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H.R. 3355, THE HOMEOWNERS

DEFENSE ACT OF 2007

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

AND THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 6, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–60

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

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 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin, 

ALBIO SIRES, New Jersey 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BARNEY FRANK, Massachusetts 

JUDY BIGGERT, Illinois 

STEVAN PEARCE, New Mexico 

PETER T. KING, New York 

PAUL E. GILLMOR, Ohio 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

(IV)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

DEBORAH PRYCE, Ohio 

RICK RENZI, Arizona 

RICHARD H. BAKER, Louisiana 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SHELLEY MOORE CAPITO, West Virginia 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

BLACKBURN, MARSHA, Tennessee 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

JEB HENSARLING, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

(V)

C O N T E N T S 

Page 

Hearing held on: 

September 6, 2007 ............................................................................................ 1

Appendix: 

September 6, 2007 ............................................................................................ 77

WITNESSES 

THURSDAY, SEPTEMBER 6, 2007

Echeverria, John D., Executive Director, Georgetown Environmental Law 

& Policy Institute, Georgetown University Law Center ................................... 58

Evans, Hon. Thomas B., Jr., Chairman, Florida Coalition for Preservation ...... 19

Joyce, Robert, Chairman and Chief Executive Officer, The Westfield Group, 

on behalf of the Property Casualty Insurance Association of America ........... 54

Malta, Vince, Malta and Company, on behalf of The National Association 

of Realtors ............................................................................................................. 53

Nutter, Franklin, President, The Reinsurance Association of America .............. 51

Ozizmir, Danyal, Head of Asset Back Securities-Insurance Linked Securities, 

Environmental and Commodity Markets, Swiss Re .......................................... 48

Patrick, Hon. Matthew C., State Representative, The Commonwealth of Massachusetts ............................................................................................................. 18

Schmidt, Hon. J.P., Insurance Commissioner, State of Hawaii, on behalf 

of The National Association of Insurance Commissioners ................................ 16

Seo, John, Co-Founder and Managing Member, Fermat Capital Management, 

LLC ........................................................................................................................ 49

Spiro, Steven J., CLU, ChFC, Spiro Risk Management, Inc., on behalf of 

the Independent Insurance Agents & Brokers of America, Inc. ...................... 56

Swagel, Hon. Phillip, Assistant Secretary for Economic Policy, Office of Public 

Affairs, U.S. Department of the Treasury .......................................................... 15

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 78

Kanjorski, Hon. Paul E. ................................................................................... 79

Mahoney, Hon. Tim .......................................................................................... 81

Maloney, Hon. Carolyn B. ................................................................................ 87

Echeverria, John D. .......................................................................................... 88

Evans, Hon. Thomas B., Jr. ............................................................................. 95

Joyce, Robert ..................................................................................................... 99

Malta, Vince ...................................................................................................... 108

Nutter, Franklin ............................................................................................... 120

Ozizmir, Danyal ................................................................................................ 131

Patrick, Hon. Matthew C. ................................................................................ 138

Schmidt, Hon. J.P. ............................................................................................ 141

Seo, John ........................................................................................................... 153

Spiro, Steven J. ................................................................................................. 155

Swagel, Hon. Phillip ......................................................................................... 164

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written responses to questions submitted to Hon. Matthew C. Patrick ..... 167

Written responses to questions submitted to Hon. J.P. Schmidt ................. 170

Page

VI

Brown-Waite, Hon. Ginny: 

Statement of ProtectingAmerica.org ............................................................... 172

Kanjorski, Hon. Paul E.: 

‘‘Coastal Disaster Insurance in the Era of Global Warming, The Case 

for Relying on the Private Market,’’ a report by the Georgetown Environmental Law & Policy Institute, Georgetown University Law Center . 178

‘‘In Nature’s Casino,’’ a New York Times article dated August 26, 2007 .... 238

Mahoney, Hon. Tim: 

Statement of Ms. Leanne Finnigan ................................................................ 251

(1)

H.R. 3355, THE HOMEOWNERS 

DEFENSE ACT OF 2007

Thursday, September 6, 2007

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, AND SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittees met, pursuant to notice, at 2:13 p.m., in room 

2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the Subcommittee on Housing and Community Opportunity] presiding. 

Present from the Subcommittee on Housing and Community Opportunity: Representatives Waters, Cleaver, Green; Biggert, Capito, 

and Campbell. 

Present from the Subcommittee on Capital Markets, Insurance, 

and Government Sponsored Enterprises: Representatives Kanjorski, Sherman, Moore of Kansas, Sires, Klein, Mahoney, Wexler, 

Marshall; Pryce, Capito, Baker, Castle, Putnam, Brown-Waite, 

Feeney, Campbell, and Roskam. 

Ex officio: Representatives Frank and Bachus. 

Chairwoman WATERS. This joint hearing of the Subcommittee on 

Housing and Community Opportunity and the Subcommittee on 

Capital Markets, Insurance, and Government Sponsored Enterprises will come to order. 

Good afternoon, ladies and gentlemen. I want to thank Chairman 

Kanjorski for joining me to co-chair today’s hearing. I would also 

like to thank the ranking members, Judy Biggert and Deborah 

Pryce, and each of the members of the Subcommittees on Housing 

and Community Opportunity, and Capital Markets, Insurance, and 

Government Sponsored Enterprises, who have joined us for today’s 

hearing on H.R. 3355, the Homeowners Defense Act of 2007. 

Without objection, all members’ opening statements will be made 

part of the record. 

I look forward to hearing from today’s witnesses on H.R. 3355, 

the Homeowners Defense Act of 2007, introduced by Representatives Ron Klein of Florida, and Tim Mahoney of Florida, both of 

whom are members of the Capital Markets Subcommittee, and are 

here with us today. 

As you know, the full Financial Services Committee recently 

passed the Flood Insurance Modernization and Reform Act of 2006, 

2

H.R. 4973, because of the urgency related to the need for flood insurance reform and modernization, particularly in conjunction with 

the National Flood Insurance Program. 

This bill recognizes a similar urgency related to the need to 

spread risk associated with natural catastrophes. Our most recent 

experience with Hurricanes Katrina and Rita, where billions of dollars in losses were sustained, put a new twist on natural catastrophes. No one had predicted a storm of the magnitude of Katrina 

or Rita or anticipated the staggering financial costs of the storms: 

$40.4 billion in insured losses. 

Of course, no one knows what the financial cost of the next catastrophe will be, as catastrophic risk models have been wrong to 

date. Businesses and homeowners in many States cannot buy insurance. We know when insurance can be purchased, it is 

unaffordable for most people. 

I think it is a plausible idea for catastrophic risk to be shared, 

pooled, or absorbed by capital markets. As one expert said, ‘‘There 

is a need to spread the risk as widely as possible across the investment world, and in the process, minimize the cost of insuring potential losses from catastrophes.’’ 

Natural catastrophe bonds have grown in private capital mar- kets, from a few billion dollars to more than a $14 billion market 

since Katrina, and the market is expected to continue to grow, as 

large investors become more actively involved in the market. 

H.R. 3355, the Homeowners Defense Act of 2007, provides Federal encouragement or support for States that choose to develop 

State-sponsored re-insurance programs designed to enhance the efficiency by which catastrophic risks are transferred to the capital 

markets. 

We all know Florida has a State-subsidized pool of $32 billion in 

catastrophic insurance coverage. While other States have been slow 

to move in this direction, the question is whether a specific amount 

is sufficient for the next catastrophe in Florida, California, or elsewhere. If not, how can we encourage risk pools to be created so 

there is ample coverage for future catastrophes? 

This bill will enable the States to have greater latitude to provide insurance for homeowners against catastrophic risk by passing 

the risk on to our capital markets. Under the bill, States could decide to join the National Catastrophic Risk Insurance Consortium, 

for the purpose of transferring catastrophic risk to the capital markets through the issuance of risk-linked securities, or reinsurance 

contracts. 

In addition, the bill creates a national homeowners insurance 

stabilization program with the Treasury, to ensure a stable private 

insurance market by extended low-interest Federal loans to Statesponsored insurance programs in States that have been impacted 

by severe natural disasters. 

Further, the bill allows for the consortium to develop capabilities 

related to catastrophic risk analyses, which is active largely in the 

domain of the private sector. 

I am pleased that a debate is centered on this issue, because of 

the potential for natural catastrophic catastrophes anywhere in 

this country. As such, I look forward to hearing the witnesses’ testimony on H.R. 3355. 

3

I would like to recognize, at this point, Chairman Paul Kanjorski, 

for his opening statement. 

Mr. KANJORSKI. Thank you very much, Ms. Waters. We meet this 

afternoon to consider and review a bill introduced by our colleagues, Congressmen Klein and Mahoney of Florida. 

H.R. 3355 tackles a complex issue: how to address the growing 

problem of the availability and affordability of homeowners insurance around the country, and especially along our coastlines. I commend my colleagues for taking on such a difficult task. The Financial Services Committee and its predecessors have struggled with 

this topic for many years. 

The costs associated with natural disasters continue to rise. According to the Government Accountability Office, insured losses associated with hurricanes alone have risen from $10 billion in the 

1980’s to $97 billion for this decade. Some attribute this increase 

to global warming. Others attribute it to the higher cost of real estate and increased density of high-risk areas. Still others attribute 

it to climatic cycle where the frequency and intensity of storms is 

currently on the upswing, that will eventually subside. Whatever 

the cause, the increase in costs is very real, especially for those 

who own homes in the areas most affected by natural disasters. 

The central question before us today is, therefore: Who should 

bear these costs? Should it be those who live there, the insurance 

industry, or the government? The answer could also be some combination of these parties, as well as other sources. 

My colleagues have carefully considered these matters in crafting 

their solution to the problem. In brief, their bill would provide 

States with an opportunity to plan ahead of time for covering the 

insured losses resulting from natural disasters via our private markets. Their plan also offers emergency relief in the form of Federal 

loans for those States that may need access to funds after a major 

natural disaster. 

Specifically, the consortium proposed in Title I of the bill would 

encourage States to cede risk to the capital markets. I look forward 

to learning more about the increased role our capital markets can 

serve in paying for the insured losses of natural disasters. We 

should, to the extent possible, maximize the risk-bearing capacity 

of the private sector before calling on the government to assist. Additionally, Title II of the bill creates a Federal loan program that 

would provide loans to any State facing a significant financial 

shortfall following a natural disaster if capital is not readily available by any other means. 

The bill also aims to avoid the problems that have stalled previous efforts to mitigate the cost of catastrophic disasters for homeowners. States would voluntarily participate in the bill’s programs, 

thereby hopefully avoiding cross-subsidization from States that do 

not bear similar risks. Additionally, the bill aims to mitigate the 

transfer of risk to the Federal Government. These important provisions ought to help the legislative prospects for the bill. 

In sum, I look forward to hearing from our witnesses today on 

how H.R. 3355 may affect homeowners, businesses, insurers, reinsurers, investors, and all levels of government. I am also very interested in learning about any recommendations that experts may 

4

have about how to improve and refine the bill, as the committee 

continues to consider it. Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. I would like to recognize Ranking Member Biggert for 5 minutes, for an opening 

statement. 

Mrs. BIGGERT. Thank you, Chairwoman Waters and Chairman 

Kanjorski, for holding today’s joint subcommittee hearing on H.R. 

3355, the Homeowners Defense Act of 2007. 

I commend the authors of this bill, Congressmen Klein and 

Mahoney, for their very good intentions. They are two members 

from Florida, a State that has found itself in a difficult position 

when it comes to insurance. Because their State has failed to 

produce a workable solution to its insurance needs, my colleagues 

naturally want to do something to help. 

While I applaud their intentions, I’m not convinced that this bill 

is the best idea for Floridians or for taxpayers from Illinois or other 

States across the country, who will likely end up paying for it. At 

this time I question if the legislation we discuss today is the right 

solution, and would work as successfully as the authors envisioned. 

Unless evidence convinces me otherwise, I cannot support this bill, 

and believe that this issue should continue to be addressed at the 

State level. 

And once again, I will say that, like in Illinois, free market pricing should be the model for other States, including Florida. At the 

same time, I do think that we need to continue to more closely examine the insurance availability and affordability problems that 

exist in some areas of the country, like we had with the Gulf Coast 

and with Florida. 

However, I am also convinced that even if a majority of our witnesses today testify that H.R. 3355 is a bad idea, my colleagues on 

the other side of the aisle may, nonetheless, support the legislation. 

This was the case when the committee took up reform of the National Flood Insurance Program. We held a hearing on a new 

version of the Flood Insurance Reform and Modernization Act that 

added wind to the program, and 9 of the 13 witnesses said, ‘‘No, 

don’t add wind.’’ But 9 days later, this committee disregarded that 

advice, and passed a bill that added wind to the NFIP. 

With that said, I am very interested in hearing from today’s witnesses about the best solution to the insurance dilemma of States 

like Florida. How have regulatory systems influenced insurance 

availability and affordability? Why is there availability and affordability in some States, but not others? Are insurers allowed to price 

for the true risk a particular property faces? 

I have to admit that I am biased. In Illinois, free market pricing 

benefits consumers, ensuring that they will have choices, since insurers are encouraged to compete for their business. I am also interested in discussing ways we might lessen the regulatory burden, 

boost private market participation, and spur more affordable rates 

for consumers, without putting taxpayers on the hook. 

I look forward to the testimony of today’s witnesses as we continue to encourage a more robust market for catastrophic insurance. I yield back. 

5

Chairwoman WATERS. Thank you very much. At this time, I 

would like to recognize the chairman of the full committee, Chairman Frank, for as much time as he would like. 

Mr. FRANK. I thank the chairwoman. I thank members on both 

sides for letting me do this. I am going to have to leave. We did 

have a bill on the Floor today, and I have other things I have to 

get to. 

I did want to, first, welcome—I think I may be the only member 

here who served with Mr. Evans, so we have some continuity here. 

I was just joining the committee when Mr. Evans was up here on 

the top row, and it’s nice to work again with him. He was always 

a very important and useful member of the committee. 

And I am proud to have a representative from the district of my 

colleague, Mr. Delahunt, Representative Patrick from my neighboring Cape Cod. I think that’s important, because this is not just 

a Florida issue. We have a representative of Cape Cod here. We 

have members of this committee from Long Island, who are very 

concerned about this. 

I would hope we would take the approach that a problem doesn’t 

have to exist equally in all States before we address it at the national level. There are varying issues. You know, Illinois doesn’t 

have floods, but Illinois has a lot of agriculture that gets subsidies 

that we don’t get. 

I don’t think we say that everything has to get on an absolutely 

equal basis. We are one country, and there will be parts of the 

country that will face one set of dangers, and parts of the country 

that will face another set of dangers. And there are parts of the 

country that have one set of needs, and not others. A lot of programs that we support have only a partial impact. 

I also want to address the issue—which the gentlewoman sort of 

noted with dismay—that we did not follow the consensus of witnesses. I am a great believer in democracy, but polling witnesses 

at a committee and then using that as a basis for deciding public 

policy does not seem to be the best way to go. I am always interested in what the witnesses have to say, and the substance. 

I noticed—I apologize, I may be mispronouncing Mr. Seo, 

whose—I read that interesting New York Times article. And he 

was a great witness, because he closed—he said he asked himself 

three questions, then answered them. So, if people would follow 

that rule, we could take the day off. And I don’t mind that, maybe, 

after a busy day. He asked and answered his own questions in a 

very useful way. It is the substance of what they say—not necessarily the ‘‘yes’’ or ‘‘no’’—that we want to listen to. 

Finally, I just want to say that this is a difficult problem, and 

I think when people criticize a proposed solution, they ought to be 

required to take into account the difficulty of the problem. It is 

very hard to get solutions that are a lot more elegant than the 

problems they seek to remedy. And the more difficult the problem, 

the messier the solution will be, the less perfect. 

So, I am very much prepared to listen to alternatives. I must say 

I have been very impressed with the work done by our colleagues, 

the two gentlemen from Florida, Mr. Klein and Mr. Mahoney. I 

have been listening and watching and our staffs have participated, 

6

also. They have done as good a job as I have found so far it is possible to do. 

Now, it may be that someone could come up with a better proposal than they have. I haven’t seen one, but I would say this: I 

will not be persuaded by people who say, ‘‘We don’t think the 

Mahoney-Klein bill is perfect, so let’s do nothing.’’ If people tell me 

that they don’t think the Klein-Mahoney approach is as good as approach ‘‘X,’’ ‘‘Y,’’ or ‘‘Z,’’ then, fine, I will look at the other approaches. 

But the problem again I want to reiterate is that it is a difficult 

problem, and the solution cannot totally transcend the problem. It 

is a national problem. I have heard from people in Massachusetts 

and people in New York; we have a lot of people living on the 

coasts. 

So, I hope we will go forward. And if people want to suggest 

some improvements in this proposal, of course we will look at it. 

That’s why we have hearings and mark-ups. But, if the answer is, 

‘‘This is a very difficult problem, so let’s do nothing at all at the 

Federal level,’’ I don’t find that to be an acceptable approach, and 

I would hope people would feel some obligation not simply to be 

critical of this, which is relatively easy, because it’s a difficult problem that they’re addressing, but come up with alternatives. 

So for me, at this point I am impressed with the work that Representatives Klein and Mahoney have done, and until somebody 

comes up with something better—and I haven’t seen it—I intend 

to be supportive. And I have looked at this. 

I thank the witnesses for coming. I will give them this consolation. If, in fact, we do not follow the opinion of a majority of the 

witnesses, I hope they will feel free, in their own lives, to disregard 

opinions of mine whenever they think that’s appropriate. And I 

thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. Congresswoman 

Brown-Waite, for 3 minutes. 

Ms. BROWN-WAITE. Thank you very much, and I thank you, 

Madam Chairwoman, along with Mr. Chairman, for holding this 

hearing today. I also appreciate the witnesses who will be appearing before the committee. 

This hearing is long overdue for the residents of the Gulf Coast 

who have been abandoned in the property insurance crisis they’re 

facing. I have been working to bring relief to these residents for 

over 3 years, and I thank my colleagues from south Florida, Representatives Klein and Mahoney, for joining me in this fight. 

But let me emphasize this very, very clearly: It is not just a Florida problem. I will be listening closely to learn how constituents in 

various areas of our great country are actually going to benefit 

from such an approach offered in H.R. 3355. 

I also ask unanimous consent that a statement from 

ProtectingAmerica.org be submitted for the record. Madam Chairwoman? I ask unanimous consent that a statement be submitted 

for the record. 

Chairwoman WATERS. Without objection. 

Ms. BROWN-WAITE. Thank you. And, again, I thank you very 

much for holding this hearing, and I look forward to hearing what 

our witnesses have to say here today. I think that there are many 

7

valid ways to approach this issue that certainly is nationwide, not 

just in Florida, and not just on the Gulf Coast. Thank you. I yield 

back the balance of my time. 

Chairwoman WATERS. Thank you very much. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. It seems a bit 

weird for a representative of Missouri—and sitting next to my 

friend and colleague from Kansas, Dennis Moore, to be here at a 

meeting dealing with legislation sponsored by two people from Florida. The ocean dried up near Missouri about a million years ago. 

But 3 years ago, my wife called our son, who was a student at 

Dillard University in New Orleans, and said, ‘‘Look, we’ve heard 

that there is a hurricane warning for New Orleans, and you need 

to go.’’ But my son said the basketball coach wanted them to stay. 

He was on the team—and I must also unnecessarily say the captain of the team—and so the coach said, ‘‘We’re going to stay. We 

get these warnings all the time.’’ 

The threat came and left. And so, on August 24, 2005, when tropical depression number 12 began to hit the news, I didn’t think 

much about it, because I had bought into what happens in New Orleans, which is that you ignore it. I had no idea that tropical depression number 12 would eventually destroy $70 billion of insured 

property. 

And because I saw what happened then, I am starting to pay a 

little more attention to history. On December 16, 1811, an 8.0 magnitude earthquake hit New Madrid, Missouri. It was so powerful 

that bells began to ring in downtown Boston, Massachusetts. 

And so, I am in the middle of the country, but nonetheless concerned about what the Federal Government is going to do in a 

similar catastrophe. And I am concerned about the fact that we do 

need, I think, a backstop that would help provide coverage for individuals, even in the middle of the country. I yield back the balance 

of my time. 

Chairwoman WATERS. Thank you very much. Mr. Castle? 

Mr. CASTLE. Thank you very much, Chairwoman Waters, Chairman Kanjorski, and Ranking Member Biggert. This is a very interesting hearing. We have not dried up in Delaware. We have 25 

miles of oceanfront, and a lot of bay and riverfront along the Delaware River, so we are very concerned about this. 

But I wanted to take my time, if I may, to introduce somebody 

who probably doesn’t need introduction to a lot of people in the 

room, and that is former United States Congressman Tom Evans 

of Delaware, who is here to testify today. He currently serves as—

and this is shortened from a much longer bio—he currently serves 

as the chairman of the Florida Coalition for Preservation. The Florida Coalition for Preservation is a not-for-profit organization that 

promotes responsible growth and protection of barrier islands along 

our coast. 

Congressman Evans was a member of the former House Banking 

Committee, which is now our committee, the Financial Services 

Committee; the Merchant Marine and Fisheries Committee; chairman-elect of the Environmental and Energy Study Conference; and 

vice chairman and chairman-elect to the Arts Caucus. He also 

serves as a delegate to the UN Law of the Sea Conference. 

8

He was well known for putting coalitions of Democrats and Republicans together, and as a result, he was able to achieve major 

legislative victories. For example, he was the author of the Coastal 

Barrier Resources Act that curtailed Federal land development 

funding in environmentally sensitive barrier islands. His legislation has saved the American taxpayers billions of dollars. 

He served as the Republican Floor leader for the Alaska Lands 

Act, he was the Republican leader for U.S. funding for multi-lateral 

development institutions, and was co-chairman of a coalition encouraging enactment of the Caribbean basin initiative, and other 

trade measures. 

He also served as leader of a congressional coalition to eliminate 

funding for pork barrel projects, in order to reduce the deficit, and 

was co-author of the first successful bill to ban dumping of sewage 

sludge in the Atlantic. 

Mr. Evans has served on numerous corporate, educational, and 

charitable boards, and has received national awards from the Nature Conservancy, the Sierra Club, and Americans for the Coast, 

and Alaska Wilderness League for his leadership in preserving millions of acres of wilderness. 

I thank both of the Chairs for holding this important hearing 

today. I look forward to hearing from the experts, such as Tom 

Evans, on the impacts of this legislation. I think it’s a very significant hearing. I yield back the balance of my time. 

Chairwoman WATERS. Thank you very much. Mr. Scott? 

[No response] 

Chairwoman WATERS. Mr. Scott is gone. Who is next? 

Mr. GREEN. I believe I am, Madam Chairwoman. 

Chairwoman WATERS. Mr. Green. 

Mr. GREEN. Thank you. 

Chairwoman WATERS. Thank you. 

Mr. GREEN. Thank you, Madam Chairwoman. And I also thank 

Chairman Kanjorski for the two of you working together to host 

this hearing, as well as the ranking members. 

I am honored to have this august panel today to give us some 

insight and I look forward to hearing what they have to say. But 

my belief is that we have a de facto policy in place, currently. The 

de facto policy is that in a national crisis, the Federal Government 

does step in. 

9/11 was a national catastrophe, and we did step in, and we did 

the right thing. Katrina was a national disaster. We stepped in, 

and we spent more than $100 billion. I happen to think that we 

have done the right thing, notwithstanding the fact that some of 

the money has not been used as judiciously, in my opinion, as it 

should have been. But I think that the government, right now, is 

in a de facto position of, when we have a national crisis, of being 

a hand in a time of a national crisis. 

