the difference in how they weathered the storm was dramatic, and so, that has to be part of the equation. 

It cannot be putting the onus all on insurance. It has to be both 

about building inspections that are significant and secure in the 

knowledge that they will achieve a thorough inspection and not 

allow for shoddy workmanship, but also the difference is the methodology that happened in the growth of Florida during those midyears seemed to create homes that clearly would not withstand—

never mind 150-mile-an-hour storm but possibly not even 40. 

So that is something I think we also have to digest as we do a 

look at insurance opportunities. We have to look at the methodology by which construction takes place, and there is also give and 

take—what we find in Florida, because there are no longer overhangs allowed, because that allows the wind to come up and rip off 

the roof. That has created some energy efficiency issues. 

So it is trade-offs and a lot of obvious different things that place 

us in a conundrum, but I am anxious to work with all of you to 

come up with some solutions, but it is the urgency that I cannot 

underscore enough, and not just for this election year. I have been 

working on this bill since 1999, I believe. 

So it is not something I deduced in a hysteria of the moment. It 

is something that I knew was coming, a long time coming, and it 

is developing at a critical, critical pace. 

Madam Chairwoman, thank you. 

Ms. BROWN-WAITE. I appreciate your comments, and I certainly 

want to thank all of the witnesses who are here today, who contributed to make this a very successful hearing. 

As the chairman said, we are going to be taking action next year. 

It cannot come a day too soon for so many homeowners and businesses who are really struggling to pay those increased costs, and 

today, if nothing else, we saw that from the testimony of the various members here today, and statements that are being submitted, 

that this is not just a Florida problem, and I look forward to working with each and every one of you to come up with a solution that 

helps everyone and helps to make insurance, a necessary component, more affordable. 

With that, this meeting is adjourned. Thank you. 

[Whereupon, at 12:49 p.m., the hearing was adjourned.] 

(53)

A P P E N D I X

Septemberr 13, 2006

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