So, I think that my colleagues from Florida—both of whom I 

commend highly—have merely codified a sensible methodology by 

which we can plan a response, as opposed to doing it on a caseby-case basis, and having a de facto policy. They have thoughtfully 

and prudently given us at least one means by which we can involve 

private enterprise before the event, before the occurrence of the 

event, and also allow government to play a role. 

9

I really don’t know that we can do it much better than they have 

codified it. But I, too, look for a better strategy, a better methodology. And if it is available, I would gladly review it and would embrace it, if it’s better. But in the interim, given that we do have—

and we do know that we will have—additional circumstances that 

are unpleasant to deal with, I thank them for having the vision to 

give us a means by which we can at least embrace a process beforehand. I yield back the balance of my time. 

Chairwoman WATERS. Mr. Feeney. 

Mr. FEENEY. Well, thank you. One thing we know in Florida is 

that hurricanes are not a partisan issue, and I want to thank Congressman Klein and Congressman Mahoney for coming forward 

with a proposal. And Representative Brown-Waite—and I know 

this because before our freshman colleagues joined us, we have had 

bipartisan proposals in the Congress, I think Congressman Wexler 

knows that, as well. 

And I am mindful of, I think, the chairman of the full committee’s chastisement that criticizing people who come forward with 

answers to complex questions is, in some ways, inherently unfair. 

But the corollary to that is that just because you have a complex 

solution to a complex problem, it doesn’t mean the solution will improve things. 

And so, I think it’s fair, with a very difficult problem to deal with 

that Floridians know a lot about, that we struggle in a bipartisan 

way to get a solution that will improve things. 

And I am mindful that the consortium that this bill contemplates 

is not mandatory. It doesn’t necessarily require that anybody participate. States that want to participate in the risk of one disaster 

or another are permitted. But that would be permitted under current laws the Treasury testimony provides. 

What this bill does do is to suppose that if there is a consortium 

that is started, that there is an implied guarantee of subsidized 

loan rates in the event of certain events. I think Mr. Evans points 

out in his testimony one problem with that is that it may incentive 

risky behavior. I think the Treasury Secretary also talks about the 

FAIR system that encourages people to remain in vulnerable areas 

which are attacked by natural disasters over and over again, and 

that seems to violate one of the principles that good insurance policy would want to contemplate. 

Florida has developed a very enhanced building code. I know 

that Congressman Klein and Congresswoman Brown-Waite and I 

were there at the time, and we required homeowners to do those 

things. This bill doesn’t require that. 

This bill doesn’t make any—it doesn’t provide any insistence to 

insurance companies that enhance reserve requirements, as Congresswoman Brown-Waite’s bill would do. Representative 

Wasserman Schultz and I have a bill that would encourage individuals to put aside money for very high deductibles, which we have 

in Florida that other States may not have experienced. 

And so, I think this is a fascinating proposal that needs a lot of 

discussion, and it is a complex solution to a complex problem, 

which doesn’t necessarily mean it’s going to make things better. 

And so, this member will stay tuned, and continue to participate. 

With that, I will yield back. 

10

Chairwoman WATERS. Thank you very much. Ranking Member 

Pryce just came into the room. I would like to recognize her for 5 

minutes. 

Ms. PRYCE. Why, thank you. I appreciate that very much. But in 

the interest of time, until we get to the meat of things, I will waive 

my opportunity and look forward to the testimony. Thank you, 

Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. The next member 

to be recognized is one of the authors of this legislation. I know 

how hard he has been working, and I know how anxious he is to 

share with us his deep feelings about what he has embarked upon. 

And it gives me great pleasure, and I am very proud, to ask one 

of our newer members to please give us 5 minutes’ presentation on 

his bill. 

Mr. KLEIN. Thank you very much, Madam Chairwoman. And I 

would first like to thank Chairman Frank for his guidance and 

support. And, of course, Chairwoman Waters and Chairman Kanjorski and the Republican leads on both subcommittees, for holding 

this hearing today to discuss H.R. 3355, the Homeowners Defense 

Act of 2007. 

This is a bill that Congressman Mahoney and I have been working very hard on, and I want to pay special tribute to the expertise 

that Congressman Mahoney has, and that he brings to the Congress in the financial services area, because it has been extremely 

valuable in thinking through this issue over the last several 

months. 

It has been suggested by the prior parties that were introducing 

their comments that this is a complex issue, and it is. We know 

that we want to address the concerns of displaced homeowners, 

protect the financial solvency of States, and to stimulate the insurance markets. 

It is also important to understand that insurance availability and 

affordability problems have become a national issue. Congresswoman Brown-Waite has already stated this, as well as Congressman Feeney, and I think we all understand that. 

Hundreds of thousands of homeowners across the country have 

already had their insurance coverage dropped, or are currently 

slated for non-renewal by their insurance company. Those who remain, in many cases, are confronted with crippling premiums, 

which, in some cases, is forcing homeowners to make tough decisions about whether to go without property insurance or not—

which, of course, those people who have mortgages, and most people do, don’t have that alternative. 

Insurance problems are not limited to Mississippi, Louisiana, or 

Florida. Last year, property insurers indicated that they planned to 

stop offering new coverage in parts of Maryland and Virginia’s 

coastal markets. They have also stopped in certain areas of Delaware, New Jersey, and Connecticut, no matter where the property 

is located within the State, not just on the coast. 

Furthermore, tens of thousands of homeowners in Massachusetts, New York, North Carolina, South Carolina, Alabama, and 

Texas have already been dropped, as well. Added to that is, even 

with California’s known record of seismic activity, over 85 percent 

11

of California homeowners currently do not have earthquake insurance. That’s a pretty substantial number for us to consider. 

It is unacceptable for property owners not to be able to get reliable coverage in their markets. And it’s precisely this reason that 

we have moved to come up with some solutions. Our legislation 

aims to take a two-fold approach, by establishing a program to help 

States responsibly manage their risk before disaster strikes, while 

also providing financial assistance to ensure that they can quickly 

and efficiently respond to homeowners’ insurance claims following 

a natural catastrophe. 

Specifically, the bill provides a venue for State-sponsored insurance funds to voluntarily pool their catastrophe risk with one another, and then transfer that risk to the private markets through 

the use of catastrophe bonds and reinsurance contracts. 

The legislation also allows for the Federal Government to extend 

low-interest loans to cash-strapped State insurance funds after a 

large-scale natural disaster, so that they can meet their obligations 

to homeowners. 

By utilizing these new strategies, and an innovative, flexible capital market approach, this bill allows investors to assume some of 

the risk currently held by the States in return for an interest payment or a premium payment. 

The voluntary nature of this program, coupled with the use of 

the capital markets, ensures that homeowners in less disasterprone States will not be on the hook if a disaster strikes a neighboring State. I want to emphasize that the opt-in nature of this 

plan creates no obligations or burdens whatsoever on States that 

do not wish to participate; this is a very significant new way to approach this. 

The total economic impact accompanying natural disasters resonates throughout the entire Nation. Total economic damages from 

the 2005 hurricanes will likely exceed $200 billion, with the Federal Government responsible for paying out an excess of $109 billion, and probably a lot more, for disaster relief. 

Although we all agree that it’s necessary, as was suggested already, this Federal spending has drawn equally from taxpayers in 

every State of our country, not simply from those of the affected regions. Through this legislation, we are looking to take a proactive 

approach where States responsibly plan in advance of a disaster 

rather than a reactive approach where the Federal Government 

opens the Treasury after a catastrophe. 

I want to note that, although we have a bill in front of us, we 

will continue to work with all of you who have an interest in this, 

who are stakeholders, who may want to find ways to improve the 

text, as was already suggested by our members and our Chair. In 

striving to produce the most effective bill possible, we welcome any 

suggestions that would help us fulfill our underlying goals, utilizing the framework that we have established. 

But I would like to make one thing clear that I think we all feel 

very strongly about; the status quo is no longer an option. We have 

to work together, in a bipartisan way, with the industry and with 

our consumers to establish a system where property insurance is 

both available and affordable for hard-working families and those 

12

most in need. We feel this is a good piece of legislation in that direction, and I thank the chairwoman for the time. 

Chairwoman WATERS. Thank you very much. Ms. Capito? 

Mrs. CAPITO. Thank you, Madam Chairwoman. In the interest of 

time, I will waive my opening statement, and listen intently to the 

hearing. Thank you. 

Chairwoman WATERS. Thank you very much. The other author 

of this bill, a gentleman who had a hearing earlier today on a great 

piece of legislation for seniors, and who has put a lot of time, also, 

on this bill, and I know how important it is to him, Mr. Mahoney? 

Mr. MAHONEY. Thank you, Chairwoman Waters. It has been 

great spending the day with you, working on these many issues. 

And it’s always tough going after my colleague, Congressman 

Ron Klein, and I want to thank him for his great leadership, and 

all the years that he has spent in the Florida legislature, dealing 

with this issue. His experience and knowledge of this matter has 

been tremendous, in terms of coming up with this legislation. I 

would also like to thank Chairman Kanjorski, for his leadership, as 

well as Chairman Frank. 

Before we begin summarizing the natural catastrophe insurance 

crisis affecting Florida, I want to reiterate that this is a national 

problem. And let me be clear, the Federal Government has been 

forced to act, because private markets for homeowners insurance 

have failed. 

The issue, ladies and gentlemen, is not industry’s ability to pay 

claims, it is an American’s ability to purchase affordable homeowner’s insurance. This legislation is essential, as the investment 

in a home is the single biggest investment an average American 

citizen has, and it is vital that we protect the American dream of 

homeownership. 

I am proud that this bill preserves the private homeowners insurance industry. It recognizes that no one got into business to underwrite a nuclear devastation which—made by man, or made naturally. This bill is voluntary, so States can choose to participate or 

not. 

However, it sets a principle that no longer will the American taxpayer foot the bill for a natural disaster with an expensive bail-out. 

We know that these catastrophic events will happen, and this bill 

ensures that we plan for them in a manner that is cost-effective 

and recognizes personal responsibility. 

In 2004 and 2005, natural disasters resulted in approximately 

$89 billion in privately insured catastrophic losses. These disasters 

and population growth in areas prone to natural disasters have 

caused the insurance industry to adjust their models for insuring 

these events. As a result, insurers and reinsurers are pulling out, 

or reducing their exposure in disaster-prone areas of the country. 

Today, in my home State of Florida, the citizens of my State are 

the owners of the biggest homeowners insurance company, with 

over 30 percent of the market. 

In addition to lost insurance capacity, homeowners have seen 

their premiums skyrocket. The toxic cocktail of rising gas prices, 

healthcare costs, and homeowners’ insurance has created a vicious 

cycle of terror for our seniors living on fixed incomes, and middleclass families struggling to provide for their children. 

13

Recently I received a letter from one of my constituents detailing 

the difficult choices she had to make in order to pay her homeowners’ insurance bill. Ms. Leanne Finnigan, a single mother of 

two from Stuart, Florida, was dropped by her insurance company 

in 2006. 

She eventually found another insurance company which charged 

her more than 3 times what she had been paying for similar coverage. As a result, she has been forced to work overtime on Saturdays, and to give away one of her family pets and reduce her weekly grocery budget. Unfortunately, Ms. Finnigan’s story is not 

unique. Thousands of families across Florida have been forced to 

make similar difficult decisions. 

The Financial Services Committee has held numerous hearings 

on this same issue. During these hearings, several facts became 

clear: the risk posed by natural catastrophes is not going away; the 

damage caused by disasters will keep growing; and the insurance 

premiums have remained high, despite the 2006 storm season 

being relatively calm. 

The Homeowners Defense Act of 2007, which Congressman Klein 

and I introduced, is a two-prong approach, designed to address the 

property insurance crisis, ensuring a stable insurance market that 

will give States impacted by severe natural catastrophes the ability 

to help their citizens rebuild their homes and their lives. 

Title II of the National Homeowners Stabilization Program extends low-interest Federal loans to States impacted by several natural disasters. These loans, which will be paid back by the States, 

will allow a State catastrophe fund to cover its liability in the event 

that it is not fully funded at the time of the disaster, and assist 

in covering damages that exceed its liability. 

Because the legislation utilizes private capital markets and a 

loan program that requires repayment by affected States, it eliminates cross-subsidization. Taxpayers in Nebraska no longer have to 

bear the risk of those living in Florida. This legislation is responsible, fair, and returns stability and competition to the private insurance market. 

I look forward to working with the members of this committee 

and key stakeholders, to ensure that this legislation adequately accomplishes its intended goals. And again, I would like to thank 

Chairman Frank, Chairwoman Waters, and Chairman Kanjorski 

for holding this hearing today, and I look forward to hearing the 

comments of our witnesses. Thank you very much. 

Chairwoman WATERS. Thank you very much, Mr.— 

Mr. MAHONEY. Oh, one other thing. I would like to ask unanimous consent to add Ms. Finnigan’s letter to the record. 

Chairwoman WATERS. Without objection, it is so ordered. 

Mr. MAHONEY. Thank you very much, Madam Chairwoman. 

Chairwoman WATERS. Mr. Roskam? 

Mr. ROSKAM. Thank you, Madam Chairwoman. In the interest of 

time, I waive my statement, and I look forward to the witnesses’ 

testimony. 

Chairwoman WATERS. Thank you very much. Mr. Wexler. 

Mr. WEXLER. Thank you, Madam Chairwoman. I will be brief. I 

just want—as an original co-sponsor of Mr. Klein and Mr. 

Mahoney’s bill—to point out a few things that I think are quite relVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
14

evant. Mr. Klein and Mr. Mahoney and I held a hearing this past 

week in West Palm Beach, and heard from, I think, a wide array 

of business community leaders, industry leaders, regarding this 

issue last week. 

And what I think deserves repetition is that Mr. Klein and Mr. 

Mahoney, even though they are new to this body, have done an extraordinary thing in, one, persuading the leadership that homeowners insurance is a proper venue for Federal action. And we are 

extremely grateful to Speaker Pelosi, to Chairman Frank, to Chairwoman Waters, and the others, for enabling Mr. Klein and Mr. 

Mahoney to put forth the legislation that they have. 

This is a private sector solution. And this is a meeting of extraordinary, and at the same time, competing demands, but doing it in 

a rational and responsible way. I will close by simply following, I 

think, an argument that Mr. Feeney, our friend from Florida, 

makes, which is a very deserving point, and that is that States like 

Florida have already adopted many meaningful reforms, both in 

terms of requiring building codes and individual action, as well as 

significant insurance reforms. 

But even though the State of Florida, led by a Republican Governor and a Republican legislature—and, I believe, acted in earnest, and did their very best—and I think Mr. Feeney would 

agree—they took their best shot at resolving the homeowners’ insurance crisis in Florida. It didn’t stop the bleeding. Still, tens of 

thousands of homeowners in Florida continued to lose their policies. 

So, for all the people who argue for State action, for all the people who argue for individual responsibility, for all the people who 

argue that the Federal Government may not have a role, well, Florida has done exactly what you said. We have implemented it, and 

we still have a huge problem. 

So, I would respectfully suggest that Florida is actually the best 

example of why Federal action on homeowners insurance is not 

only advisable, but it is absolutely necessary, because even when 

a State legislature acts responsibly, as the Florida Governor and 

the Florida legislature has done, it is still not enough. 

And why isn’t it enough? Because even a large State like Florida, 

with all of the resources that it brings to this problem, cannot affect the private market in a way big enough, like the Federal Government can. And that’s what Mr. Klein and Mr. Mahoney’s bill designs to do, bolster the private sector, so that it is financially responsible for investors to again participate in the homeowners insurance market. And that’s what we attempt to do. Thank you, 

Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. I would now like to 

introduce our first panel of witnesses, including: the Hon. Phillip 

Swagel, Assistant Secretary for Economic Policy, U.S. Department 

of the Treasury; the Hon. J.P. Schmidt, insurance commissioner, 

State of Hawaii, on behalf of the National Association of Insurance 

Commissioners; the Hon. Matthew Patrick, State Representative, 

Masssachusetts House of Representatives; and the Hon. Tom 

Evans, chairman, Florida Coalition for Preservation. 

I would like to thank all of you for appearing before the subcommittee today, and, without objection, your written statements 

15

will be made a part of the record. You will now be recognized for 

a 5-minute summary of your testimony. 

Mr. Swagel? 

STATEMENT OF THE HONORABLE PHILLIP SWAGEL, ASSISTANT SECRETARY FOR ECONOMIC POLICY, OFFICE OF PUBLIC AFFAIRS, UNITED STATES DEPARTMENT OF THE TREASURY 

Mr. SWAGEL. Chairwoman Waters, Ranking Member Biggert, 

Ranking Member Pryce, and members of the subcommittees, thank 

you for inviting me to testify again to the committee. 

The Administration opposes H.R. 3355, the Homeowners Defense 

Act of 2007, because its provisions are at odds with the goal of ensuring that there is a stable and well-developed private market for 

natural hazard insurance and reinsurance. 

Recent increases in insurance rates in coastal areas have been 

difficult for many homeowners. This, however, is fundamentally a 

reflection of the risk involved, not a defect of the market. Instances 

of reduced availability of private insurance likewise present a challenge. Generally, these can be traced to State regulatory actions. 

H.R. 3355 would create a federally-chartered natural catastrophe 

risk consortium to issue risk-linked securities and enter into reinsurance contracts. But State-sponsored programs are already free 

to pool risks and they have access to competitive reinsurance in 

capital markets, designed to pool risks, globally. 

Reinsurance contracts and financial instruments entered into by 

a consortium with a Federal charter would be seen as carrying an 

implicit Federal Government guarantee. This would mean subsidized coverage for the participating States, but a hidden cost to 

all taxpayers that puts the Federal Government at risk for future 

liabilities. 

H.R. 3355 would also establish the National Homeowners Insurance Stabilization Program, through which the Treasury would 

provide loans to State insurance programs at below-market rates 

before and after catastrophes. This would reduce the need for 

States to purchase private reinsurance and charge adequate rates 

to maintain capital reserves—again, at a cost to the Federal Government and to all taxpayers. 

The subsidies provided by the consortium and the stabilization 

program would encourage State-sponsored programs to offer subsidized insurance and reinsurance. This would result in the displacement of private coverage, lead to costly inefficiencies, and retard innovation in the private sector. 

Lower insurance premiums would reduce incentives to mitigate 

risks and make taxpayers nationwide subsidize insurance rates in 

high-risk areas. The Federal Government would face potentially 

large liabilities since it might be expected to step in to support the 

operations of the consortium and face pressure to forgo full repayment of stabilization program loans. 

Allowing private insurance and capital markets to fulfill their 

roles is the best way to maintain the economic sustainability of 

communities at risk of natural catastrophes. Federal Government 

interference would crowd out an active and effective private market 

for natural catastrophe insurance, increase the incentive for people 

16

to locate in high-risk areas, result in potentially large Federal liabilities, and be unfair to taxpayers. For these reasons, the Administration opposes H.R. 3355. 

[The prepared statement of Assistant Secretary Swagel can be 

found on page 164 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Next, we will hear from the Honorable J.P. Schmidt. 

STATEMENT OF THE HONORABLE J.P. SCHMIDT, INSURANCE 

COMMISSIONER, STATE OF HAWAII, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. SCHMIDT. Chairwoman Waters and Chairman Kanjorski, 

Ranking Members Biggert and Pryce, and members of the subcommittees, I thank you for the opportunity to testify here today 

on H.R. 3355, the Homeowners Defense Act of 2007, and I thank 

you for addressing this very important issue. My name is J.P. 

Schmidt, I am the insurance commissioner for the State of Hawaii, 

and I am here today on behalf of the National Association of Insurance Commissioners. 

Last month, in the span of just 24 hours, my State was hit with 

a magnitude 5.4 earthquake while we watched Hurricane Flossie, 

at the time a category four storm, head towards our islands. In addition, at the same time, an earthquake in Peru generated a tsunami warning. A lava flow from Kilauea Volcano began winding its 

way toward old Hilo Town, and we were midway through a weeklong brush fire, burning thousands of acres on the Waianae Coast. 

Fortunately, the recent earthquake and the weakening hurricane 

were relative modest, in terms of insured losses. The tsunami 

didn’t develop, and the fire was kept from buildings and residences. 

However, we are still keeping an eye on the lava flow. But it is safe 

to say that Hawaii knows something about living with and managing the threat of natural disasters. 

Representatives Klein and Mahoney have put forward a bill intended to help States and insurers better manage the threat of natural catastrophes. We commend them for their leadership and for 

recognizing the important role States play in managing the threat 

of natural disasters. 

In those areas where private market property coverage is either 

unavailable or unaffordable, States have stepped in to fill the gap 

with wind pools, insurance incentives, reinsurance funds, and, in 

the case of Hawaii, a hurricane relief fund that provides coverage 

after the occurrence of an event. 

The NAIC has adopted guiding principles for evaluating Federal 

catastrophe insurance proposals, and has used them to consider 

H.R. 3355. The full evaluation is included in our written statement. 

Generally speaking, we are encouraged that the Homeowners Defense Act meets many NAIC guiding principles. However, the proposal’s viability will ultimately depend on how it is implemented, 

and on the willingness of States, insurers, and investors, to all participate. 

The NAIC sees the risk consortium as a possible mechanism to 

help lower potential losses to State catastrophe funds by extending 

them to the capital markets. The capital and surplus of the residential and commercial property insurance market is approaching 

17

$500 billion, while the global securities is over $50 trillion. The financial impact of a $50 billion storm would be relatively small, 

then, if absorbed in the securities marketplace. This risk transfer 

mechanism for States would create another avenue to cede risk, 

similar to the role of the reinsurance marketplace. 

Another beneficial aspect of the consortium is the process of cataloging the various risks of its participants. With better information 

about underlying risks, market participants would have greater 

confidence in projected outcomes, and a better sense of a fair price. 

Although securitization is an important tool to spread risk, it is not 

a panacea. We see it as a vehicle that augments, but does not replace, the traditional reinsurance market. 

A key unknown that will determine the impact of this type of approach is the appetite of the investment community, and the impact of consortium products on the attractiveness of those securities already on the market. 

The loans created by Title II of the bill help spread the timing 

risks associated with large natural disasters. The loans leverage 

the capacity of the Federal Government to allow State funds, for 

those States that choose them, to better manage risk and help reduce volatility in the market, by giving insurers less exposure to 

truly catastrophic events. This approach allows States to tailor 

their programs to allow the private insurance and reinsurance 

markets to be the first line of defense, but recognize the inevitability of government obligation for catastrophic events. 

The loan approach will work best in an area when all the insurance entities in that area can take advantage of it. For that reason, 

a reinsurance type facility would be a better structure for managing the flow-through for loans than a residual market wind pool. 

A wind pool, as a direct writer of insurance, does not have the ability to provide a backstop to insurers in a region. 

For all consumers to benefit, States would either need to create 

a separate reinsurance entity, or restructure their residual market 

entity to take on this additional role. Although we cannot anticipate which State will choose to take advantage of this program, the 

Federal backstop aspect seems to provide an incentive for States 

with an affordability problem to consider this approach. 

The insurance and reinsurance markets have a significant 

amount of capacity, and access to that capacity for events that are 

small yet frequent is generally affordable. But for those who live 

in areas where events can be infrequent yet catastrophic, access to 

insurance capacity is either unavailable or unaffordable. This is the 

dilemma that regulators and legislators must face together. 

Again, we commend Representatives Klein and Mahoney for 

their leadership on this important issue, and we thank the subcommittee for the opportunity to testify. 

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

141 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

The Hon. Matthew Patrick, State of Massachusetts. 

18

STATEMENT OF THE HONORABLE MATTHEW C. PATRICK, 

STATE REPRESENTATIVE, THE COMMONWEALTH OF MASSACHUSETTS 

Mr. PATRICK. Thank you, Madam Chairwoman. I am Representative Matt Patrick, from the third barnstable district in Massachusetts. The third barnstable district is on Cape Cod, that arm that 

sticks off of Massachusetts into the Atlantic Ocean. I am accompanied by my colleague, Sarah Peake, from the fourth barnstable 

district, who is on the financial services committee in the legislature in Massachusetts. 

I am here to speak in favor of H.R. 3355. We have a problem in 

the Commonwealth of Massachusetts, as was stated before. We can 

help ourselves, with a little help from the Federal Government, and 

I think H.R. 3355 will do just that. 

Back in 2003, our constituents started complaining. I feel like we 

are your colleagues that are closer to the people, in that regard. 

When I go to the supermarket, I hear from people exactly what’s 

bothering them, and homeowners’s insurance is the biggest problem on their minds since 2003. 

Insurance companies have left—or have increased rates from 

$700 in 2003 to roughly about $1,700, on average. The Mass FAIR 

plan, which is the insurer of last resort, has gone from 3 percent 

of the market to 44 percent of the market on Cape Cod, Martha’s 

Vineyard, and Nantucket Islands. They have also increased rates 

25 percent, with approval from the insurance commissioner, and 

have applied for another 25 percent increase. The free market is 

not working. 

And I want to also reinforce the fact that you may not realize 

this, but not all of us are rich on the Cape and the islands. Sixtythree percent of the workers who are employed on the Cape and 

the islands work in retail trade or the service sectors. The average 

wage is $20,000, according to the 2000 census. That may have increased slightly, but it’s still not up to what the Crittenton Women’s Union estimates that a family of four needs to live without any 

frills, which is about $58,000. 

Twenty-five percent of our residents on the Cape and the islands 

are senior citizens on fixed incomes. Many of them have canceled 

their homeowners insurance. They don’t have mortgages, so they 

can do that, but it puts them at an incredible risk, because they’re 

at risk of fire, or anything else. But they simply can’t afford the 

increases. All of this is driven by reinsurance, computer models—

private computer models—and global warming. 

The FAIR plan expenses for reinsurance—just to give you an example—have increased dramatically. In 2005, the FAIR plan spent 

$17.5 million for $500 million worth of reinsurance. In 2006, they 

spent $43 million for $455 million in reinsurance. And this year, 

2007, the FAIR plan spent $75 million for $979 million in reinsurance. That’s all money that could be going into our own reinsurance pool, to build it up. 

Right now, we are having trouble getting the legislation passed. 

We have a senate bill, 624, which would maintain the private insurance companies, give them the backstop with our reinsurance 

pool, and also help us establish our fund in 7 to 10 years. 

19

But we need that 7 to 10 years to establish our own fund. And 

with H.R. 3355, we will be able to give our colleagues the reassurance that we will be able to—we will have the backstop, we will 

have some guarantee that we won’t have to increase the assessment on all insurance policies across the State, if we do have a catastrophic event before the fund is built out. So, it would be politically helpful to us to have H.R. 3355 to get our bill passed to create 

a catastrophic insurance fund in the Commonwealth of Massachusetts. 

We would also like to see this tax-exempt status—and I know 

that’s beyond your purview—but we would like to see that clarified, 

so it’s a definite. But, again, we think it’s a good bill. It definitely 

would help us. 

And thank you for this time to testify. I appreciate it. 

[The prepared statement of Mr. Patrick can be found on page 138 

of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Next, the Hon. Tom Evans, chairman of the Florida Coalition for 

Preservation. 

STATEMENT OF THE HONORABLE THOMAS B. EVANS, JR., 

CHAIRMAN, FLORIDA COALITION FOR PRESERVATION 

Mr. EVANS. Madam Chairwoman, thank you. Thank you very 

much for inviting me, and a special thanks to Congressman Castle 

for his kind words. It was good to see my friend, Barney Frank, the 

chairman of this committee now, who served here when I was sitting on the top row, and he was down here. 

I think the approach Chairman Frank outlined earlier is a very 

good one, because I think we should look at all the alternatives. We 

should advance the process carefully forward. And I am glad to be 

here with three gentlemen who represent an area where I spend 

a lot of time; I teach at Florida Atlantic University, and chair the 

Florida Coalition for Preservation. 

The older I get, the more I am concerned about the future, particularly for my grandchildren and other grandchildren like them 

all over this country. And one of the things that concerns me the 

most is the amount of money we spend, because it affects everything that we do. It affects our national security, and it affects people’s lives tremendously. We need to spend tax dollars as efficiently 

and effectively as possible. 

I remember voting for an increase in the debt ceiling to $1 trillion in 1980. And now, in the last 6 years, we have increased the 

debt ceiling by another $1.5 trillion, just in 6 years. That is unacceptable. It took us 200 years to get to $1 trillion. I think we 

should be doing something about that, and that brings us to today’s 

hearing on H.R. 3355. 

On the surface, especially if you’re from Florida, Congressman 

Klein and Congressman Mahoney’s bill sounds good. However, in 

my view, I don’t think there should be a rush to judgement to mark 

up this bill before considering it, before looking carefully at all aspects, and before looking at other opportunities you have, gentlemen, as far as this bill is concerned. I think there is an appropriate 

role for government and the private sector and each should be examined. 

20

But I would like to bring your attention to several concerns I 

have about H.R. 3355, because of its complexity. One is to be careful; don’t displace agents and brokers, and don’t replace the private 

sector’s involvement in insuring and reinsuring. And don’t mask 

the risk involved. 

Let me share with you a recent experience that I have had over 

the last 4 to 5 months. It involves south Florida, and it involves 

a development, a little town by the name of Briny Breezes. You 

may have heard about Briny Breezes. Some developers offered $510 

million for Briny Breezes, about 40 acres of land. Briny is an old 

trailer park. 

Now, that’s about $13 million to $14 million per acre. And, ladies 

and gentleman, the only way you could make that economically feasible is to go up, way, way up, with high rises. And in this instance, they suggested on this 40-acre plot 1,200 condominium 

units, with high rises ranging from about 12 to 14 stories to 20 to 

22 stories, a 349-room luxury hotel, and a greatly expanded yacht 

marina, with retail shops, restaurants, etc. 

Briny was and is a classic example of a barrier island in south 

Florida situated between the inter coastal and the Atlantic Ocean. 

And what we tried to do with our coalition was to point out, to educate the people, to make sure that policymakers at every level understood the complexities involved. We wanted them to understood 

that this type of intense irresponsible development would greatly 

and dangerously stress the surrounding infrastructure: transportation; water supply; the emergency response time for vehicles of 

all kinds; evacuation problems, etc. 

Our Coalition appeared before the State of Florida to make our 

case in Tallahassee. Tom Pelham was the secretary of community 

affairs. He has the final responsibility in determining whether or 

not a comprehensive plan is or is not acceptable. And they determined that it was not acceptable. Now, that was a reasonable decision, but nothing compelled the State to find the comprehensive 

plan presented by the developers unacceptable. 

Most of the standards used in Florida’s Growth Management Act 

are subjective, they are not objective. They are not codified in law. 

And the more you reduce the risk, it seems, ladies and gentlemen, 

the greater opportunity you have to access capital markets, and the 

greater opportunity for reduced premiums. It just makes good common sense. 

The national catastrophe fund envisioned by the legislation 

you’re considering today does not address the responsibility of 

States to reduce risks and mitigate losses that will occur in the 

event of a catastrophic storm. 

An ounce of prevention—and I will finish in one minute, if I may, 

Madam Chairwoman—an ounce of prevention is still worth a 

pound of cure. And I hope you will include in this legislation that 

you’re considering today—and will be considering, hopefully, for 

weeks ahead—a requirement that States demonstrate that they are 

taking initiatives that will reduce risks and mitigate damages to 

the maximum degree possible: tough building codes, for example, 

and very importantly, some standards that prevent intense development on vulnerable, storm-prone barrier islands. 

21

The Florida legislature could pass amendments to the Growth 

Management Act that would take care of that. And you all could 

suggest that they do so. This would be tangible recognition that the 

States understand that, in accepting assistance, any form of assistance, they must bear their fair share of responsibility. We should 

encourage this type of action. And we should discourage unreasonable risk-taking. 

I hope you all consider that, and I thank you very much for having me here today. 

[The prepared statement of Mr. Evans can be found on page 95 

of the appendix.] 

Chairwoman WATERS. Well, thank you very much. I would like 

to recognize myself for 5 minutes for questions. My first question 

is directed to you, Mr. Swagel. 

Katrina/Rita hurricanes were devastating, and they have caused 

a lot of pain to many, many people, not only the people who were 

impacted or affected by it, but for those of us who have tried to 

forge solutions to the tremendous problems that have been created. 

This problem of the denial of claims by the private insurers is 

particularly painful, where the denials are such that some homeowners are in a state of shock, thought they were covered both for 

wind and for flood, only to have the insurance companies fight 

them, tooth and nail, to keep from recognizing or honoring their 

claims. 

We also saw a lot of threats from private insurers to pull out. 

They said, ‘‘We’re leaving,’’ not only in the Gulf region, but also 

there were those threats in Florida. And for those who have stayed, 

the rates have increased tremendously in some areas, particularly 

in the New Orleans area. I was just there, and went over this. 

So, given the problems that we have experienced, the number of 

uninsured—and Mr. Klein is absolutely correct— I’m from California, and most of us don’t have any earthquake insurance. 

Given all of these problems, do you still—am I to understand 

that your testimony is such that you said the Administration opposes any Federal role in the natural catastrophe insurance market, and that Federal Government interference in a functioning 

natural hazard insurance market could crowd out an effective, private market? I mean, is that what you’re saying? 

Mr. SWAGEL. Yes, Madam Chairwoman. The Administration opposes the provisions of the bill, as written. 

Chairwoman WATERS. But I would like to know a little bit 

more— 

Mr. SWAGEL. Sure. 

Chairwoman WATERS. —about your opposition to any and all 

Federal role in any natural catastrophe insurance market. Is that 

a true statement? 

Mr. SWAGEL. No. You know, I was just thinking of what Chairman Frank had said. And I thought that was a fair way of putting 

it, you know, his challenge. You know, ‘‘If you say no’’—and obviously, my testimony says no—‘‘what do you support?’’ So there are 

things that the Administration supports. I could go through them, 

if that— 

22

Chairwoman WATERS. Does the Administration recognize the 

problems that Americans are faced with in these flood-prone areas? 

Well, and all of the perils that we experience in this country. 

Mr. SWAGEL. Absolutely. 

Chairwoman WATERS. And, if so, do you have another solution? 

Mr. SWAGEL. Absolutely, you know, the role of insurance in rebuilding is critical, and we see that in the Gulf States and in New 

Orleans, as you pointed out. And the disagreement, of course, is 

what is the best way to foster the insurance market, and make 

sure that people have the ability and access to insurance. 

Chairwoman WATERS. We have two different approaches that 

have been presented by members who are trying very hard to offer 

their constituents and our citizens some measure of protection. Do 

you have something that we do not know about? 

Mr. SWAGEL. I want to say a few words that—I think this is responsive about the Administration’s approach, and what we support, and what the Administration is doing. 

Starting at the Federal level, with—in the Department of Homeland Security, efforts to support mitigation, substantial funding in 

the President’s budget, Federal assistance to help State and local 

governments improve their mitigation efforts, to improve the quality of the flood maps, for example. 

At Treasury—you know, obviously, we’re a bit removed from 

that—the role of Treasury—and this is something Secretary 

Paulson has spent a lot of time on—is on the competitiveness of 

our capital markets, which, of course, sounds quite removed from 

floods and catastrophes. But, of course, that’s what this is all 

about, is making sure that we can tap into active capital markets, 

to foster that reinsurance. 

Chairwoman WATERS. Well, we all, I think, support—on both 

sides of the aisle—mitigation. And, as was represented here today, 

we should insist on reducing risk, wherever we can do that. But 

meanwhile, it’s going to take some time to get the maps redone for 

these flood zones. It’s going to take time to get mitigation to the 

point where it can be helpful. 

So, I was just wondering, do you have any other answers? Do you 

have any other proposals that you could present to Congress that, 

perhaps, would be helpful? 

Mr. SWAGEL. The staff of Treasury have worked with the staff of 

the committee in discussing some of the provisions of this bill to 

help us understand them, and we’re happy to continue to work 

with the staff. 

Chairwoman WATERS. So you have not closed the book on this 

legislation? You’re still reviewing it? And there is some possibility 

that you could support some parts of it? All of it? You may have 

some suggestions, but you will work with these authors, is that 

right? 

Mr. SWAGEL. We are happy to continue talking to the committee. 

Chairwoman WATERS. I am sorry, I didn’t hear you. 

Mr. SWAGEL. We are happy, yes, to continue talking to the committee. 

Chairwoman WATERS. So, am I to take that to mean that you 

will be happy with work with these authors, to try and make this 

bill even better, so that you could possibly support it? 

23

Mr. SWAGEL. As written, the Administration— 

Chairwoman WATERS. I know, ‘‘as written,’’ but what we’re looking for—we’re looking for an open door for some interaction and exchange and cooperation to solve the very desperate problems of the 

victims of these disasters. Are you willing to work with them? 

Mr. SWAGEL. Yes. Treasury staff, we were out talking to the committee yesterday, exactly to understand the provisions of the bill. 

And we are happy to continue— 

Chairwoman WATERS. All right. Thank you very much. Ranking 

Member Biggert? 

Mrs. BIGGERT. Thank you, Madam Chairwoman. Just for the 

record, I would like to clarify that Illinois is subject to flooding. 

And, as a matter of fact, we had a major flood in August. It was 

suggested that maybe we don’t have all the mountains and all the 

things, or the coastal, but we did have a major flood in which—it 

could have been worse, except for the mitigation, I think, that was 

in Illinois. But in northern Illinois it was bad. 

I would like to ask, first of all, Mr. Swagel, how could the riskbased pricing, FAIR risk-based pricing, like we do have in Illinois, 

help to temper the growth in Florida? Wouldn’t this help with the 

availability problem, since insurers would find a risk-based regulatory regime a more inviting environment in which to do business? 

Mr. SWAGEL. Yes, that’s right. And as we look at the markets, 

one of the things that we see is that the places in which States 

have tended to interfere with the workings of the insurance market, there has been the unintended consequence of reducing the 

availability. 

Mrs. BIGGERT. Okay. Then, Mr. Evans, you talked a lot about 

mitigation, and mitigation at the local level and the Federal level 

under the National Flood Insurance Program has been crucial to 

reducing damage from flooding and storms, particularly where 

there is a repeating event. So I don’t think that H.R. 3355—it 

doesn’t specifically describe mitigation, does it? 

Mr. EVANS. As I read it, it doesn’t, Congresswoman Biggert. But 

it should. You could add that, and that’s why I suggest that you 

don’t rush this through to a mark-up on September the 18th or earlier. You should not consider such a complex bill after only one 

hearing. 

Mrs. BIGGERT. Thank you. And then, Commissioner Schmidt, I 

understand that the Hawaii State catastrophic fund created after 

a hurricane in 1994 was eventually dismantled as unnecessary. Do 

you know what factors led to the State to conclude that that fund 

was no longer needed? 

Mr. SCHMIDT. That’s not quite correct, Representative Biggert. It 

was not dismantled. It was wound down, however, and we still 

have a considerable amount of money available to reactivate the 

hurricane relief fund, in the event of a hurricane. 

The way it is designed is it’s intended to go into action once a 

hurricane hits, and it’s assumed that the insurers, at that point, 

will tend to pull out of the market, and not want to participate, as 

they determine the losses that they are suffering. At that point, our 

citizens still need their insurance coverage. The hurricane relief 

fund provides insurance coverage for everyone. And those insurers 

that remain in the market are exempted from the assessments for 

24

the operation. Then, as the market settles down, the hurricane relief fund is wound down, as insurers come back into the market, 

and we have a more settled market for our citizens. 

Mrs. BIGGERT. I don’t quite understand what you mean by 

‘‘wound down.’’ Don’t you still have to fund, or do you build up the 

fund in the event that there is another catastrophe? 

Mr. SCHMIDT. In the event that there is another catastrophe, we 

would have to build the fund up. We have a certain amount that 

we are retaining, that will help us get the funds started. 

But then, the fund will be increased through the premiums collected from the individuals, from assessments of insurance companies, and then, as I said, provides the primary coverage, purchases 

reinsurance, and ensures that our citizens do have coverage, so 

that they won’t default on their mortgages, and so that we can get 

back on our feet quicker. 

Mrs. BIGGERT. Do you have any idea how many States currently 

have reinsurance funds that would qualify for Title II loans? 

Mr. SCHMIDT. I do not know the exact number off the top of my 

head. But certainly that is something that we can get for you. 

Mrs. BIGGERT. I would appreciate that. Do you think that this 

bill would incentive more States to form such a fund? 

Mr. SCHMIDT. Yes, I think it would. I think, because it provides 

a—you know, one good approach to dealing with a very difficult situation, a catastrophe, it provides support and a backstop for the 

private sector, the private insurance industry, in its coverage of our 

citizens. 

Mrs. BIGGERT. Okay, thank you. My time is up. I yield back. 

Chairwoman WATERS. Thank you very much. Ms. Pryce? 

Ms. PRYCE. Thank you very much. I want to extend my appreciation to our panel for your patience, and for your informative testimony, and I thank the chairwoman for holding this hearing today. 

I think it’s important that we tackle this issue. 

At the same time, I think we need to do so in a way that really 

looks at it carefully, so that it protects not only policyholders but 

also taxpayers, and the solvency of the insurance industry, in general. I am just a little bit skeptical—but very open minded—about 

any Federal bill that includes little in the way of risk reduction and 

mitigation. I think we can improve upon this product by looking at 

that very carefully—but also, a bill that encourages direct government involvement at such low levels of loss, and has no guarantee 

that the actual savings will be passed on to the taxpayer. 

And so, as you answer my questions—and any of you witnesses—

please feel free to address any of those things that are troubling 

me. 

Specifically, let me ask about the consortium aspect of this bill. 

The purpose of that is—part of the purpose of this bill—is to establish this consortium for interested States that would be used to buy 

reinsurance for them, or to issue catastrophic bonds. 

Can any of you tell us how that would work, and whether you 

think that this is really a new Federal law that is actually necessary, or is this already possible among States? Is it already happening in the reinsurance market? Is it already—don’t we already—haven’t we already seen some hedge fund involvement? And 

25

would you compare this to a new government sponsored enterprise, 

if we do go this route? 

That is a lot of questions in one. Mr. Patrick, you have your hand 

up. Go right ahead. 

Mr. PATRICK. Thank you, Congresswoman. I just want to remind 

you that this is in the form of loans. I mean, you would get a lower 

interest rate for loans, so the States still do bear quite a bit of responsibility. They are not going to make it easy, in my mind, for 

people to build on the coast, for example, or to build 20 stories in 

the air. I think those things will be regulated on a State level. 

But, from my own perspective, it has been difficult for us to get 

our bill, our Massachusetts catastrophic fund bill passed but with 

assurance from the Federal Government that they will back us up 

in the 7 to 10 years that it takes to establish—I mean, to make our 

fund self-funding, I think we can get it passed. 

I cited some numbers to you about our FAIR plan. They are donating—or, they are not donating, but they are paying tens of millions of dollars for reinsurance every year. And that is gone. If we 

don’t have a catastrophic event, that is gone. That money could be 

going into our fund to build it up. 

Ms. PRYCE. Tom? You indicated you had something to say about 

this. 

Mr. EVANS. Well, you expressed some concerns that I have, as 

well. Is it a new government enterprise? The gentleman who authored the bill suggests that the Secretary of the Treasury is going 

to be the chair of the committee. Two other members of the Cabinet are involved in that committee. It seems to me that is fairly 

close to a government enterprise. 

And the other question is, do the States have the opportunity to 

do precisely what this legislation suggests that they should do? I 

don’t have the answer to that, but I think that needs to be addressed. You need to focus on that and it cannot be accomplished 

in one hearing. 

Ms. PRYCE. Thank you. Assistant Secretary Swagel, Federal catastrophic reinsurance bills have been introduced many times over 

the years, and this bill looks a lot like them, except it uses the 

term ‘‘loans,’’ rather than ‘‘reinsurance.’’ 

Do you have an opinion as to whether a real solvency loan bill—

wouldn’t it kick in at a higher rate of loss than this, when there 

is a clearer threat to the industry, or the market, rather than a 

way to basically smooth the premium changes from year to year? 

It seems like that’s what would be accomplished by this, as opposed 

to assurances for the market, in general. 

Mr. SWAGEL. Right. We share the concern that you said at first. 

This kicks in very quickly. 

I share some of the concerns you also stated just before that, you 

know, we look at the consortium and don’t understand what is 

there that can’t be done now, and end up in the same place. There 

is an implicit government guarantee there. 

And you kind of look forward and say the fundamental problem 

is the rate suppression, and what does that mean about the ability 

of the people taking out the loans against the Treasury to eventually repay those loans? And that’s—you know, that’s the fundamental problem, as we see it. 

26

Ms. PRYCE. All right. Thank you, Madam Chairwoman. My time 

has expired. 

Chairwoman WATERS. Thank you very much. Mr. Sherman? 

Mr. SHERMAN. Thank you. I want to thank the Chairs for holding 

his hearing, and the authors for authoring this bill. Our committee 

has already passed terrorism reinsurance; this is critical, not only 

to provide coverage for victims, but also to make sure that buildings get built, and buildings get sold. 

We recognized, with terrorism, that we needed a good insurance 

system, and the private sector couldn’t do it all by itself, because 

the losses were hard to predict, and involved tens of billions of dollars. It seems like the natural disaster situation is identical, and 

even cries out more for Federal involvement, because the harm is 

not just that things won’t get built or get sold. 

We had a little crisis in my area—I represent Northridge—where 

you couldn’t buy or sell a home for a few months, or at least it was 

very difficult. We need an insurance system that works. These 

things are hard to predict. They involve tens of billions of dollars 

of cost, and a backstop of a similar nature seems to be called for. 

Mr. Swagel, you are here, in part, to defend the Treasury of the 

United States. We pass this bill, you have a contingent liability to 

put on our national balance sheet. But at least it would be scored, 

acknowledged, admitted to by Treasury. 

Right now, we have a different system, and that is we have absolutely no liability any time we have a natural disaster. But every 

time it’s big, we pass a supplemental appropriation. Right now, 

shouldn’t the Federal balance sheet have a little footnote on it saying, ‘‘We have no legal liability, except the legal liability to spend 

the money that Congress forces us to spend, or appropriates,’’ and 

we would estimate over the next century, that we’re talking between $100 billion and $1 trillion in supplementals that will be 

passed over the next 100 years. 

And does the Federal balance sheet have that footnote, and 

shouldn’t it? 

Mr. SWAGEL. You know, I agree with what you said about the approach now, that after a catastrophe, as a nation, we look at what’s 

happening, and then the Congress decides what to do. 

The problem with the approach in the bill that’s written is one 

of both fairness and incentives. The incentives in the bill, for people to, unfortunately, put them in harm’s way—and it’s something 

we’ve seen for the flood insurance—and then, for the States, it’s 

what I said before to the ranking member, that it’s for the States 

to essentially suppress the rates, knowing that the Federal Government is back there as a backstop. 

Mr. SHERMAN. I would just point out that if we do absolutely 

nothing—you have insurance. You don’t have insurance if you’re 

flooded by a small flood, because then it won’t be on the front page 

of the newspapers right here in Washington. 

But the fact is, all those things exist now. You know that if your 

community is hit by a big flood, there is going to be a supplemental, and it’s going to benefit those people who have—are uninsured. If you incentivize people to buy insurance, then at least they 

are contributing something. 

27

You would have to be a very cold-hearted legislator—and perhaps Mr. Evans can identify—and you may very well become a 

former legislator, if you’re going to turn a blind eye to people suffering from a natural disaster, and instead, send them a letter 

about how they should have bought insurance and/or mitigated 

their risk. 

Mr. Evans, I know a lot of attention is focused on building in a 

floodplain. There are more floods than there are earthquakes. Coming from California, I would say, ‘‘Thank God,’’ not that we would—

but we would want to have, of course, fewer of each. 

But I would hope that you could work with this committee, not 

only to talk about where people build, and how we mitigate risk—

because often the way to mitigate risk from a flood is to not build 

in the floodplain—but also focus on earthquakes, which I realize is 

the problem less talked about, in terms of building standards, because, as I mentioned earlier, the Federal Government is going to 

get left holding the bag, one way or the other, with or without this 

bill. 

And if we want to minimize Federal costs, we’re going to have 

to push States and push individuals, in one way or another, to 

build the right way in earthquake zones, like my entire State, and 

to build in the right place and in the right way in flood zones. Does 

your organization—I mean, you talk about how—it looks like my 

time is expiring. I will ask whether your organization has specific 

proposals as to how to mitigate losses, how this bill can be improved. 

Mr. EVANS. Let me just answer that, Congressman Sherman—it’s 

good to see you again. 

Mr. SHERMAN. It is good to see you, too. 

Mr. EVANS. I would be happy to work with these gentlemen. 

They live pretty close to me, down there in south Florida, and I 

would be happy to work with them on addressing the reason we 

need to reduce the risks. I think that is a duty that we have, and 

I think it is a duty that the States have, as well. The States should 

share in the responsibility. 

I agree, that we need to respond to people who are in need, and 

respond to people who don’t have insurance in a national catastrophe, whether it’s an earthquake, a flood in the Midwest, or 

wherever it is. Or, a hurricane in hurricane alley. We’re right in 

the middle of it. These gentlemen live right in the middle of it. But 

I think we also have a parallel duty and responsibility to do what 

we can to reduce the risks. 

Mr. SHERMAN. Thank you. 

Chairwoman WATERS. Mr. Castle? 

Mr. CASTLE. Thank you very much, Madam Chairwoman. And let 

me, Mr. Swagel, ask you a question. I may ask Mr. Evans, as well. 

H.R. 3355 contains little in the way of mitigation directives to 

States that either join the consortium or apply for a loan. There is 

a provision in that bill that states, ‘‘The funds receiving these loans 

must comply with building codes designated by the Treasury Secretary,’’ which I thought was a little bit unusual. I don’t know that 

Treasury Secretaries are necessarily familiar with building codes. 

28

Do you think that is the appropriate agency to set such codes, 

or has the ability to designate to do that, or do you think this is 

outside of the scope of Treasury’s expertise? 

Mr. SWAGEL. No, there is no expertise for this at Treasury. It is 

certainly outside our scope. 

Mr. CASTLE. All right. So it’s probably something we should be 

looking at, if we go forward with the legislation? All right. 

And that sort of ties in, Congressman Evans, with what you were 

talking about earlier. I assume that you would agree with that answer? 

Mr. EVANS. Absolutely I would, Congressman. 

Mr. CASTLE. Let me go a little further with you. I am very concerned about some of the—you raised the issue, I don’t remember 

the name of it, but of a small 40-acre space of landing, and building— 

Mr. EVANS. It is called Briny Breezes. 

Mr. CASTLE. —right, and building a great high-rise—I won’t remember now, either—and raising a high-rise there, and the possible overcrowding that comes with that. And, let’s face it, we see 

that all along the coastal areas. We see it in Delaware, we see it 

throughout. And this concerns me. 

In other words, you’re putting a lot of dollars into that kind of 

housing, and they are charging a lot for it, and there is a lot of 

pressure on the local zoning people to do this. But if there is a tragedy of some sort in the form of a hurricane or wind damage, or 

whatever it may be, there are huge cost implications that I don’t 

think are necessarily taken into consideration. 

And whether it’s the plan that we have here, or State agencies, 

or insurance companies, it seems to me that we are— 

Mr. EVANS. You are absolutely right. 

Mr. CASTLE. We are dealing with something that is a little bit 

out of hand. 

Mr. EVANS. You are absolutely correct. 

Mr. CASTLE. I would like your comments on that. 

Mr. EVANS. You are right, Congressman Castle. What happened 

with Briny Breezes is, at the local level, they wanted to do everything they could to get $1 million per trailer lot. You know, most 

of us may have accepted that. But, as I told them—we want to 

work with you to bring about responsible development there, and 

responsible development in other parts of Florida. The proposal 

they accepted is irresponsible. 

But—and people say to me, ‘‘Oh, Tom, you can’t take away their 

right to sell their property.’’ I said, ‘‘Yes, but freedom stops at the 

end of the other fellow’s nose.’’ And if you’re destroying a community in the process, then you have to stop. But you’re absolutely 

right. What we need to do is do something at the State and national level that will take care of this. Because, generally speaking, 

at the local level they approve permitting, just as we do in Sussex 

County, for example, in southern Delaware. 

In Delaware, virtually anyone who comes up with a plan at all 

will get a permit to build just about anything they want. And that’s 

why we need something at the national level that I think does address this problem of mitigation, and reducing risk, and reducing—

minimizing the losses. 

29

Mr. CASTLE. I assume when you say something at the national 

level, you’re talking about some sort of general guidelines, and 

you’re not asking— 

Mr. EVANS. General guidelines— 

Mr. CASTLE. —the national government to get involved with— 

Mr. EVANS. For example, the Coastal Barrier Resources Act that 

I authored here a number of years ago had tremendous bipartisan 

support. We don’t see a whole lot of bipartisan support anymore, 

but I think this is an example of where you could have some Members of Congress working together for a change. 

What I would like to do is to expand the concept of the Coastal 

Barrier Resources Act. What we said was, in these storm-prone, 

vulnerable barrier islands, if you are going to develop, do it on your 

own nickel and not the American taxpayers. Now, we can’t prevent 

people from building in storm-prone areas, but we can eliminate 

subsidies, including flood insurance. I think we could apply that 

principle to redevelopment on barrier islands. 

For example, if you had a whole bunch of houses, or three-story 

condominiums in the same spot, rather than tearing those down 

and building 20-, 25-, or 30-story condos and hotels that dangerously stress the infrastructure, it would seem to me that you 

could have a new bill, or an extension of the principles in the 

Coastal Barrier Resources Act that would discourage such redevelopment. 

Mr. MAHONEY. Will the gentleman yield? 

Mr. CASTLE. Let me just make one statement, and I will be 

happy to yield. I don’t know if I’m going to run out of—well, my 

time is going to be up. I can’t even make my statement. I yield 

back, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. I would have 

loved to have had the opportunity to work with you, Mr. Evans. I 

appreciate your comments, particularly along the lines of—about 

bipartisan work. I think we’re going to have to get back to—Congress is going to dip far lower than it is now. 

I am hoping my comments don’t come across as facetious to Mr. 

Swagel, but I am—because I am trying to understand something. 

The insurance industry, shortly after tropical depression number 

12, known as Katrina, devastated the Gulf Coast region, ended up 

having some of the largest profits ever. And I am—and it troubles 

me that with probably $60 billion, $70 billion in insured—damage 

to insured properties, that the insurance industry could have the 

highest levels of profitability ever. And at the same time, insurance 

rates have increased exponentially. 

Help me. Because I think most Americans are not going to buy 

that. Most Americans are going to try to get a headache, trying to 

understand that. Can you ‘‘un-headache’’ me? 

Mr. SWAGEL. Thank you. I will try. You know, as you know, of 

course, the insurance industry is regulated mainly at the State 

level. So, in terms of profits, I would really have to look at the 

State level. 

I certainly agree with what you said about—and others have said 

this, as well—that after catastrophes in the past, insurers have 

withdrawn from markets. And what has been interesting over time 

30

is that phenomenon has become less so, and the re-entry has been 

quicker. 

And there is a sense in what you say, that the record profits, and 

the sort of level of profitability is an indication of that, that capital 

does come back into the insurance markets quickly. And some of 

this reflects the role of financial innovation. And, obviously, in the 

second panel, you’re going to hear from some of the people involved 

in this innovation. 

You know, I’m sorry, I didn’t talk about rates, but I will stop 

there. 

Mr. CLEAVER. Well, I was just going to say that the headache is 

still pounding. 

Mr. SWAGEL. Should I— 

Mr. CLEAVER. Can you say it differently? Maybe it will stop me 

from hurting. I mean, I—do you—this is—I wish we were just two 

of us in a room—do you actually think most Americans would hear 

that and say, ‘‘Oh, well now, I feel better.’’ 

Mr. SWAGEL. The hard thing is that the rates are going up, and 

there is no denying that, and it is very hard for families— 

Mr. CLEAVER. Which is what most people are concerned about. 

Mr. SWAGEL. And that’s what you start with. And that’s where 

you start—I think it’s exactly right. And the hard thing is to say—

you have to look at the rates and say, ‘‘Why are they going up?’’ 

And as anyone who read the New York Times magazine story—

I guess it is 2 weeks ago, now— 

Mr. CLEAVER. Yes, I read it. 

Mr. SWAGEL. Yes, so the—you know, there is a—there has been 

a change in the prevalence of catastrophes, and a change in the 

modeling of them, and people’s beliefs about both the impact of the 

catastrophes, and the financial consequences. 

And that’s what I meant in my statement, that the rates, while 

a challenge, are a reflection of the risk. They’re not a defect of the 

market, it’s just part of the market mechanism. 

Mr. CLEAVER. Madam Chairwoman, I will suppress my desire to 

continue this, in the interest of making sure my colleagues have 

more time to be involved, dialogically, with this issue. I yield back 

the balance of my time. 

Chairwoman WATERS. Thank you very much. Ms. Brown-Waite? 

Ms. BROWN-WAITE. Thank you very much. Madam Chairwoman, 

I want to assure you that the Administration is bipartisan in their 

opposition to anything that is going to help the homeowner. They 

opposed my bill, and I had mitigation in my bill. So I want you to 

know that. They are absolutely bipartisan in their opposition. 

Mr. Assistant Secretary, let me get this straight. I am also from 

Florida—I’m originally a New Yorker, so I tend to be real blunt 

here, okay, I’m not a sweet southern belle, nobody has ever accused 

me of being that. 

[Laughter] 

Ms. BROWN-WAITE. I didn’t need all that laughter. So, certainly 

mitigation is missing from this bill. Your comment that, you know, 

we need mitigation and an updating of flood maps—sir, do you 

know what an updating of flood maps already does to the already 

stressed homeowner out there? 

31

Gee, they are already paying very high insurance bills. And then, 

because we update the flood maps, which I agree is probably, you 

know, an important thing to do, then they are also faced with flood 

insurance. This is not what the homeowner needs to hear, sir, 

when we have a slow-down in the housing market, and you have, 

not just Florida, but other States having problems with insurance. 

The insurance commissioner from South Carolina sat here last year 

and said her rates were going up 300 percent. So it is not just a 

problem in Florida. 

You know, in your testimony, you said something like State-sponsored programs encourage people to locate in high-risk areas. Do 

you consider the State of Florida to be a high-risk area? Could you 

answer that? 

Mr. SWAGEL. Well, the State of Florida is at a higher risk of hurricanes than some of the other inland States, yes. 

Ms. BROWN-WAITE. Well, obviously so, because we’re a peninsula. 

But, you know, without Florida’s CAT fund, or insurer of last resort, nobody in this State could get insurance, not just those living 

on the coast. My district goes just about to the center of the State. 

Those people couldn’t get insurance, either. 

And the Administration’s, you know, ‘‘let them eat cake’’ attitude 

does not help any Member on either side of this aisle. We need to 

work together to come up with some solutions here, not just well, 

let’s redo the flood maps; or, let’s do mitigation. Because you know 

what, sir? There are already 18 million people living in the State 

of Florida. My district has grown by over 200,000 people in the 5 

years since I have been representing it, so that is not an answer. 

And so, you opposed my bill when it has mitigation in it. What 

is your solution? Not in gobbledygook, okay? In plain English, 50 

words or less. Help me out, here. 

And also, I would like you to address one other issue, and that 

is that, under this bill, there is no limit on the number of loans 

that a State can take out, nor is there a limit on the amount, nor 

even any requirement that there be a certification that the loan 

can be paid back. Is that situation just setting up a virtual trough 

for States to go to that might act as a disincentive to them, having 

what might be called smart insurance reforms? I would like to hear 

your comments on that. 

Mr. SWAGEL. On the first point, you know, I look at last Friday, 

with the President’s announcement about the Administration’s approach to helping homeowners, very targeted help, helping people 

stay in their homes. That’s the Administration’s approach, trying 

to—as plainly as possible, as directly, not in a confusing way, help 

the people most at risk. 

Ms. BROWN-WAITE. Sir, with all due respect, that relates to the 

mortgage problem. 

Mr. SWAGEL. Absolutely, absolutely. You asked me what the Administration’s approach is that—the Administration would never do 

anything to help homeowners. I’m sorry, that’s what I was answering first. 

Ms. BROWN-WAITE. So, for Floridians, and those on the coastal 

areas certainly, that phenomenon was going on, but they also have 

the unaffordability issue. So, what would you support? 

32

Mr. SWAGEL. Right. The situation in Florida, in some sense, has 

two challenges, and they are related. There is the unaffordability 

challenge, and there is the lack of availability. These are related. 

The State actions to address the affordability challenge has led, unintentionally, to an availability challenge. 

Ms. BROWN-WAITE. Madam Chairwoman, may I have 30 seconds? 

Chairwoman WATERS. You can, and I would be happy to extend 

that, but I am getting very concerned about whether or not your 

heart can take it. 

[Laughter] 

Ms. BROWN-WAITE. I’m from New York, I’m tough. 

Chairwoman WATERS. All right. Without objection. 

Ms. BROWN-WAITE. Let me break that down. Is what you’re saying that people aren’t paying enough for insurance? If that’s what 

you’re saying, I want you to come down to any place on the Gulf 

Coast, especially Florida, whether it is the two gentlemen on the 

other side of the aisle, or my district, or somebody from the Panhandle, and I would like to see you get out of that room alive if 

you tell those people they are not paying enough for insurance. 

Chairwoman WATERS. You don’t want to try to respond to that, 

do you? 

[Laughter] 

Mr. SWAGEL. No, I was thinking about that, and then I think you 

helped me out. 

Chairwoman WATERS. He is all yours, Mr. Green. 

Mr. GREEN. Thank you, Madam Chairwoman. Mr. Swagel, are 

you familiar with a highly technical term, ‘‘fish or cut bait?’’ I 

would beg that you fish or cut bait. 

Let me ask you simply if we incorporate mitigation as you have 

embraced it, and update the flood maps, would you then support 

the bill? 

Mr. SWAGEL. No, sir. The Administration— 

Mr. GREEN. You would not. 

Mr. SWAGEL. —opposes the bill. 

Mr. GREEN. Right. Let me ask you this. Is there anything that 

we can do, such that you would support the bill? Anything? 

Mr. Evans has given us a road map. He has said, ‘‘If you will do 

these things, then I will give consideration to it,’’ and I greatly appreciate your comments, by the way. 

So, I ask you, Mr. Swagel, sir, is there anything that we can do 

that would cause you to say, ‘‘The Administration will support the 

bill?’’ 

Mr. SWAGEL. You know— 

Mr. GREEN. Mr. Swagel, permit me to say this. Sometimes when 

people finish, I don’t know whether they have said yes or no. So 

I will ask you to kindly say yes or no. That would help me, immensely. 

Mr. SWAGEL. It— 

Mr. GREEN. Yes or no? 

Mr. SWAGEL. There is no yes or no answer. You know, it’s like 

I said before, we have talked—the staff at Treasury has talked to 

the committee staff, and are glad to keep going. The Administration— 

33

Mr. GREEN. I will take it that your answer is no. Let me go to 

another area. You are familiar with wind damage versus water 

damage, and how this became an issue in the Gulf Coast, especially 

in Louisiana and Mississippi. 

Mr. SWAGEL. Yes, I am. 

Mr. GREEN. But, for edification purposes, we had insurance companies—not all, but some—that would collect premiums, and when 

the damage occurred, would contend that it was water damage, as 

opposed to wind damage, which, if they could prevail with this 

premise, would mean that they would not have to pay for the damage. Did I state that fairly accurately? 

Mr. SWAGEL. That was the issue discussed at the hearing before, 

yes— 

Mr. GREEN. All right. Given this proposition, the insurance companies under your de facto program will continue to collect premiums, and they then—not all, but some will do it, and if one does 

it, it’s too many. And then, when the time comes for them to fish 

or cut bait, they will make the argument that it’s the Federal Government’s responsibility, notwithstanding premiums collected: ‘‘It’s 

the Federal Government’s responsibility, because it was flood damage.’’ 

And in some of these circumstances, we would have houses right 

near each other, wherein one company concluded that it was wind 

damage, and the other concluded that it was flood damage. 

So, the company keeps the premiums, the Federal Government 

does what governments ought to do in times of catastrophes, and 

it steps in, and it helps its citizens. That’s what we will continue 

to do, if we continue with the de facto policy that you have embraced. 

Now, it just seems to me that there is something wrong with that 

picture. It just seems to me that if we can find a way to, beforehand, before the event occurs, make reasonable steps to have a program such that people can spend some of their money, such that 

the marketplace can participate, and that the government does 

have some role, it just seems reasonable. 

Because, right now, the insurance companies will place you in 

long-term litigation. For edification purposes, that can be 3 to 5 

years. And while you’re in long-term litigation, your home is not 

being repaired. You are living, literally, in trailers. Have you been 

to the Gulf Coast, by the way? 

Mr. SWAGEL. No, not— 

Mr. GREEN. Have you been to New Orleans? 

Mr. SWAGEL. I have been to New Orleans, but not since the— 

Mr. GREEN. I would invite you, if you could, to please visit and 

see what people are actually experiencing. If you get a chance, sir, 

and you can see what it’s like to lose everything and not know 

what the future holds for you. 

Finally, I will tell you this. There are many people, Madam 

Chairwoman and Sir, who are still at a point where they cry when 

they talk about this. They literally break down and cry. The government hasn’t been there, as they see it. The private market 

wasn’t there for them. And these were people of means. We’re not 

talking about people who were in poverty. And they have not been 

able to recover, to this day. 

34

So, this is but a means by which we can use good will to try to 

mitigate and to try to be of help. I just hope that you would see 

it that way, and take a visit down to the Gulf Coast. I believe that 

it could be of benefit to you. I thank you for coming in and testifying today, and I yield back the balance of my time. 

Chairwoman WATERS. Thank you very much. Mr. Roskam? 

Mr. ROSKAM. Thank you, Madam Chairwoman. First of all, I 

want to commend my freshman colleagues for stepping up to the 

plate with a substantive bill that is not renaming a post office, and 

it’s really real, and you’re doing your best here. 

I come representing an adjacent district to Mrs. Biggert, and I 

am actually, very interested in this, because I feel like I’m kind of 

representing the people who are invited to dinner and we’re going 

to have a fabulous meal, and at the end of the dinner, maybe Mrs. 

Biggert and I are going to be there with our taxpayers going to be 

paying the tab. 

So, I think the great challenge going forward—and I’ve always 

looked at the challenge here—is the people who are proposing 

change are those people who have the burden of moving forward. 

It is not people who come with a little bit of a skeptical eye that 

have the burden of figuring it all out, it’s the proponents of bills 

who have the burden of answering all the questions, and satisfying 

the critics. 

So, my wife and I recently bought a dog, much to my dismay. I 

thought we were going to get through all four children without 

owning a dog, but we were worn down. And when we finally got 

the dog, friends who are also dog owners said a very simple thing. 

They said to me, ‘‘Look. You get what you pet. When the dog jumps 

up on you, don’t say to the dog, ‘You bad dog,’ and kind of ruffle 

its ears. You get what you pet.’’ 

So, I’m thinking to myself as I’m listening to this, we’re going to 

get what we pet. We’re going to get—as taxpayers, we’re going to 

reward the type of behavior that we subsidize. And the great challenge, I think, moving forward, is how do you create the environment where you’re not rewarding inherently illogical behavior? 

It is not logical to expect Illinois taxpayers, or other taxpayers, 

to subsidize a lifestyle living on a glorious Gulf Coast somewhere—

which is great living, if you can get it—but please don’t ask the 

taxpayers of the Illinois sixth district to subsidize that choice. 

Now, I realize that I am overly simplifying that. I realize that 

there are some subtleties to that. But it was instructive for me, the 

way Mr. Evans characterized this, in that the local folks on the 

ground in that development that he described a couple of minutes 

ago were very eager for the development. Great idea, you know, 

‘‘We’re going to open up this, we’re going to get property tax revenue from this, we’re going to enhance our community from this.’’ 

But there is a logical disconnect between that purchase decision, 

that decision to develop that property, and the ultimate liability 

that is sometimes hidden in this whole thing, and that is what rolls 

in, in a catastrophe. 

So, I come with an open mind. I come with a district that recognizes we have a national responsibility here, and that we’re all 

Americans, and we’re all in this together. But let’s not characterize 

this as a private sector solution. It’s not a private sector solution, 

35

it’s an invitation for the Federal Government to play a very big role 

in this whole thing. 

And I understand the desire, when States fail, and are unable to 

come up with solutions to try and go to Washington. I mean, that’s 

great. If I were representing an area, I would try to be a proponent 

of that, too. So I am not criticizing anybody for advocating for their 

district. 

But what I am saying is that I think we need to change the tone 

of the conversation somewhat, and that there may be opportunities 

for us to work together, but let’s call it what it is. This is a massive 

federalization. But I think we really need to creep and crawl and 

walk. Thank you. 

Chairwoman WATERS. Thank you. Mr. Mahoney? 

Mr. MAHONEY. Thank you very much. Mr. Swagel, you say the 

Administration believes that the private insurance markets for insurance are active and effective, is that correct? 

Mr. SWAGEL. Yes, sir. 

Mr. MAHONEY. Are you saying that, in the opinion of the Administration, that the citizens of the State of Florida owning the biggest private insurance company, 30 percent of the market, are you 

saying that the Administration considers that to be active and effective? 

Mr. SWAGEL. No, this is a case where— 

Mr. MAHONEY. Thank you. Does the Administration believe that 

every—well, let me ask you this. Does the Administration believe 

that it is—should be a goal of every American citizen to be able to 

try to buy their own home? 

Mr. SWAGEL. Yes. 

Mr. MAHONEY. Okay. Let me ask you something. What do you 

see as the cost of $1 billion worth of reinsurance? Could you give 

me an answer for that, please? 

Mr. SWAGEL. Well, it depends on the purpose of the reinsurance. 

Mr. MAHONEY. For homeowners insurance. Let’s say a 1 in 10- year event, what’s the cost of $1 billion worth of homeowners reinsurance on a 1 in 10-year event? Do you know? 

Mr. SWAGEL. No, I don’t know— 

Mr. MAHONEY. Do you know what it is on 1 in 100 years? 

Mr. SWAGEL. No, I do not. 

Mr. MAHONEY. Okay. If I told you it was anywhere from $550 million to $100 million per billion, do you think that that’s reasonable? 

Mr. SWAGEL. You know, again, it reflects the underlying risks. 

Mr. MAHONEY. So you do think that that’s reasonable? 

Mr. SWAGEL. You know, I don’t have enough information to— 

Mr. MAHONEY. Is that—so you don’t know? 

Mr. SWAGEL. Yes, there is not enough information to answer— 

Mr. MAHONEY. Okay. Do you know what the State of Florida 

would have to pay—you know, they have a State catastrophe fund 

that’s being paid for. And, in fact, this bill doesn’t ask people to not 

walk away from personal responsibility. This says every State has 

the option. And, should they have the option, they would have a 

State catastrophe fund that would be actuarially sound, so that 

every State would have to take the responsibility for where their 

citizens lived. Did you understand that in the bill? 

36

Mr. SWAGEL. That’s in the bill, yes. 

Mr. MAHONEY. Yes. Then my question is that in the State of Florida, where we have had a $28 billion fund that has been whittled down to $6.8 billion, do you know that it was—$650 million 

would have been the cost from Goldman Sachs to get a commitment letter to raise the other money to fill out the fund? Did you 

know that? 

Mr. SWAGEL. I didn’t know that specific— 

Mr. MAHONEY. Do you think $650 million for a piece of paper 

from an investment bank saying they will raise the money, is that 

a reasonable amount of money to pay? 

Mr. SWAGEL. You know, I don’t have the information to evaluate 

that. 

Mr. MAHONEY. Well, I would suggest that I was very disappointed, because it wasn’t 15 seconds after we dropped the bill 

that we had a statement from the Administration saying that they 

were not going to support the bill. And I am very disappointed that 

we are having testimony from somebody here today who really isn’t 

prepared to discuss this seriously. 

Because when you take a look at what is going on here in the 

State and the country—and it’s not just Florida, sir, it’s all across 

the country—the issue here is affordability and availability. 

So, with that, I will go on to Mr.—Congressman Evans. I would 

like to first point out to Congressman Evans, if you were to come 

back to Congress today, we would be happy to welcome you as a 

Blue Dog Democrat, as you are somebody who is obviously concerned about runaway debt and fiscal responsibility. 

But I would like to point out very quickly that in Title III, section 301(a)4 of the bill, it does talk about mitigation. And in that 

bill, it does—in the bill, what it says is that the Department of 

Treasury will have the responsibility, prior to extending any loan, 

to make sure that they are satisfied that there are reasonable programs in place to mitigate, and to make sure that we’re not reinforcing unreasonable behavior. 

So, my question is—really quick, because I’m running out of 

time—what are the things that we could do in this—the Department of Treasury could do—that could enhance mitigation? Because I agree with you. We can’t reinforce bad behavior. And this 

bill doesn’t reinforce bad behavior. Matter of fact, it makes mitigation a requirement in order to be able to get a loan from the Federal Government. 

Mr. EVANS. I would like to see you a little more specific about 

what the mitigation would be, and I would be happy to work with 

you on that, Congressman. 

Mr. MAHONEY. Okay. As far as my colleague, Mr. Roskam, who 

has left, he is a dear friend of mine. And he makes a good point. 

You have to be careful what you pet. 

And coming originally from the State of Illinois, born in Aurora, 

Illinois, what I would like to point out is that, you know, we have 

an illogical situation right now. What we are petting is a situation 

where people do not have insurance coverage to protect for catastrophic funding. 

It is every American’s belief, in the case of a natural disaster, 

that the Federal Government will come in and will give a bail-out. 

37

And a bail-out is a situation where every taxpayer in this country 

pays in money and gets nothing back. What this program proposes 

is a loan where every State has the responsibility to get paid back 

by the State, so there is no hand-out. 

And in the State of California, where only 14 percent of the people have earthquake insurance, where the insurance is available, 

you’re seeing that we’re petting bad behavior, as Mr. Roskam says. 

So, I would make a point that, as this bill is totally voluntary, 

it requires each State to have a catastrophe fund that is actuarially 

sound, that requires each State to step up and take responsibility 

for the likelihood of disaster in the State, and requires everything 

to be paid back 100 percent, that this is a far greater situation, a 

far enhanced situation, than what we have now, which is, as was 

mentioned before, a bail-out situation, which means that we have 

a contingent liability on our balance sheet of between, you know, 

$100 billion and maybe $1 trillion over the next 50 years. With 

that, I will yield back the rest of my time. 

Chairwoman WATERS. Thank you very much. Mr. Baker? 

Mr. BAKER. Thank you, Madam Chairwoman. Mr. Swagel, I want 

to take another run at this from a slightly different perspective. If 

one were to come to south Louisiana and enter into the insurance 

business today, and assume the risk for insuring a $200,000 structure somewhere near the coast, I am told by my commissioner that 

rates in Baton Rouge, pursuant to Katrina, are about $1,000 a year 

on a $200,000 home. 

In the Orleans area, it’s about $2,000 now for a $200,000 home. 

I am told by market activists in the region, however, that those are 

quotes, they’re not real, that you may actually pay $4,000 to $5,000 

a year to insure the $200,000 home. 

Even if the figure turned out to be $10,000 a year, and it was 

a $200,000 home, you know, I wonder how many people on the 

committee would want to put $200,000 worth of insurance out 

there for anybody on the belief that you were going to get your 

money back at $10,000 annual premiums, given the fact that out 

of a 20-year exposure, what’s the likelihood of getting a storm that 

would adversely impact that insured risk? 

In other words, if you’re really going to price your coverage based 

on the business risk you’re going to assume, isn’t that the way the 

market is supposed to work, that government shouldn’t be involved 

in artificial—the barriers to the performance of a free-working marketplace? And the answer is yes. 

And, secondly—you’re doing well—that in going forward and analyzing part of the problem in the market function today, and for 

those looking for remedies, it is currently 54 different varying regulatory entities which you must get approval from, in some form or 

fashion, before entering into the market and selling the product 

you design to the consumers you choose to sell to. 

And what we have is a collage of regulatory standards from 

forms and functions, to using paper clips or not, to stapling, to 

using right colors, to prior approval. So it is not an unregulated 

market, where someone merely shows up and says, ‘‘I’m an insurance guy, here is my product, do you want to buy it,’’ there is a 

process which you must go through. 

38

Some of this is entirely responsible, in light of protection of consumer interests and not to permit fraud. But one of the contributing factors to the distortion of market function is government 

regulation keeping persons from offering product at a competitive 

rate, where many companies will come to a marketplace—it’s my 

observation that almost 50 percent of Americans live within 50 

miles of the coastline. It’s a huge market. Lots of value. Lots of big 

condos going to get built, lots of hotels. A big chunk of business. 

And if you could get it to where you would have 20 companies 

in any State writing policies to homeowners, where there might be 

some competitive opportunity, I would almost guarantee you that 

the result of that effort would yield a cheaper product for the consumer than an artificial guarantee of a Federal Government reinsurance payment system that we are contemplating today. 

It’s almost like we are taking the Federal Flood Insurance Program, a governmentally-created intervention into that marketplace, 

which has sort of worked—not well, and now we’re going to put the 

wind program into effect under the Taylor proposal, but only, of 

course, where flood insurance is sold, which is all 50 States and 

every city in the country, but it’s a limited thing, and we’re going 

to be surprised when the wind program doesn’t work the way we 

hope, because of the great success of the flood program. 

Private market function should assume the risk. They should be 

free to price. And they should, therefore, compete with others in a 

similar market to give consumers choice. Now, all of the other ancillary points, to provide for evaluation of safety, and whether or 

not you’re behind the levee or under sea level, all of those things 

should certainly be considered. 

In fact, on the flood insurance maps within the City of New Orleans, it is plainly stamped. You live behind a levee, if the levee fails, 

you may be subject to inundation. ‘‘Please be advised, you may 

wish to acquire flood insurance.’’ It’s on the flood maps, for those 

who have come to New Orleans and not looked at the flood map, 

look at it. 

And, interestingly enough, a letter out in the press today from 

the Levee Boards Association of Louisiana, they took great affront 

that the Administration is going to require that that type—FEMA 

is going to require—that continued pronouncement on—to homeowners—that if you live behind a levee, you might want to have 

flood insurance, too. An amazing position for an organization engaged in flood protection. 

The point here is that much of the dysfunction in the insurance 

market today comes from State and local regulatory barriers which 

preclude involvement from private market participants and result 

in a high-priced, inefficient system. And in order to cure that problem, the suggestion is being made, ‘‘We should put government in 

the mix, and make it, therefore, more efficient.’’ I find this a striking recommendation. 

I would refer members who have not had the opportunity to go 

back and look at a bill in prior sessions that has been before this 

committee on many occasions, the SMART Act, which proposed not 

to take away consumer advocacy from the State level, but to allow 

the ability to price and sell product, without limitation, across the 

country. 

39

I have suggested in other meetings that we should have a national product, authorized by this Congress, sold by the private 

market, that would be priced by the private market, but not be 

subject to State pricing controls. And I have few takers, because it 

would allow the free market to work, and for an insurance product 

to be sold and meet the needs of consumers in a much more efficient way. 

Thank you, Mr. Swagel, for your persuasive testimony. 

Chairwoman WATERS. Mr. Klein? 

Mr. KLEIN. Thank you very much, Madam Chairwoman. And I 

think this has been very helpful today, for those of us who have 

been working on this bill for many months. 

The mitigation issue, absolutely, is part and parcel of where 

we’re going to move and continue this, because the reason I am 

very proud to have the National Association of Insurance Commissioners—representing 50 States—supporting this, is because there 

is a partnership here. Insurance is regulated at the State level. The 

Federal Government has limited responsibility, and has only 

jumped in when there was market failure, such as flood insurance 

and such as TRIA, you know, the terrorism risk issue. 

But, generally, it is a State issue, and we certainly want our 

States to continue to have that full responsibility. This whole mitigation idea, it’s going to be different mitigation in Florida than it 

is in California, or in maybe a part of the country that has some 

other type of natural disaster risk. 

There is a great opportunity—and the reason the idea was initially having the Treasury Secretary in there and his staff, was to 

involve the consortium to work with the States, and come up with 

that mitigation. There is not one mitigation plan that is going to 

be as good for New York City as it is for California. It is going to 

have to be developed. And if you want to be eligible to opt into this 

plan, then you have to participate in a mitigation that is customized for that State that will be developed. 

This is very common sense, and well reasoned. And, you know, 

to the extent that none of you have ideas of who should be part 

of that discussion, we’re all ears. I mean, this is just a very common-sense thing. You want to give every incentive to have people 

who live in a particular State, and governments in those States, to 

work together to reduce the exposure and the risk. I agree. Congressman Evans, exactly, we agree on that, and again, we’re going 

to want to fully develop that in our manager’s amendment. 

The second thing I want to point out. There is definitely—some 

people have not read this bill, based on the comments that I am 

hearing today. 

The idea of where we’re at right now—and I think it was expressed by some of the members up here—is right now you have 

Congress and the taxpayers of the United States fully funding 

large-scale natural disasters. That’s where we’re at right now. Most 

of the time, it’s not getting paid back. It’s a gift that goes out, and 

that’s it. Every taxpayer in every State is paying for that. 

What we’re proposing is a much better way of dealing with that. 

Number one, we want to make insurance more available, using the 

private—the private market piece of this is Wall Street selling 

bonds not guaranteed—and Mr. Assistant Secretary of the TreasVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
40

ury, if there is some confusion—because I know he had some notion 

here that there is a Federal guarantee, or implicit guarantee—

there is no intention of that. You can help us craft language which 

will make that crystal clear. 

This is private bonds that are offered by private issuers—private 

underwriters, I should say—through the consortium as an issuer. 

No Federal guarantee, nothing on the Federal books to create any 

obligation. And that is very—by design. We don’t want the Federal 

Government being involved. We think there is a very big capacity—

and our next panel will probably talk about this a little bit, what 

kind of potential capacity. Without having to assess, you know, 

higher premiums, we can do this in the form of this additional 

means. So, that’s the first piece. 

The second piece, if the Federal Government comes in with a 

loan in this natural disaster, where we, as Americans, want to 

stand and help a local community, it’s a loan. It gets paid back. 

Sounds like a better deal to the American Treasury, and for every 

American taxpayer, to be a loan that gets paid back in some form 

or fashion, than a gift or a grant. I mean, that just sounds logical 

to me. 

So, it seems like we’re addressing and doing it the right way, instead of having this gift, and every time there is a natural disaster. 

I would just—Mr. Swagel, in your comments, you say specifically, 

‘‘Government actions that interfere with well-functioning private 

insurance markets have unintended consequences,’’ and you went 

on to say, ‘‘Federal Government interference in a functioning natural hazard insurance market would crowd out an active and effective private market.’’ 

I think you heard from Congresswoman Ginny Brown-Waite, and 

I think you will hear from a lot of people around the United States, 

and I ask that you really go out and look into this. And we will 

be glad to bring you into parts of the country where the market is 

not functioning. Example, 30 percent is through a governmentbacked program. 

The big issue? Affordability and accessibility. People can’t buy insurance. That’s not a functioning—we all want competition, but 

what we’re trying to do here is to create competition. If you create 

a higher end of liability and limit with the private bonds, you will 

hopefully get competition. That’s what we are being told by many 

people, many experts in the field here. 

But, you know, the notion here is to try to fix it, create a solution. I am going to offer, on behalf of Mr. Mahoney and me, to meet 

with you and the Treasury Secretary and the President, if necessary, to go over all the fine points and the details, to make sure 

that we can get all your best advice, and so you understand, as opposed to a bunch of us suits in Washington here saying, ‘‘Oh, 

there’s not a problem out there.’’ 

There is a problem. There is a very big problem in the United 

States right now, and it needs to be addressed. And we want to try 

to do it in a very commonsense way that promotes the private market, keeps insurance companies stable and competitive, brings 

more competition in, will allow affordability and accessibility to 

homeowners. 

41

Your home is usually the biggest investment you have, and what 

we’re doing right now, because the market is not functioning in 

many places, we’re driving people out. So I hope that you will agree 

to meet, and you and your senior colleagues will agree to work with 

us, and to come up with some specific suggestions, and really try 

to address some of the points that have been stated today. 

Mr. SWAGEL. Sure. We have been working with you, and we will 

be glad to continue to do so. 

Mr. KLEIN. Thank you. 

Chairwoman WATERS. Thank you very much. Mr. Putnam. 

Mr. PUTNAM. Thank you, Madam Chairwoman. Mr. Swagel, I 

guess you’ve probably had better days. You know, to my friends 

from—mostly from Florida, but also from other parts of the Gulf 

Coast, I can see by the lack of interest from around the country 

that we have a pretty steep hill to climb, in terms of persuading 

non-hurricane areas of the need for some form of recipe for correcting what is a failing private marketplace in, particularly, Gulf 

Coast States, but especially in Florida. 

And Mr. Swagel, in your testimony, quoting almost the same line 

that Mr. Klein quoted, you say that, ‘‘Allowing private insurance 

and capital markets to fulfill their roles is the best way to maintain 

the sustainability of communities at risk of natural catastrophe. 

Government interference in a functioning natural hazard insurance 

market would crowd out active and effective private market.’’ 

First of all, it’s not an unfettered marketplace, because you have 

to go before State-elected politicians to get rates to go up or come 

down. So it’s not—it is not a responsive competitive marketplace, 

it is subject to externalities that are particular in even-numbered 

years. 

Secondly, if that’s the Administration’s position, what’s the defense of the flood insurance program? I mean, if there should not 

be government interference in natural hazard insurance, then 

should the Federal Government get out of the flood insurance program? 

Mr. SWAGEL. Well, the flood insurance program, you know, it is 

what it is. There is no proposal to get rid of it. The Administration 

supports reforms of it. You know, there is all the bad incentives I 

discussed before to build and rebuild, and then there is the legacy 

of subsidized rates. So the Administration does support reforms addressing those problems. 

Mr. PUTNAM. But you’re already pregnant, right? I mean, there 

is already government interference in the Federal marketplace—in 

Federal insurance, right? 

Mr. SWAGEL. Well, certainly in flood. 

Mr. PUTNAM. I mean, I’m an advocate for reform of the flood insurance program, too. I’m just saying you can’t make sweeping 

statements in your testimony when you recognize that there is already some significant intervention in that marketplace. 

And then, finally—I mean, I think all of us are trying to find the 

right recipe here. I hope that you’re trying to find the right recipe 

here, because if you look at Katrina as a model, the amount of 

money that the taxpayers were on the hook for anyway is enormous. 

42

And I think that the collective thinking, on a bipartisan basis, 

whether it’s this particular instrument or some other, is that, implicitly, the Federal taxpayers will rally to respond to a major natural disaster in the country. And, explicitly, the risk models out 

there on the right earthquake in the right part of California, or the 

right hurricane striking the right portion of the Gulf Coast or the 

Eastern Seaboard, would bankrupt every insurance company and 

reinsurance company in the world. Right? 

Mr. SWAGEL. Depending on the damage, there would be— 

Mr. PUTNAM. I mean, wouldn’t— 

Mr. SWAGEL. A great amount of damage— 

Mr. PUTNAM. Going back to 1992, wasn’t Hurricane Andrew 

within 20 miles of bankrupting all of the companies? And, even hitting the Everglades, it almost put them down, and drove most of 

the companies out of the State of Florida. 

So, my fault, your fault, nobody’s fault, the pace of development 

and the value of that development around the country—not just in 

Florida, not just on the Gulf Coast, not just on the Eastern Seaboard, but in particular areas that are vulnerable to a variety of 

natural disasters, the market value of those losses could potentially 

eliminate every private marketplace that’s out there. 

And so, it seems to me that there is a role here for some blended 

private/public solution that thinks prospectively about how we can 

create some kind of risk pool, how we can create some kind of a 

reinsurance marketplace that does not reward bad behavior, but 

does recognize that these occurrences will be expensive, and that, 

ultimately, the taxpayers will be on the hook. 

And it seems to me that we have been talking about this now 

at least since Andrew, and we have gone through a number of Administrations, a number of Congresses in that period of time. And 

‘‘no’’ is not an adequate answer. It seems like there ought to be 

some appropriate mechanism for us to have this discussion, other 

than the blanket rejection of any of the proposals that are out 

there. So I yield back. 

Chairwoman WATERS. Thank you. Mr. Wexler? 

Mr. WEXLER. Thank you, Madam Chairwoman. I think Mr. Putnam makes some very important points, in terms of the—I certainly don’t speak for Mr. Putnam, nor would he allow me to—but 

the sweeping nature, Mr. Swagel, Secretary Swagel, of your testimony is astonishing. The sweeping nature of the callousness and 

the brazenness is astonishing, only because you represent the 

President of the United States. 

And if I can analyze the President of the United States’s position, 

it essentially is, as you stated at the beginning of your testimony, 

that the unavailability and the excessively expensive nature of 

homeowner insurance is largely a result of State regulatory actions. 

So, I’m curious, being that I represent the State of Florida, or a 

portion of it, what State regulatory actions during the last 8 years 

of Governor Jeb Bush’s Administration did we do or not do in Florida that resulted in the unavailability and the excessively expensive—when it was available—homeowners insurance throughout 

the State of Florida, not just on the coast, but in every internal 

area in Florida? What State regulatory actions have we committed 

in the last 8 years that have resulted in this situation? 

43

Mr. SWAGEL. Just to be clear, the affordability challenge, as I 

said, reflects the risk. Availability is what I see as the result of the 

unintended State actions. And, here again, I would point to the role 

of the State insurer in displacing the private market with the rate 

suppression leading to— 

Mr. WEXLER. So this goes back to Ms. Ginny Brown-Waite’s question to you. So it’s your position that people are not paying nearly 

enough for insurance? So your—the President’s—response to the 

homeowners insurance crisis in America is that people must pay 

exceedingly more for their homeowners insurance, correct? 

Mr. SWAGEL. No, sir. 

Mr. WEXLER. No? So they must pay less? 

Mr. SWAGEL. No one wants— 

Mr. WEXLER. No? They must pay the same? 

Mr. SWAGEL. No one wants to pay more. 

Mr. WEXLER. I’m not asking about what people want to pay. I am 

asking what the President of the United States—what the Administration’s position is. Should people pay more? Should people pay 

less? Or, is it just right? 

Mr. SWAGEL. The Administration wants a well-functioning market that supports people’s ability to have access to insurance. And 

in States such as in the Gulf, to have the insurance they need to 

rebuild, and move on with their lives. 

Mr. WEXLER. Is the market functioning well in Florida today? 

Mr. SWAGEL. As the result of State actions, it is not. 

Mr. WEXLER. Which State actions in Florida have created the inability of the market to function? 

Mr. SWAGEL. The State insurer has largely displaced the private 

market, to become the largest insurer in the State, and is substantially undercapitalized. 

Mr. WEXLER. Ah, so the State of Florida had dozens and dozens 

of insurance companies that were writing policies left and right, 

and the State insurer in Florida said, ‘‘We want in on this business,’’ and crowded out the private market. That’s what we did, apparently, correct? 

Mr. SWAGEL. I wouldn’t put it quite that way. 

Mr. WEXLER. How would you put it? 

Mr. SWAGEL. You know, as has been discussed, insurance regulation is at the State level. So—and one aspect of the regulation is 

on rates. Obviously, there are other aspects. 

Over time, a pattern of suppressing rates will have the desirable 

property of lowing the price that people pay, but will affect insurance companies’ willingness to write policies. And that— 

Mr. WEXLER. So how do you propose—apparently Mr. Klein and 

Mr. Mahoney, their prescription isn’t good enough for you. So how 

do you propose to create this well-functioning market? Is it simply 

redrawing the flood maps? Is that going to carry it? 

Mr. SWAGEL. I don’t have a proposal to create— 

Mr. WEXLER. Oh, you don’t have a proposal. 

Mr. SWAGEL. To solve the problem in Florida. I certainly— 

Mr. WEXLER. Do you have a proposal to solve it in Louisiana? 

Mr. SWAGEL. I have a diagnosis, which— 

Mr. WEXLER. Can we hear—how do we solve the market problem 

in Louisiana? 

44

Mr. SWAGEL. When— 

Mr. WEXLER. Do you have a plan? 

Mr. SWAGEL. In these two States, the State regulatory action to 

suppress rates— 

Mr. WEXLER. Oh. So in Louisiana, too, they did something wrong 

at the regulatory agencies that created the inability to get homeowners insurance. Louisiana is guilty, too? 

Mr. SWAGEL. These are the two States in which— 

Mr. WEXLER. Florida and Louisiana. 

Mr. SWAGEL. —in which the State insurer has crowded out and 

displaced the private market. 

Mr. WEXLER. You used the words, I believe, ‘‘People have put 

themselves in harm’s way.’’ I thought we were at the Iraq hearing. 

So, is it the Administration’s position, essentially, ‘‘If you move 

to Florida or you live in Florida, you have put yourself in harm’s 

way, so we can’t help you, and nor should you expect any help?’’ 

Mr. SWAGEL. No, sir. 

Mr. WEXLER. No? So why would you use the terminology, ‘‘People 

have put themselves in harm’s way,’’ in the context of homeowner 

insurance availability in Florida, in Louisiana? How is it relevant? 

Mr. SWAGEL. People who build a home in locations susceptible to 

natural catastrophes such as hurricanes— 

Mr. WEXLER. Florida. 

Mr. SWAGEL. —such as Florida, face high insurance premiums. 

They face great risks. 

Mr. WEXLER. And they have put themselves in harm’s way, 

which, therefore, necessitates a response from the Federal Government that says, ‘‘Sorry, we will redraw the flood maps, you’re on 

your way.’’ Correct? That’s your position, isn’t it? 

Mr. SWAGEL. That’s not my position, no. 

Mr. WEXLER. Then what is? Thank you, Madam Chairwoman. 

Chairwoman WATERS. I’m not going to save you. You have to answer that one. 

Mr. SWAGEL. Just looking for permission to go on. I will be very 

brief. 

You know, people have to face the consequences of the decisions 

they make. And one of the unfortunate consequences of living in a 

place with high risk is facing high insurance premiums. And it’s 

not for me to tell people what to do, but I can diagnose and say 

that this is the consequence. If we want to help people, you want 

to make sure you— 

Mr. WEXLER. Madam Chairwoman, if I may for 10 seconds, the 

President of the United States, the position as you enunciate it, is 

that people in Florida must pay a much higher rate for property 

insurance. That’s your plan. 

Mr. SWAGEL. That’s not my plan, no. 

Chairwoman WATERS. Mr. Wexler? 

Mr. WEXLER. Yes, Madam Chairwoman? 

Chairwoman WATERS. Your time has ended, and I think— 

Mr. WEXLER. Thank you. 

Chairwoman WATERS. —the young man did not say it was his 

plan. He said he had a diagnosis, not a plan. Thank you very 

much. 

Mr. WEXLER. That is true. 

45

Chairwoman WATERS. All right. All right, with that, I am going 

to call on Mr. Kanjorski to raise whatever questions he would like 

to raise. And upon completion of Mr. Kanjorski’s questions, we will 

end this panel and then Mr. Kanjorski will take over for the second 

panel that we will have today. With that, Mr. Kanjorski. 

Mr. KANJORSKI. Thank you, Madam Chairwoman. It has been an 

interesting discussion. I am certain that we have a lot of answers, 

but I almost feel compelled to come to the Administration’s rescue. 

Would you like me to do that? Take some of the pressure off of you? 

Mr. SWAGEL. Oh, sure. 

Mr. KANJORSKI. I would feel really bad if it had some impact on 

you in the future days. 

In reality, as I understand what you are indicating, is really the 

problem that we have always faced in the coastal States and the 

high-risk States, and that is virtually recognizing that we had an 

unusual increase in population, because of the pleasures and benefits of living, as Mr. Evans does, in Florida. People go there from 

all States; I think half of Pennsylvania went to Florida, so I am 

acutely aware of that fact. 

But the reality is that Florida, unlike Pennsylvania, has disasters, climatic disasters, periodically that we can almost trace. And 

so, as a result, if you look at it purely from a private market situation of supply and demand, the demand for property is excessive, 

the prices are high, the people arrive, and shortly thereafter the 

storms arrive, and the replacement and repair of the properties are 

huge, and the people find themselves incapable of buying private 

coverage. 

And the State officials, incidentally, find it very difficult to allow 

them to buy in an expensive private market, because it is very unpopular, politically. So, as a result, more government intervention 

occurs on the State level, premiums are driven down, private market sellers want to leave, and ultimately the void or vacuum gets 

filled by the State. 

I often raise the question in my mind—as a matter of fact, I am 

one of the least supporters of catastrophic insurance, but my two 

gentlemen friends from Florida are starting to convince me that we 

have to do something. And we probably do have to do something, 

and it is going to be a hybrid that may work out in the end. 

But it has always disturbed me that, if I were a private investor, 

and I wanted to invest $10 million, whether to put that investment 

in real estate in Miami Beach or put it in Kokomo, Indiana. If I 

put it in Miami Beach, it probably will appreciate at the rate of 10, 

15, or 20 percent a year, so that as soon as I build my building or 

real estate, I will have reaped a benefit. I can easily sell it, and 

it will constantly appreciate. 

Normally, because I am in a high-risk area, I would have to compensate for that appreciation by paying a high premium to cover 

my risk. But because that is suppressed, I do not have to pay that 

premium. So, somebody is subsidizing my position to make my investment in Miami Beach instead of Kokomo, Indiana. 

If I make my investment in Kokomo, Indiana, I would be extremely lucky at the time I completed the building or piece of real 

estate, that it would have equal value to my actual cost of construcVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
46

tion. It probably would drop a little bit, and it may be worth 80, 

85 percent of what I put into the property, initially. 

But, on the other hand, my insurance rate would be significantly 

lower, whether it was the private market or the public-involved 

market, because there are not a lot of hurricanes in Kokomo, Indiana. 

So, the question poses itself, why do people not build in Kokomo, 

Indiana, but build in Miami, Florida? Well, obvious. One, great 

weather. Two, their physical assets are going to appreciate significantly, compared to the investment in Kokomo, Indiana. You would 

have to be stupid not to, so the question is, how does that impact 

the social economic make-up of the country? 

And this is in your defense now, listen to this. The reason you 

want to discourage the subsidization of insurance, and cause the 

disconnect in population flow that has already occurred in this 

country, and is constantly occurring, is that it violates basic supply 

and demand, and violates the free market system. 

The free market system says that if you are going to put an investment in a place, that benefit or risk is the price to cover the 

insurance premium if the loss occurs. If either of those are not in 

balance, more people will be more attracted to living somewhere 

like Miami Beach than they should be. 

And we ought to discourage people from building on sand bars. 

That is true, it is self-evident. But the truth of the matter is, we 

have to find a way of discouraging people from building in Miami 

Beach. Because, as I understand it right now, if Hurricane Andrew 

occurred now, the damage would be 2 or 3 times greater than it 

was when the storm actually occurred. It would be horrific, in 

terms of how we would pay for that loss, if the identical type storm 

hit the identical place. 

Now, if you are going to have a subsidization, it is a question of 

who is going to subsidize. And if you leave it up to the private market to subsidize, they will spread it out among their policyholders, 

countrywide, as well as in Florida. There will be a little higher 

price in Florida, but in Pennsylvania, and Kokomo, Indiana, the 

price is going to be a little higher, so they can take that money and 

cover their losses in Florida if they occur. So, the country would be 

subsidizing out-of-State for living on the coast, or living in dangerous areas. 

Is that good public policy? I do not think it is good public policy 

for people to subsidize other people, whether it is done by the government or whether it is done in the private sector. If you have 

government subsidization, either by reducing premiums initially, or 

by making pay-outs when damages occur, that also is subsidization. 

The only difference is that if you do it from the general taxpayer 

base, everybody in the country contributes, probably, therefore, a 

little bit less, proportionately, than if you did it on the policy basis 

because the policies would have the property owners pay as opposed to non-property owners. 

You can make an argument either way about which is better. 

Clearly, having all of the taxpayers in the base is cheaper, and 

having the property owners pay is putting the burden on the property owner class of the country. That may be a slightly fairer way 

to do it. 

47

But, clearly, in any way you analyze this problem, there is no 

way that you can escape that living in Florida or in the coastal 

States, because of the nature of weather, is going to be more costly 

than living in the interior of the country, or in other areas of the 

country at less risk. And there is no question as to a need for subsidization, either through government or through the private sector, using the policy prices across the country. 

So, what we select really does not matter. Now the question 

comes down to should we do anything. And the fact that we have 

ourselves in this position now, I think, strikes a very interesting 

sociological problem and political problem. 

We are now at the problem in Florida that we may have economic discrimination. Poor people cannot pay the insurance, so 

they cannot live in the nice weather of Florida, but rich northerners can abandon the north and go south, and, incidentally, avoid 

inheritance tax, which perhaps could be used to subsidize. I just 

throw that out there, gentlemen, as something that has always disturbed me—that we would change the bankruptcy law of Florida, 

that you cannot claim your home as a total exemption, but only 

$750, as you can in Pennsylvania. 

We always, in the Federal Government, have given a tremendous 

subsidy to the State of Florida to allow somebody to build a $10 

million home and not lose it if they go bankrupt. But in Pennsylvania, if you have a $10 million home and you go bankrupt, you 

get to keep $750 and you lose everything else. That is not quite 

fair, either. 

In one moment, Madam Chairwoman, I will close. My conclusion 

is—and one of the reasons I wanted to participate with this hearing today, and why I wanted to address the panel on it—it seems 

no question in my mind that the gentleman from Florida did the 

right thing, and tried to make a proposal. 

It may not be absolutely the proposal, but I agree with Mr. 

Wexler. We cannot take the Administration’s position, ‘‘There is no 

solution, other than people have to pay and pay and pay,’’ and end 

up having economic discrimination. We have to find some hybrid 

between government, people (rich and poor), private sector insurance, and public insurance, to cover this aspect, to ensure that people can continue to live in high-risk areas. Thank you, Madam 

Chairwoman. 

Chairwoman WATERS. Thank you very much. I would like to 

thank all of our witnesses who have spent so much time here 

today. We really do appreciate it. 

The Chair notes that some members may have additional questions for panel one, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses, and to 

place their responses in the record. This panel is now dismissed. 

Thank you very much. 

Ladies and gentlemen, we are about to turn the hearing over to 

Mr. Kanjorski, who will carry on with panel two from this point. 

Thank you very much. 

Mr. KANJORSKI. [presiding] We will move through this as quickly 

as we can. I know everybody is itching to get started. We will start 

48

with Mr. Ozizmir, head of the Asset Back Securities-Insurance 

Linked Securities. 

STATEMENT OF DANYAL OZIZMIR, HEAD OF ASSET BACK SECURITIES-INSURANCE LINKED SECURITIES, ENVIRONMENTAL AND COMMODITY MARKETS, SWISS RE 

Mr. OZIZMIR. Thank you, Chairman Kanjorski, and Chairwoman 

Waters, for holding this hearing on H.R. 3355. My name is Dan 

Ozizmir, and I am manager director of insurance linked securities 

for Swiss Re. 

The Reinsurance Association of America will speak on behalf of 

the reinsurance industry with regard to the legislation currently 

before the joint subcommittee. I am here today at the invitation of 

the joint subcommittee to provide basic information about the 

workings and mechanics of the CAT bond market. Swiss Re has 

been a leader of the insurance linked securities market. We have 

underwritten more CAT bonds than any other broker dealer over 

the last 10 years. 

Five years ago, I testified in front of many of you, and described 

the insurance linked securities market as a small, but strategically 

important source of capital. Today, this market not only remains 

strategically important, but has grown from $7 billion outstanding 

in 2002, to $32 billion outstanding in 2007, and plays a meaningful 

role in making insurance more affordable and more available. 

Today, many major U.S. property insurers have accessed this 

market. My comments today will focus only on the current and possible future direction of the CAT bond segment, which represents 

$12 billion of the $32 billion in insurance linked securities. 

Insurers need to hold significantly more equity to underwrite 

peak exposures, like Florida hurricanes or California earthquakes, 

than it does to underwrite non-peak exposures, such as a single 

house fire, or auto accident. Insurers are motivated to issue CAT 

bonds, because they provide additional multi-year reinsurance capacity at a fixed price, and eliminate default risk. 

Why do investors buy CAT bonds? The largest investors include 

fixed income money managers, dedicated CAT bond funds, and 

multi-strategy hedge funds. By way of geography, over 60 percent 

of the buyers are based in the United States, one quarter in Europe, 10 percent in Bermuda, with the remainder primarily in Asia. 

Spreading individual risk globally will, over time, increase capacity 

and reduce the cost of reinsurance, as it has in other capital market products. 

The primary motivation for investing is to add diversification to 

an investment portfolio, and to achieve a higher risk adjusted return. Adding CAT bonds or fixed income portfolio reduces the expected standard deviation of the portfolio, improving the overall 

risk return profile. 

In other words, the return stays the same, but the portfolio risk 

goes down. As an example, historically there has been essentially 

no relationship between earthquakes and corporate bond defaults. 

We have, in particular, seen this during the recent turmoil in the 

credit markets, where the CAT bond prices have remained unaffected. 

49

Here is how a typical transaction would work. First, the insurer 

would establish a special purpose vehicle to issuer. The insurer 

then enters into a reinsurance agreement with that issuer. The 

issuer sells rated bonds, and places the bond proceeds in trust to 

collateralize or secure the reinsurance agreement. The issuer pays 

interest on the bond, using reinsurance premiums received from 

the insurer, and the investment returns on the asset in trust. 

If a catastrophe occurs before the reinsurance contract ends, the 

parties will look at the terms of the reinsurance contract, to determine if the insurer is entitled to recovery. At maturity, the issuer 

repays any remaining trust assets to the investor. 

CAT bonds play an important role in making property insurance 

in the United States more available and affordable. Most of this 

new capacity supports U.S. natural catastrophe risk. At present, 

the $12 billion outstanding of CAT bond issuance offers nearly $23 

billion of capacity. The reason this is possible is due to the overlapping coverage provided in so-called multi-peril bonds. Of this, $15 

billion of the capacity is used to provide coverage for U.S. CAT risk, 

and the rest for other geographies, on a global basis. 

We expect the CAT bond market to continue to grow, along with 

the broader market for tradeable insurance risk. The cumulative 

average growth rate between 2002 and today, as measured by the 

total amount outstanding CAT bonds, is 35 percent. If the market 

continues to grow even half this rate over the next 5 years, the 

amount outstanding would be $56 billion. And there is plenty of room to grow. The $12 billion outstanding 

today represents a tiny percentage of the overall fixed income markets. For example, the outstanding amount of U.S. dollar denominated bonds equals $27 trillion. Clearly, these numbers dwarf even 

the potential insured losses from even the largest hurricanes and 

earthquakes. 

In conclusion, in our view, CAT bonds and related solutions play 

an important role in assuring the continued availability of affordable insurance. Swiss Re believes this market will continue to 

grow, and will assist in growing insurance capacity throughout the 

United States and the world. It is Swiss Re’s view that, given time, 

the private marketplace will adjust, innovate, and grow. 

Thank you for the opportunity to express our views on this very 

important matter. Thank you. 

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

131 of the appendix.] 

Mr. KANJORSKI. Thank you very much. 

Next, Mr. John Seo, co-founder and managing member, Fermat 

Capital Management, LLC. 

STATEMENT OF JOHN SEO, CO-FOUNDER AND MANAGING 

MEMBER, FERMAT CAPITAL MANAGEMENT, LLC 

Mr. SEO. I thank the Subcommittee on Housing and Community 

Opportunity and the Subcommittee on Capital Markets, Insurance, 

and Government Sponsored Enterprises for inviting me to testify at 

this hearing on the catastrophe bond and risk linked securities 

market, which I will simply refer to as the CAT bond market. My 

name is John Seo, and I am co-founder and managing member, 

along with my brother, Nelson Seo, of Fermat Capital ManageVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
50

ment, one of the leading firms in the CAT bond market, with $2 

billion in assets under management. 

Wall Street invented the CAT bond market in the mid- to late1990’s, in the wake of Hurricane Andrew and the Northridge earthquake. Many people assume that CAT bonds are just securitized 

reinsurance, or even just a bond issued by an established insurance 

company seeking coverage. But none of this is true. 

Each CAT bond is, in effect, a miniature, brand new reinsurance 

company, set up to run automatically. This automated company 

structure is intended to be like one big baseball cap, into which two 

parties put their money for a wager. Neutral, third-party professionals safeguard the baseball cap, and pay out money according to 

pre-specified instructions meant to cover every conceivable outcome 

to the wager. 

This marvelous, automated, arms-length construct is necessary 

for large-scale securitization of risk, because if collateral at risk is 

not held and dispersed by a third party, the situation can quickly 

end up in court if large amounts of money are involved. 

In the 2 years since Katrina became a household name, the liq- uid CAT bond market will have tripled in size, from about $5 billion to about $14 billion by the end of this year. Looking forward, 

even with things cooling down a bit, we might expect a $50 billion 

market in 5 years, and a $150 billion market in 10 to 15 years. 

In the long term, the biggest factor that will drive CAT bond supply is a form of Moore’s Law. As you know, Moore’s Law, which 

says that the number of transistors we can put on a square inch 

of silicon doubles every 2 years, is driving the growth of digital 

technology. The equivalent of Moore’s Law in CAT bonds is that 

the amount of property value Americans put onto every square 

mile in key earthquake and hurricane zones is doubling every 10 

years. 

Yet reinsurance and insurance capital available to U.S. earthquakes and hurricanes does not double every 10 years. It doesn’t 

even come close, as far as I can tell. Therefore, this fundamental 

and snowballing concentration risk will drive CAT bond supply in 

the long term. 

Globally, across all traditional markets, investment returns are 

increasingly moving in locked step with each other. This correlation 

trend threatens to be devastating to institutional investors, who 

previously enjoyed a tremendous diversification advantage over all 

but the wealthiest individual investors. 

In response to this threat to their supremacy, institutional investors are adding alternative investments to their portfolios by hundreds of billions of dollars every year, in a quest for non-correlation. And, in this regard, CAT bonds are building a great reputation. In this year’s credit crisis, CAT bonds performed steadily and 

well, as was also the case almost 10 years ago, during the longterm capital management crisis. 

This has not escaped the notice of institutional investors, pension 

funds in particular. Pension funds can be gigantic, bold, long-term 

investors, and they have about $15 trillion in assets, combined. If 

pension funds want to put 1 percent of their assets into CAT 

bonds—and that is shaping up to be the case—pension funds alone 

would end up investing $150 billion in the CAT bond market. 

51

As a whole, pension funds, like many institutional investors, 

tend to act on a rule of tens, which I describe as, ‘‘To be taken seriously, any new market must first be in existence for at least 10 

years, and second, grow past $10 billion in size.’’ The CAT bond 

market achieved both of these milestones this year. 

So, we might consider that the next 10 to 20 years’ worth of CAT 

bond market growth is likely to be driven by a single class of investors so large that even a $150 billion insurance industry loss would 

cost them no more than 1 percent of their assets. Thank you for 

your attention. 

[The prepared statement of Mr. Seo can be found on page 153 of 

the appendix.] 

Mr. KANJORSKI. Mr. Franklin Nutter, president of the Reinsurance Association of America. 

STATEMENT OF FRANKLIN NUTTER, PRESIDENT, THE 

REINSURANCE ASSOCIATION OF AMERICA 

Mr. NUTTER. Chairman Kanjorski, and Ranking Member Biggert, 

thank you for the opportunity to testify. My name is Frank Nutter, 

and I am president of the Reinsurance Association. The RAA appreciates the opportunity to testify on H.R. 3355. While the RAA 

does not support this legislation, and has significant concerns with 

the provisions of it, because we believe it may crowd out the private reinsurance market—we do agree with many of the principles 

in the legislation, and pledge to work with the committee to improve it, as it moves through the legislative process. 

I would also like to commend Representatives Mahoney and 

Klein for their leadership in exploring solutions that seek to maximize the resources of both the public and private sector in addressing coastal insurance issues. 

Notwithstanding the extraordinary losses from natural catastrophes in 2004 and 2005, the private insurance and reinsurance 

sector proved exceptionally resilient. The record losses for insurers 

reduced insurer earnings in 2004 and 2005, but U.S. property and 

casual insurers increased capital in both years, and again in 2006. 

After Hurricane Katrina, an additional $41 billion of new capital 

entered the reinsurance business to support and underwrite U.S. 

natural catastrophe risk, including $12 billion to $15 billion of new 

securities for catastrophe risks issued by the capital markets. 

We are pleased that the principle of utilizing the private reinsurance and capital markets underlies H.R. 3355. Spreading the risk 

of natural catastrophes to the private sector, rather than State insurance programs, is the best long-term solution to addressing catastrophe exposure and cost issues. 

Most States, in fact, embrace this same goal of depopulating 

State programs and residual market mechanisms. The alternative 

to competitive private markets are State insurance and reinsurance 

programs that encourage State entities to replace or compete with 

the private sector, by underpricing catastrophe risk. These programs serve to concentrate catastrophe risk in a State, rather than 

to spread it into the global, capital, and reinsurance markets. 

This, in our view, turns sound risk management on its head. If 

government reinsurance programs do not collect premiums based 

upon the catastrophe risk of the insurers that transfer risk to it, 

52

those programs will be financed by public debt, and cannot afford 

to lay off risk to the capital or global reinsurance markets, a principle underlying this piece of legislation. 

Reinsurance markets embrace, and in fact, regularly reflect the 

principle contained in H.R. 3355. Insured catastrophe risk can and 

should be transferred to the private market, rather than concentrated in these State-sponsored programs. We do not, in that respect, understand why a federally-chartered corporation or consortium is necessary to achieve this. Reinsurance brokers and intermediaries to the capital markets regularly perform the functions 

described for the proposed federally-chartered consortium. 

In addition, States, in particular Florida, have explored a consortium goal of risk transfer of catastrophe exposure among the 

States. To date, States have chosen not to join together to pursue 

this. Insurers, reinsurers, and capital markets now serve to assimilate risk among various risk bearers, public and private, as an efficient way to achieve a spread of risk and competitive market pricing. The consortium’s underlying finances and value to consumers 

should be further analyzed. 

The authors of the bill are to be commended for the principle 

that the Federal Government will have no liability under the program, yet it is difficult to understand how a federally chartered corporation or consortium that does not bear risk on its own account 

can issue securities, and not expose the Federal Government to liability. 

It should be expected that the capital and reinsurance markets 

will require a risk-based rate for assuming a State program’s—or 

a consortium State program’s catastrophe risk. In that regard, it’s 

hard to understand how a federally-chartered enterprise—a conduit, as described in the bill—would seem to achieve any savings. 

The RAA has significant concerns with Title II of this legislation. 

We believe that Title II will encourage the creation of State catastrophe reinsurance funds, and unnecessarily crowd out the private 

reinsurance and capital markets. The principles stated in Title II 

of H.R. 3355 that reflects concerns of the liquidity of State reinsurance programs is valid, but currently of very limited application. 

The Florida Hurricane Catastrophe Fund, the only fund that arguably qualifies under this program, is heavily exposed to debt financing. No other State has a reinsurance fund. Hawaii did have 

an active reinsurance fund after Hurricane Iniki in 1994, but 

closed it 2 years later, as private market conditions rebounded. 

The bill, in our view, will incent States to create reinsurance programs like Florida’s, based upon public debt. With a carrot of lowinterest loans from the Federal Government, States will create reinsurance programs which, to date, they have chosen not to. The 

risk of loss will no longer be spread through the private, reinsurance, and capital markets, but instead will be concentrated within 

that particular State and its insurance consumers. 

The likely effect of the liquidity provisions is to transfer risk 

from consumers who live in catastrophe-prone areas to Federal taxpayers. 

We have offered in our written statement several suggestions for 

modifications to the bill. I will not take the time to go through 

them, but I encourage the committee and its staff to look at them. 

53

They certainly include encouraging the Secretary of the Treasury 

to have a greater role in addressing the financial underpinning of 

these State reinsurance and insurance programs, and certainly 

questions about the low trigger that is contained in the legislation 

of 150 percent of homeowners’ premiums. This is a very small 

event in most States, and would result in borrowing for many 

events that, historically, have been easily absorbed by the private 

market, without any disruption in capacity or pricing. 

We look forward to working with the committee, Mr. Chairman, 

and the committee staff, in improving this legislation as it goes forward. Thank you. 

[The prepared statement of Mr. Nutter can be found on page 120 

of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Nutter. 

Mr. Vince Malta, on behalf of the National Association of Realtors. 

STATEMENT OF VINCE MALTA, MALTA AND COMPANY, ON 

BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS 

Mr. MALTA. Good afternoon, Chairman Kanjorski, Ranking Member Biggert, and members on the subcommittees on housing and 

capital markets. Thank you for the invitation to present the views 

of the National Association of Realtors, NAR, on H.R. 3355, the 

Homeowners Defense Act of 2007. 

My name is Vince Malta, and I am a Realtor from San Francisco, 

California, where I am the owner of Malta and Company. Our firm 

handles real property sales and manages over 300 residential rental units. I was the 2006 president of the California Association of 

Realtors, and currently serve as vice chair of NAR’s public policy 

coordinating committee. 

On behalf of NAR, the leading advocate for homeownership, affordable housing, and private property rights, I want to thank Representatives Ron Klein and Tim Mahoney for their efforts to develop H.R. 3355, the Homeowners Defense Act. 

A strong real estate market is central to a healthy economy by 

generating jobs, wages, tax revenues, and a demand for goods and 

services. In order to maintain a strong economy, the vitality of residential and commercial real estate must be safeguarded. 

Unfortunately, we have heard Realtors in numerous States, not 

just in the Gulf Coast, but also New York, New Jersey, South Carolina, and North Carolina express concerns about the availability 

and affordability of property insurance. Their insurance concerns 

extend beyond homeowners insurance, and include multi-family 

rental housing, and commercial property insurance. 

Insurance is a key component to financing the purchase of real 

estate. Limited availability and high cost of property insurance 

threatens the ability of current property owners to hold on to their 

properties, and slows the rate of housing and commercial investment in many communities. Either of these threats could, in turn, 

further delay the rebuilding of communities damaged by recent catastrophic storms. 

The Homeowners Defense Act has two components: number one, 

a national catastrophe risk consortium; and number two, a program to make liquidity and catastrophic loans to State or regional 

54

reinsurance programs after a natural catastrophe. Both of these 

programs would enhance a State’s ability to institute disaster mitigation activities, support the availability and affordability of insurance, and help States and property owners recover faster after disaster strikes. 

The bill authorizes the Secretary of the Treasury to make liquidity and catastrophic loans to States with qualified reinsurance programs, and in case of catastrophic loans, to FAIR and windstorm 

plans. These loan programs would help provide consumers access 

to homeowners insurance by stabilizing insurance markets, particularly after a disaster has struck. 

NAR believes that the time has come for Congress to develop a 

comprehensive natural disaster policy that will mitigate exposure 

to the risks of natural disasters, and foster the availability and affordability of insurance for residential and commercial properties. 

The private sector, government, and individual property owners 

must work together to address the current insurance situation. A 

comprehensive natural disaster policy would acknowledge that 

there must be a team effort, with shared responsibilities, to prepare for and recover from catastrophic events. 

Homeowners need to take appropriate mitigation measures, and 

purchase adequate insurance. Insurance companies need to offer 

adequate and understandable coverage at fair prices, and pay 

claims in a timely manner. Governmental responsibilities include 

protecting consumers, preventing market failures, and ensuring the 

adequacy and soundness of a central infrastructure, such as levees, 

damns, and bridges. 

A comprehensive policy must address each of these elements. 

H.R. 3355 addresses one element, preventing failure of insurance 

markets, of what can be a comprehensive national policy to address 

future catastrophic events. 

NAR also would support legislation such as tax credits to support 

mitigation activities, and increased funding for infrastructure, two 

areas outside the jurisdiction of the Committee on Financial Services. 

Additional details regarding NAR’s position on these and other 

provisions can be found in my written statement. Thank you again 

for the invitation to present the views of NAR on H.R. 3355. We 

stand ready to work with you and the members of the Committee 

on Financial Services to enact H.R. 3355. 

[The prepared statement of Mr. Malta can be found on page 108 

of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Malta. 

And now we will hear from Mr. Robert Joyce, chairman and chief 

executive officer of The Westfield Group, on behalf of the Property 

Casualty Insurance Association of America. 

STATEMENT OF ROBERT JOYCE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, THE WESTFIELD GROUP, ON BEHALF OF 

THE PROPERTY CASUALTY INSURANCE ASSOCIATION OF 

AMERICA 

Mr. JOYCE. Good afternoon. I am Robert Joyce, chairman and 

CEO of Westfield Group, and vice chairman of the Property Casualty Insurance Association of America, a national trade group repVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
55

resenting more than 1,000 insurers. PCI members provide homeowners insurance to more than 35 million American households. 

Thank you, Chairs Kanjorski and Waters, and Ranking Members 

Pryce and Biggert, for inviting me to address you today. We are 

pleased to have the opportunity to work with you in this effort to 

develop a solution that works for consumers, insurers, and State 

and Federal Governments. 

When it comes to insuring against the financial devastation 

caused by natural disasters, all of us share the same goals. We 

want to reduce the losses from catastrophes by making homes 

stronger and people safer. We want to limit development in higher 

risk areas. We want to stabilize markets by combining private market competition with appropriate government participation. 

While no insurer can predict how or where an individual loss will 

occur, the most common and frequent types of losses covered by 

homeowners insurance policies are very predictable. Insurers can 

reasonably estimate, from past experience, what percentage of policyholders will file claims, and how much those claims will cost. 

Catastrophes, however, present a unique problem. Either no one 

is affected, or millions of people file claims at the same time. 

What’s more, the financial risk from natural disasters, such as hurricanes and earthquakes, are highly concentrated. H.R. 3355 provides a basis to begin the debate over how we can work to stabilize 

property insurance markets. Title I of the bill establishes a Federal 

consortium that opens the door to developing effective ways to utilize innovative financial tools, most notably catastrophe bonds. 

While we support this concept, it appears that a centralized repository may result in the establishment of a tax advantaged private market competitor. We would like to work with you on possible modifications to Title I that would achieve the same results, 

without creating a new Federal bureaucracy. 

Title II contains a provision that would make credit financing 

available to qualified State catastrophe funds, insuring their ability 

to meet claim requirements. We believe that this liquidity loan program should be one of the key elements of a comprehensive public/

private program to address catastrophic issues. 

The industry has proven that it can respond to large catastrophes, but private markets may not have the financial capacity 

to fund mega catastrophes, or to pay claims from a series of very 

large events in a single year. In these instances, the liquidity facility would offer solvency protection to State catastrophe funds in 

order to stabilize markets. 

However, any Federal program must be carefully structured so 

that it does not mask the true cost of insuring against catastrophes, encourage reckless development in high-risk areas, or 

hinder the flow of private—new private capital to the markets. We 

think it is critical to connect such standards to the creation of a 

Federal financing facility, in order to provide incentives for States 

to do everything they can to reduce their exposure to future losses, 

and attract private capital, before asking for Federal assistance. 

PCI believes that the threshold for liquidity loans is too low, and 

will allow States to look to the Federal Government to pay for catastrophe losses that are well within the ability of the private market and State disaster insurance plans to handle. We look forward 

56

to working with you to develop threshold levels that are more appropriate to each State with exposure to catastrophic risk. 

H.R. 3355 will also make loans to State or regional catastrophe 

funds that are not qualified reinsurance plans, or to State residual 

market entities. PCI believes that making loans to these entities 

would allow States to benefit from a Federal loan program without 

doing everything possible to reduce or prevent losses, and spur private market participation before seeking Federal assistance. 

Finally, the bill’s provisions do not specify how the loans will be 

repaid. PCI’s concern is that the cost of these loans could simply 

be passed on to insurers, which could create solvency problems for 

some companies, following a catastrophic event. 

The liquidity facility proposed in this bill has considerable merit, 

and could play an instrumental role in a long-term solution to 

America’s natural disaster problem. There are other provisions in 

the bill and other components to a comprehensive approach to addressing catastrophic risk issues that are addressed in our written 

testimony. We look forward to working with the sponsors and the 

committee to refine this proposal, so that it best serves consumers 

and taxpayers. Thank you. 

[The prepared statement of Mr. Joyce can be found on page 99 

of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Joyce. 

Mr. Spiro, on behalf of the Independent Insurance Agents & Brokers of America, Inc.. 

STATEMENT OF STEVEN J. SPIRO, CLU, CHFC, SPIRO RISK 

MANAGEMENT, INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA, INC. 

Mr. SPIRO. Good afternoon, Chairman Kanjorski, Ranking Member Biggert, and members of the committee. My name is Steve 

Spiro, and I am pleased to be here today on behalf of the Independent Insurance Agencts & Brokers of America, Inc., also known 

as the ‘‘Big I,’’ to provide my association’s perspective on efforts to 

reform how our Nation insures against natural disasters. 

I am currently serving on the government affairs committee on 

the Big I. I am also president of Spiro Risk Management, Inc., an 

independent insurance agency based in Valley Stream, New York, 

which offers a broad array of insurance products to consumers and 

commercial clients in New York, and approximately 30 other 

States. 

Whether it is the possibility of earthquakes or threats posed by 

hurricanes, just about every corner of the United States is subject 

to the effects of a devastating natural catastrophe. Even if your 

constituents aren’t hit directly by natural disasters, when the government provides assistance after disaster strikes, we all pay, as 

taxpayers. 

This unfortunate and regrettable certainty has created what 

amounts to a property insurance crisis in some parts of the country. I have seen the effects of this crisis firsthand, on Long Island. 

Within the last year-and-a-half, a number of major insurers have 

decided that they will not write new homeowners policies. Meanwhile, the commercial marketplace is now seeing policies with sepVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
57

arate wind storm deductibles, as well as new limitations on business interruption coverage. 

While at this time I am able, through much effort, to find insurance coverage for my consumers, it is often times at unaffordable 

rates. I would like to stress that this issue is not simply a Gulf 

Coast problem, it is a national problem. The same marketplace 

challenges that have affected coastal areas are now beginning to 

occur elsewhere. 

Along the New Madrid fault line, both a large national and regional company have recently announced their intentions to completely withdraw over time from the residential and commercial 

earthquake market. The regional company is the largest regional 

writer of homeowners insurance coverage for independent agents in 

these earthquake areas, and as many as 70,000 customers could be 

affected by their decision. These latest developments are further 

evidence of the increasing national scope of this problem. 

In order to effectively prepare for and insure against natural disasters, our country needs a natural catastrophe plan. The Big I is 

not alone in calling on Congress to act. Both the bipartisan Southern Governors Association and the U.S. Conference of Mayors have 

adopted resolutions urging Congress to create a reasonably priced 

national reinsurance program. Copies of both States are included 

at the end of my written testimony. 

Some insurance companies are also recognizing that a congressional solution is needed, and we particularly like to commend companies like Allstate and Travelers, for engaging in this policy debate, and proposing innovative ideas. In specific regard to the 

Homeowners Defense Act, I would like to thank Representatives 

Ron Klein and Tim Mahoney for their efforts to address this natural disaster crisis. 

While the Big I is not yet ready to formally endorse the Homeowners Defense Act at this time, we do believe it contains a number of provisions that could have a positive impact on the availability and affordability of natural disaster insurance. There are, 

however, important questions that must be answered. 

The legislation contains a number of creative ideas, including a 

consortium that could lead to some lower reinsurance prices, a loan 

program to stabilize State reinsurance programs in the event of catastrophe, and the incentive such a loan program would provide for 

more States to create reinsurance programs. As I mentioned, however, there are also some questions this legislation raises that I feel 

must be answered. 

For example, how many States would volunteer to participate in 

the consortium, and how many investors would be interested in 

purchasing these natural disaster bonds? 

Can the legislation go further in strengthening building codes for 

qualified plans? 

Should a qualified plan be required to offer commercial coverage, 

in addition to residential? 

Would the 5-year transition allowing FAIR and windstorm plans 

access to loans crowd out the private market, and should this transition be shortened or altered? 

58

Finally, and the most important question for any proposed solution, how will the private market react? And will this result in increased coverage for consumers? 

In short, we believe the Homeowners Defense Act deserves serious consideration. We are hopeful that some questions—the questions mentioned earlier are resolved, and this bill could be part of 

a broader, more comprehensive solution. 

As the committee searches for this solution, we urge you to look 

first towards the possible addition of Congresswoman BrownWaite’s provisions from H.R. 330. This bill would allow private insurers to purchase, at auction, reinsurance contracts directly from 

the U.S. Treasury to cover natural disasters. A package that contains a consortium to offer natural disaster bonds and reinsurance 

contracts, a loan program to stabilize State reinsurance programs, 

and a Federal reinsurance program that would directly assist the 

private market, could be an interesting and innovative approach to 

the natural disaster crisis. 

In conclusion, we commend you for convening today’s hearing, 

and hope the committee will act quickly to pass a comprehensive 

solution to resolve the catastrophe insurance availability crisis. 

Thank you. 

[The prepared statement of Mr. Spiro can be found on page 155 

of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Spiro. 

Mr. Echeverria. 

STATEMENT OF JOHN D. ECHEVERRIA, EXECUTIVE DIRECTOR, GEORGETOWN ENVIRONMENTAL LAW & POLICY INSTITUTE, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. ECHEVERRIA. Thank you, Mr. Chairman, and members of the 

committee. I will attempt to set a record for brevity in these proceedings. 

The institute which I direct, the Georgetown Environmental Law 

and Policy Institute, recently published a report on this topic with 

a dramatic bright blue cover. The basic conclusions of that report 

are one, that a major Federal Government intervention in the 

coastal disaster insurance market such as that proposed in H.R. 

3355 would likely have numerous unintended adverse consequences. And, two, the case has not been made that the private 

insurance industry, working with reinsurers and private investors, 

cannot succeed in making coastal disaster insurance widely available at fair prices without Federal Government involvement. 

Because I think the latter point has been more than adequately 

addressed by this panel, I am going to focus, in the interest of brevity, on the first point. 

The nature of our political system, as well as our experience with 

the National Flood Insurance Program, suggests that the Federal 

Government cannot do a good job of supporting coastal disaster insurance prices that reflect the true cost of the covered risks. The 

financial burdens of disasters and the premiums necessary to cover 

those risks create a strong, concentrated, and highly motivated constituency seeking financial relief from those burdens. 

On the other hand, the costs to the Federal Government—and, 

in turn, to Federal taxpayers—of providing this relief are disVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
59

persed, and often deferred into the future. As a result, there is a 

substantial risk—indeed, I would say an inevitability—that Federal 

Government involvement would lead to systematic underpricing of 

coastal disaster insurance, creating a subsidy for development in 

hazardous areas, and greater long-term financial risk. 

The dangers associated with this underpricing of disaster insurance become even more serious when one recognizes the recent upward revisions in projected hurricane intensity and resulting property damage. 

These risks are compounded by the fact that, under our Federal 

system, responsibility for regulating land use is generally assigned 

to State and local governments, while under the proposed legislation, the Federal Government would backstop insurance. 

Under this arrangement, the level of government with the most 

to gain from development, from increased tax revenues and general 

economic development, would bear relatively little financial exposure from potentially unwise development, while the level of government with the greatest financial exposure would have little direct authority to limit and mitigate risks. This misalignment of incentives also tends to encourage unwise coastal development, again 

creating greater long-term financial risks. 

In sum, taking into account the unfair subsidies, the irrational 

incentives for development, and the cost to taxpayers inherent in 

a major Federal intervention in the insurance market, and taking 

into account the capacity of the private market to address this 

issue, our view is that Congress should avoid making the U.S. 

Treasury the backstop for coastal disaster insurance. While there 

are undoubtedly some risks associated with relying on the private 

sector, on balance, the risks to the taxpayer and to the country’s 

general economic welfare appear significantly lower if the business 

of providing coastal disaster insurance is mainly left to insurance 

companies and to private investors. 

This is not to say there is no role for the Federal Government 

in supporting the availability of fairly priced coastal disaster insurance, as I have outlined in my written testimony, but it is a very 

limited role. 

In closing, let me say that I am sympathetic to the accounts of 

citizens, particularly those of low and moderate income, unable to 

obtain affordable insurance. It seems to me that the problem is a 

larger one of the distribution of resources in our society, one that 

could be addressed through revisions to the tax code, or reducing 

expenditures on a whole variety of things, depending on your politics, including the war in Iraq, or agricultural subsidies in Illinois. 

But the one solution we should not embrace is that of systematically underpricing insurance policies for coastal disasters. Thank 

you for the opportunity to testify. 

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

88 of the appendix.] 

Mr. KANJORSKI. Thank you very much. Well, we still have our 

two cosponsors here, Mrs. Biggert. 

[Laughter] 

Mr. KANJORSKI. This may be history for this subcommittee. 

60

If I could very quickly, Mr. Seo and Mr. Ozizmir, either one of 

you, give me a thumbnail sketch explanation of the bonds, how it 

is done, who makes the purchases, why, and what risk is involved. 

Mr. OZIZMIR. I will cover that. The basic structure of the transaction is as I described before. There is a sponsor, which can be an 

insurance company, it can be a reinsurance company, or a corporation, who will look to buy protection. That protection will be in the 

form of a reinsurance contract or a derivative contract, depending 

upon the trigger for the pay-out. 

An SPV will be created, in which investors will purchase bonds 

issued by that special purpose vehicle. The investors of those bonds 

will tend to be hedge funds, money managers—specialized managers, such as Mr. Seo, next to me. Those investors will purchase 

those bonds, due to the non-correlation aspect of them. 

If there is an event, there are specific rules about what the trigger is. Some are based upon the industry losses in Florida. Others 

are based upon the actual loss of a specific insurance company. If 

those triggers are hit, the investors lose all their principal, and 

that money goes to the insurance company to pay claims. If there 

are no events, the investor will get their full principal back, and 

will receive a coupon over LIBOR for their risk. 

Mr. KANJORSKI. What interest rate is the return? 

Mr. OZIZMIR. The interest rates will vary widely. Typically, 

they’re between LIBOR plus 300, which is 3 percent on the low 

end. There have been some bonds issued up to a 45 percent coupon. 

Typically, we have seen most U.S. perils pay somewhere between 

LIBOR plus 400, and LIBOR plus 1,000. So, 4 to 10 percent. 

Mr. KANJORSKI. Is there a restriction on high net worth individuals who can be the purchaser of these bonds, or can anybody wander off the street or out of a casino? 

Mr. OZIZMIR. No. Not anyone can buy these bonds. The purchasers of these bonds are limited to qualified institutional investors, which is $100 million of net worth or greater. It is our view 

that the current state of this market, that it is an institutional 

product only. We do not believe that retail investors should be in 

this market right now. 

Mr. KANJORSKI. As I gather, it is not just a little reinsurance 

company? Everybody who is making a purchase, are they not acting as a little reinsurance operation? 

Mr. OZIZMIR. We would agree with the statement that Mr. Seo 

made, as well. The important thing to think about—and, again, Mr. 

Seo mentioned this—is that due to the structure of the transaction 

that is very programmed, it enables investors anywhere in the 

world, investors that are not experts in insurance, or experts in reinsurance, to actually take on that risk. 

By doing that, you expand the capital base from the reinsurance 

and the insurance industry to the entire capital markets. And, 

again, it is our view that, as that development continues, the 

amount will increase, in terms of availability of reinsurance, and 

that the cost will fall, because you have a far greater base of capital to access. 

Mr. KANJORSKI. And for what periods of time do these bonds— 

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Mr. OZIZMIR. Typically, the bonds are done anywhere from 1 to 

10 years, but the typical maturities are 2 to 3 years. And, in fact, 

I think this is an important point to raise. 

In any other capital market, corporations fund themselves over 

many years. For example, a corporation will do 10-year securities, 

5-year securities, and 1-year securities. Because they do that, they 

have a stable source of capital, in which they have less price volatility, from year-to-year. The insurance/reinsurance industry is interesting in the sense that all contracts are renewed each year. We 

certainly believe that the term aspect of the CAT bond market will 

allow, over time, the cycle and the volatility of insurance and reinsurance rates to be minimized. 

Mr. KANJORSKI. There is a sort of junk bond rate, then? 

Mr. OZIZMIR. Yes. 

Mr. KANJORSKI. Okay. 

Mr. OZIZMIR. Typically, the notes are, you know, single B, a double B is the most typical rating. You know, some deals are done 

with investment grade ratings that are—where very large events 

would be required to trigger it. Others are so high in risk that they 

have no rating. They’re really more like equity risk. 

Mr. KANJORSKI. Very interesting. It takes an investment banker 

to come up with an idea like that, does it not? Very good. 

Would it be fair for me to say that most of the panel is in favor 

of the legislation, with the exception of the gentleman from Georgetown? 

Mr. NUTTER. Mr. Kanjorski? 

Mr. KANJORSKI. Oh, reinsurance. 

Mr. NUTTER. But even our objections to the legislation are with 

the caveat that there are many principles, particularly the reliance 

on the private markets, that we endorse. And we have suggested 

specific changes to the legislation to try and improve it. 

Mr. KANJORSKI. The one thing that disturbs me about the bond 

question is what are we going to do to curtail the amount of development, the location of development, and the methodology of development, if we just throw it into the capital account? 

You know, is Florida going to end up with 40 million people? In 

my prior speech, I discussed that fact that if you look at the normal 

principles, you get a control of population by the cost of living in 

an area, and eventually it becomes prohibitive. 

But if we put a fast fix in where we can sell junk bond rated securities, what is going to inhibit Florida from further densifying, or 

other States? California is probably another example. 

Mr. NUTTER. Mr. Chairman, it does seem to me that all States 

should look at consumers who are funding these kinds of programs, 

whether they’re public or private, with a sound basis of risk assessment, and the risk that they’re exposed to. Insurance premiums are 

a great messenger to people about the cost associated with the decisions they make. And so, risk-based premiums, or risk-based reinsurance premiums, seem to be a fundamental feature. 

I think we would agree with the various statements that have 

been made that there are people with low or fixed incomes for 

whom the cost of their insurance has become difficult or prohibitive, and that the States and the private sector should be looking 

at solutions that address that specifically. In other words, look at 

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the consumers of insurance, to see if we can find some solutions for 

those people. 

But there obviously are people for whom the cost of their insurance is a consequence of the decision they made, but they also may 

have the resources to pay for the cost of that decision. 

Mr. KANJORSKI. So, some subsidy for the snow birds who moved 

to Florida 20 or 30 years ago, that their pensions or individual net 

worths cannot afford the insurance has now occurred—that is what 

you’re talking about, as compared to the independently wealthy 

people down there, let them handle the full burden? 

Mr. NUTTER. Well, it’s consistent with the principles of the legislation being proposed that you’re looking for sound economics, that 

the capital markets and the reinsurance markets that are part of 

the solution being proposed here are likely to expect a risk-based 

premium for this. And loans, or some sort of facility that does indeed make this more affordable for these funds, need to reflect the 

quid pro quo. 

What does this do to help the consumer at the consumer level, 

if in fact you’re going into the private markets and expecting the 

private markets to price this on a risk-based basis? Some kind of 

government role related to consumers that have affordability problems needs to be incorporated in State programs or a Federal facility of some kind. 

Mr. MAHONEY. Mr. Chairman, would you yield? 

Mr. KANJORSKI. Yes. 

Mr. MAHONEY. Yes, one of the things I would like to point out 

is that—to make sure that there is clarity on this point—and that 

is what the program does is it requires that each State that volunteers to go into the program have an actuarially sound catastrophe 

program, so that a State like Florida would have the responsibility 

to have their own CAT program. Today, that number is about $28 

billion, and gets us to probably maybe a 1 in 100 year kind of 

event. 

States like, you know, North Carolina, their actuarially sound responsibility might be, you know, $1 billion or $6 billion, depending 

on what it is. So this idea that somebody is subsidizing the State 

of Florida is not accurate, because in each State there would be a 

responsibility to have a catastrophe program funded by the State 

and the citizens of the State before anything happens with the Federal monies. So, this concept of subsidization, it just really doesn’t 

occur in this bill. 

Mr. KANJORSKI. Okay, well, my time has expired. Mrs. Biggert. 

Mrs. BIGGERT. Thank you. Just a little bit more on that. Mr. Seo, 

it seems like we’re at a pivotal point in the CAT bond history. The 

point at which these bonds are becoming mainstream, it’s not going 

to be—institutional investments. 

How would the Federal Government involvement or competition 

in the CAT bond market affect this emerging market? 

Mr. SEO. I’m not sure how to answer that, because I’m still not 

clear on what’s being proposed. But from what I can understand, 

from what I can see, I think that the effects, you know, could be 

positive, could be negative, but limited, either way. I don’t really 

see any—nothing really jumps out at me that says it can be a complete disaster for the private sector. 

63

Mrs. BIGGERT. Okay. 

Mr. SEO. And nothing really jumps out at me that says, you 

know, this is exactly the spark that we need to get it going, either. 

Does that answer your question? 

Mrs. BIGGERT. I think so. Maybe if Mr. Ozizmir—could you comment on that, too? 

Mr. OZIZMIR. Yes. I think a lot of it will depend upon how the 

bill is executed. And, specifically, I am going to talk about, I think, 

Title I, which talks about the consortium. 

I think the way I try to get the committee to think about this 

is that in both cases we’re saying there are going to be capital market investors with risk adjusted—actuarially sound and risk adjusted returns. So, the question is, if you’re an investor like John 

Seo, and you’re being offered two CAT bonds, one from a U.S. primary insurer or reinsurer, and the other from this consortium, you 

know, what would make you buy one over the other? 

And I think the questions will come down, obviously, to pricing. 

But I think a lot of it will also come down to the controls and disciplines within those programs. 

For example, if you are a U.S. primary—pick Travelers, or any 

one specifically—when you issue your bond, you will go to investors 

with the bankers, and tell them about your program, how you underwrite risk, how you do claims, your track record. And you will 

talk about your incentives, your alignment of interest, that it needs 

to be a well-run program, and claims need to be handled appropriately. 

Now, if bonds come out of a consortium, in some sense, since 

there are so many different insurers, maybe that’s a positive, it’s 

slightly more diversified. But the investors will ultimately need to 

believe that the way that consortium is run, the way the State fund 

is run, the way prices are done, is robust and will stand the test 

of time. 

I think that if, in fact, the investors believe both stories are 

equal, then the pricing will be similar. If they believe one program 

is run better or worse, then clearly the investor capital, which is 

completely free, will ultimately go to the program that they think 

is better run. 

Mr. KLEIN. Congresswoman Biggert, would you yield for a second 

on that? 

Mrs. BIGGERT. Yes, I yield. 

Mr. KLEIN. Yes, just a—part of the thinking, and part of the discussion we had in the research in this—and we spoke to the Chicago Mercantile Exchange, some of the professionals there, and 

what they said the standardization is what they’re looking for. 

They think that helps the market. 

But, ultimately, if there is more competition, I think that’s good. 

Competition is good in any field, and obviously in the bond market, 

there is nothing wrong with it, either. 

The other thing that—there is some question of a possible good 

thing is this may create more liquidity and more trade opportunity. 

They are saying that they haven’t had enough there to make a 

huge market yet, but they think that if the bonds really start taking off, you are going to have a very big market. And the trading 

64

opportunity is what really becomes interesting to the investors, as 

I understand it—you may want to comment on that. 

But I think that’s what we’re trying to drive this toward, is more 

investor activity and interest, and hopefully more bond interest. 

Mrs. BIGGERT. Does it make any difference, then, that the consortium would be, you know, created by statute, and would, you 

know, securitize the State catastrophic risk in the form of bonds? 

I just don’t know how the competition works, when you have one 

by statute and one by— 

Mr. KLEIN. Well, we’re not trying to influence it, either way. We 

are told that, you know, they’re going to compete, and I think that, 

ultimately, the best way to do this thing would be to let it evolve, 

and let the market really sort of run this thing, and be successful 

that way. 

Mr. SEO. May I comment, please? 

Mrs. BIGGERT. Yes, Mr. Seo. 

Mr. SEO. Absolutely competition on the investor side. But as Dan 

was saying, there is also competition on the bond side. And there 

is a concern that if you’re off on the terms that you’re offering, then 

you could get very little investor interest for seemingly a very trivial thing. 

So, it is a double-edged sword. With all due respect to Congressman Mahoney, it is true that Florida has always supported the 

principle of actuarially sound rates, but I will give an example of 

something that I’m talking about that could be a problem. 

Recently the State of Florida has decided to adopt its own model 

for calculating what that is. Now, these models—I mean, no one 

model necessarily is better than another. So I think that the Florida model is well within its right to come out and say, ‘‘I think this 

is an actuarially sound rate.’’ But it just happens to be their model, 

and not the market’s model, what we’re using. And since one thing 

is not better than another, you know, you could argue all day long 

about it. But in a market, they’re going to go off the market model. 

By the way, if that market model was giving a lower risk than 

the State of Florida model, they would still go off of that. But it 

just so happens that the Florida model estimates the risk at roughly half of what the market models do. So that disconnect alone 

could result in a consortium that collects risk, comes out to the 

market, and doesn’t place one dollar of the bonds. 

Mr. MAHONEY. Can I say just something? Would you mind yielding? We happen to have the expert from the Florida insurance commissioner here, and he pointed out that you’re incorrect in that 

statement, that Florida uses an average of four private sector models. And so they do not have their own model, they are using an 

average of the four private sector models. 

Mr. SEO. Well— 

Mr. KANJORSKI. Let us try and keep this orderly now. We have 

an extension of time here, but Mrs. Biggert’s time has expired. Ms. 

Waters? 

Ms. WATERS. Allow me to just yield my time to Mrs. Biggert, so 

she can continue that line of questioning. I am interested. 

Mrs. BIGGERT. All right. Mr. Seo, if you would continue, then? 

Mr. SEO. Yes. Well, Congressman Mahoney, it’s true. I mean, 

Florida—actually, I believe—I thought it consulted even more modVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
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els than that. They take any model that’s valid out there. But, in 

the end, again, right or wrong, the Florida numbers that are coming out aren’t what the market is going off of, and there the argument lies. 

On a fundamental basis, stepping back, I don’t have a problem 

with anybody in CAT risk disagreeing with each other by a factor 

of two. That’s easy to do with these models. So I think reasonable 

people can disagree with that. But then, it comes down to a market 

transaction that has nothing to do with these types of philosophical 

judgements. 

So, you know, the anxiety that a civic-minded market professional would have is that we would be in an awkward situation 

where, fundamentally, what the State of Florida was saying is it 

thought the actuarially sound risk is—is fine. I don’t actually have 

a problem with that. But on a market execution basis, I can’t execute there. 

Effectively, the rest of the market, right or wrong, is going to be 

adopting these other market actuarial rates and paying on them. 

And I have an obligation to my clients, my investors, to put capital 

where it’s going to have the highest return. I’m putting you in competition with other bond opportunities. 

Now, if the State of Florida can actually come around to that understanding, that to tap these capital markets they’re going to have 

to go with certain market conventions, even if they disagree, then 

I think we can have a really nice situation down there. But that 

one single disagreement alone, you know, where everything else is 

beautiful, can completely kill the effectiveness of the program. And 

nobody wants to see that, of course. 

Mrs. BIGGERT. Thank you. We will look forward to more discussion of this. And I yield to Ms. Waters. 

Ms. WATERS. Thank you very much. There was a question that 

has been nagging at me for a long time, and some discussion occurred today, relative to the subject matter that I am concerned 

about. 

There was some talk about mitigation, and—mitigation in the 

bill, and there was some more discussion about not allowing people 

to build in certain areas. I thought about restrictions on building 

in certain areas, not simply because of floods, but because of earthquakes and other kinds of potential hazards. 

What is the thought from any of the panel members—and maybe 

we will just go to anybody who would like to answer this question—what is the thinking about public policy that would go in the 

direction of prohibiting the building in larger areas than we ever 

really thought about doing? Any discussion in any of the industries 

about that? 

Mr. MALTA. Chairwoman Waters, there has been a lot of discussion locally and at regional levels regarding just that. 

And in California, for instance, in dealing with earthquakes, 

‘‘Earthquakes don’t kill people, it’s buildings that kill people,’’ and 

it’s mitigation measures that, if you’re going to build in a certain 

area on a certain soil, that you have to compensate for that. Rather 

than prohibiting building in soft soils, you have to put a floating 

foundation, or you have to do some measure that will protect the 

building and human life, in the event of an event. 

66

So, rather than banning, they look towards technology that will 

allow building, but do it in a sensible manner that protects property and human lives. 

Ms. WATERS. And there is substantial technology that can mitigate against disaster? 

Mr. MALTA. So we are told, but we haven’t had a 1906-type 

earthquake happen on a 60-story building. But we are told by the 

experts that these matters have been taken into consideration in 

the construction of these properties. 

Ms. WATERS. Thank you very much. 

Mr. NUTTER. Could I? 

Ms. WATERS. Yes. 

Mr. NUTTER. If I could also comment, building codes are implied 

in all of this. The legislation that has been offered has, in fact, 

placed upon the Secretary of the Treasury some authority to see 

that States have building codes that are appropriate for the risk, 

and enforced building codes as a critical feature of this. 

And as I mentioned, I think before you came back in the room, 

the insurance premiums should be risk-based, because they do send 

a message to people about the decisions they make, whether they 

adopt certain mitigation features, or whether they place properties 

in harm’s way. That’s a message that consumers should get about 

the cost of the decisions they make. 

The legislation does offer a feature that does focus on appropriate 

building codes, so that you can get appropriate development. 

Mr. SEO. May I make a comment on your question? Let’s say 

that this legislation goes through, and the CAT bond market comes 

through. The price signal that we’re talking about that acts as a—

that helps actually keep areas safe by sending a signal that it’s 

dangerous, will go away. The prices will go down. 

And I have thought about this, and I think that is what you are 

asking. Let’s just say that, for some reason, the insurance is cheap, 

even in these really risk areas. And the only thing I can think of 

is that there is an old model or situation—for this situation, and 

it’s just fire insurance. I mean, the modern insurance industry was 

created because entire cities were burning to the ground, but yet 

the cities kept growing. 

And so, what happened is that we decoupled the price signal for 

insurance from the danger signal. So we just have fire codes. So, 

even to this day, even though fire risk may be low, we limit the 

number of people that can occupy a commercial room or auditorium, etc. And I think that you might end up getting the cost signal. Again, but it’s all poured into safety, not for the cost of capital. 

But I think that we are about to enter a phase of development 

when we can’t depend on the cost of capital, the high cost of capital, to signal danger. We just have to have a separate public policy 

that is completely analogous to what we use for fire codes. 

Mr. ECHEVERRIA. The Sigma Xi organization, which has been 

looking at the global warming issue, issued a recommendation that 

governments consider establishing a prohibition on development 

within a meter of elevation of the sea, on the theory that global 

warming is on the rise, and we need to effect some kind of gradual 

retreat from the shore. 

67

And it seems to me that as a matter of wise public policy, in addition to hardening structures, and securing them as much as possible against damage, it’s appropriate to think about moving development out of harm’s way. That inevitably raises the issue of property rights. 

The U.S. Supreme Court, about a decade ago, famously in a 

South Carolina case, struck down as unconstitutional South Carolina’s effort to draw a line along the shore, which they intended to 

revive as the shore retreated. The court was narrowly divided on 

that subject. They were not, I think it’s fair to say, fully aware of 

the risks of global warming, and the rationale for South Carolina’s 

policies. 

But I think one of the interesting questions that will have to be 

confronted, if we think about a policy of requiring retreat from the 

shore, is how to deal with property concerns. 

Ms. WATERS. Thank you very much. 

Mr. KANJORSKI. Thank you, Ms. Waters. Mr. Campbell? 

Mr. CAMPBELL. Thank you, Mr. Chairman. And I have been kind 

of listening in and out all afternoon, so I apologize in advance if 

this has been asked and answered. 

But being from California, in California we have a thing called 

the California Earthquake Authority, which a number of you have 

addressed in your statements. And that is a government-sponsored 

risk-sharing pool, as you all know. But in California today, only 15 

percent of all homes carry earthquake insurance through the California Earthquake Authority or through private entities, and there 

are a number of private entities that do offer earthquake insurance. My personal residence is insured—I have earthquake insurance through a private entity. 

What is this bill going to do, or what’s going to be different, to 

change that kind of dynamic? Because if an earthquake—when an 

earthquake hits California, 85 percent of the homes that go down 

or are damaged are not going to be insured today, in spite of the 

availability of both the government-sponsored program and a number of private insurance efforts. 

They are going to come here, and they are going to say, ‘‘Help 

us,’’ and we helped a lot of people in a lot of other States, and even 

a fiscal conservative like me is likely to say, ‘‘Well, we ought to,’’ 

because we helped a lot of other States, and not California, so— 

Mr. KANJORSKI. Maybe I can just ask a question here. Why is it 

not mandatory by the mortgagors, that earthquake insurance be 

had? 

Mr. CAMPBELL. It is not. I can’t— 

Mr. KANJORSKI. In Congress, here, we mandated on flood insurance. If you have a mortgage of a federally-insured institution, you 

have to have flood insurance. 

Mr. CAMPBELL. Yes, it’s not. I can’t answer as to why, but it’s 

not. Anybody have any comments? Because I will tell you, I believe 

we need—we ought to have something in natural disaster. 

I mean, we also have issues—we have mud slides in California. 

Those are completely uninsurable. You cannot get insurance for 

them anywhere. But they happen, they happen every few years. 

People lose their homes, and there is absolutely nothing they can 

do, because insurance is absolutely unavailable on that parVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
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ticular—I am told, from the insurance industry, because of adverse 

selection, which I am sure is probably the case. 

But—so, we have situations—particularly the earthquake, which 

is obviously a much bigger thing—where, how do we know we don’t 

do this, and we have the same sort of situation? 

Mr. OZIZMIR. I would like to take a couple of comments on that, 

for just a part of the question you have. 

The CEA program is actually substantially supported by the CAT 

bond market right now. I think the implications of that were that 

when the post-Katrina crisis happened in the insurance/reinsurance area, that the CEA did have some term capacity locked up, 

the had some multi-year transactions, so that they did not see an 

immediate move in those rates. Additionally, the capacity in the 

CAT bond market did help mitigate the increased costs that did, 

you know, occur in that program, but were much less than they 

would have been. 

So, I think that it’s a good example of some of the benefits that 

the CAT bond market can provide. But that, in itself is not, you 

know, necessarily fundamentally going to immediately change the 

situation. 

Mr. CAMPBELL. Whoemver else wants to answer— 

Mr. SPIRO. If I could make a comment? 

Mr. CAMPBELL. Yes. 

Mr. SPIRO. My response would be if California has a qualified 

program, I think the loan provisions of this bill would help. 

Mr. CAMPBELL. Because? 

Mr. SPIRO. The liquidity in the catastrophe loan provisions would 

be available to help in that situation. 

Mr. CAMPBELL. Okay. 

Mr. MALTA. But one would wonder why you would do that, the 

government would do that, when, in fact, you have a program in 

California that, unfortunately, is not meeting all the consumer 

needs that should be there, but is, in fact, as Mr. Ozizmir was saying, is a prototype that works. 

They do aggregate risk, earthquake risk. It is laid off into the reinsurance and the capital markets, just as this bill, the principle 

of this bill, provides. It is a workable prototype that’s, unfortunately, not being used by all the people that—but it’s an interesting public/private approach that does, in fact, achieve a goal 

that is a fundamental principle in this legislation. 

Mr. CAMPBELL. Okay. Let me get to one more question before my 

time runs out. I do think it’s just an interesting thing to look at, 

and figure out, because it has definitely not solved the problem in 

California. And the only reason you haven’t heard about it is because we haven’t had a major earthquake in a while. But when we 

do, then, you know, again, it will happen. 

But the second question I wanted to ask was about—and for Mr. 

Spiro, particularly, but anybody else who might want to comment, 

it’s about the Liability of Risk Retention Act, which enables people 

to do self-insurance pools for liability insurance. And GAO has said 

it has been effective in reducing rates, and that sort of thing. 

Should we extend that sort of—have a Liability Risk Retention 

Act to property insurance, and to allow groups and different people 

69

to pool together for self-insurance on that, and would that be something that could help in this situation? 

Mr. SPIRO. That’s a good question. The Big I has not formally 

taken a position on risk retention groups yet. But we do have some 

serious concerns that I would like to share with you. 

Risk retention groups are not subject to State guarantee funds, 

State guarantee fund protection, like traditional insurers. Additionally, there have been some insolvency issues with risk retention 

groups. Due to these consumer protection concerns, we would caution against their use for natural disaster risk. 

Mr. CAMPBELL. Isn’t it better than nothing, which is what 85 percent of Californians have right now? 

Mr. SPIRO. Sometimes something is better than nothing. I would 

have to see the specific provisions before I brought it back to our 

government affairs committee. 

Mr. CAMPBELL. Okay. Anybody else want to comment before my 

time expires? Mr. Seo? 

Mr. SEO. Yes. Until last year, a California earthquake was the 

largest exposure in the CAT bond market, so we have a good $5 

billion of it right now. We don’t have a problem with it, it’s just 

that there is not so much supply because of the penetration problem you’re talking about. 

And I believe it’s because it’s not the dollar amount of the policy 

that’s in question—it’s around $600, on average, per household—

it’s just the coverage. 

Mr. CAMPBELL. The coverage, yes. 

Mr. SEO. So, the coverage is being rationed. So, if this were to 

help, what would happen is that you would have a lot of Florida 

hurricane risk, or U.S. hurricane risk coming out to the market. 

The market would want to complement that with more California 

earthquake risk. It would need that. 

So, it would actually provide the opportunity for the CEA to 

change the terms of its mini-policy, and turn it into a more fullblown policy. 

Mr. CAMPBELL. In your estimation, that would either help the 

coverage or the rates? 

Mr. SEO. I think it would. I think that your penetration rates 

would go up, you know. Right or wrong, you know, I’m sure you 

know people that went through the Northridge earthquake. And so, 

they just apply the terms of the mini-policy to the claim that they 

had made. 

And so, like I know a person that had a claim that was around 

$80,000. She applied it to the mini-policy, it’s $7,000. So, even like 

I said, even if it’s not quite right, the mini-policy is worth 1/10th 

of what the normal policies were. So, even though the actual dollar 

cost of the policy is reasonable, which it is, the coverage, at least 

by perception, isn’t adequate. So, nobody knows, but I think that 

the solution lies along those lines. 

Mr. CAMPBELL. Thank you. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Okay. Mr. Klein is next. 

Mr. KLEIN. Thank you, Mr. Chairman. First of all, thank you all 

for being here today. Again, the second panel has provided a lot of 

good insight. 

70

Congressman Campbell, I will spend some time with you to go 

over—you know, we believe that part of the innovation here is to 

try to spread the risk. And there are different types of risks around 

the country. And I think what was just explained a few minutes 

ago is if you take hurricane risk—which is not just limited to Florida, it goes all the way up the East Coast and the Gulf Coast—you 

have earthquakes, and mudslides, and lots of different things, the 

scale is different, the damage is different, the probability may be 

different. 

But if you put them all in, it may do what insurance is supposed 

to do, and that is create a better model, which, in turn, over time, 

may—we are focusing on accessibility of product and price. So 

that’s what the goal is trying to accomplish. 

Mr. CAMPBELL. And if the gentleman will yield for just a second—and I am very interested in that, and I get that. I think the 

fundamental question for me is does this really get to that. 

Mr. KLEIN. Sure. 

Mr. CAMPBELL. And, in the end, how are we going to get people 

to buy it and/or hold them accountable if they don’t? I mean, in the 

end—and it always sounds harsh to say this—but if you provide a 

government insurance or reinsure, whatever, sponsored insurance 

program, and people choose—people who choose not to pay the premiums still get benefits from the government, then you have a disincentive to buy the premium. 

Mr. KLEIN. And this is not a government insurance program. 

Mr. CAMPBELL. And I don’t want to take up all your time, but 

thank you. 

Mr. KLEIN. The other thing I want to mention—because there is 

a lot of discussion about where you build properties and improvements, and all the rest of that, I think everybody understands that 

these are local government issues. The Federal Government is not 

going to start creating planning and zoning commissions in here in 

Washington, to decide what gets built. 

However, where we can use our influence a little bit is we can 

say, ‘‘If you want to participate in this model, and you want to be 

eligible, you may have to do certain things.’’ Because, otherwise, we 

have no ability to say to the local government, ‘‘You can’t build 

here.’’ I mean, we have coastal construction line issues on the 

coast, and other things, but there are limitations of what we can 

do. 

But I think we can certainly have a draw-in by, ‘‘Say, listen, if 

you want to participate’’—and that’s where, in the first panel discussion, we talked about, you know, there needs to be discussions 

with codes. Different in California than in Louisiana, you know, 

different risks to protect against. So I think we will certainly talk 

about that, and get everybody’s input on making sure that that 

mitigation factor is brought into this, and is a condition. 

You know, I think the rest of this is I think we have to read this 

carefully. We obviously want Wall Street, and the people that sell 

the bonds—we’re not forcing this on anybody. I mean, if this works, 

it’s going to work because there is a market for it, and because it 

has the consequences we are trying to create. 

But, you know, part of the assessment up to this point is, ‘‘Is 

there capacity?’’ I am hearing from—and we’ve heard from others, 

71

as well—there is a national—there is risk catastrophe bond capacity. It is growing, and that may be something that can build capacity that shifts the risk from policies over to a private source, and 

that’s a good thing, instead of having, you know, more public—we 

don’t want the government to be involved, we would rather have 

the private sector involved. And if there is more capacity there, 

that’s a positive thing. 

But I am just going to end there, by saying—by thanking everybody, and thanking the Chairs for holding this today. This is a 

work in process, as we have suggested. It is complicated. But we 

have to move forward and come up with something that will work, 

will help the homeowners, you know, work with the industries, and 

make sure that we solve this problem. So, thank you again for your 

courtesies. 

Mr. KANJORSKI. Mr. Mahoney? 

Mr. MAHONEY. Thank you, Chairmen, very much. A couple of 

things. A real quick question for Mr. Seo. 

In terms of the CAT bond market, on those interest rates that 

you were talking about, does that presume that the holder of the 

bond gets repaid in all instances, or do they take the risk of losing 

their capital, should the bond be—the CAT bond— 

Mr. SEO. Oh, yes. All the capital is at risk, all the principal is— 

Mr. MAHONEY. So you can—so, over a 10-year period of time, you 

can actually get people to take these bonds at a 10 percent over 

LIBOR rate? Is that what you’re telling me? 

Mr. SEO. Oh, for a 1 in 100 year risk, I think you could do less 

than that. 

Mr. MAHONEY. Yes, because, you know, it gets to the real issue 

here, you know. What no one has talked about here is what is 

wrong with the market. We have people who are on my right side 

of the table who are very concerned about independent agents, and 

things like that. 

I think we all agree, as a panel, that everybody that owns a 

home should be able to have affordable homeowners insurance. Is 

that correct? Okay. Does everybody understand that the average 

family of four in the State of Florida makes $42,500 a year? Does 

that sound reasonable? 

So, the question becomes one of what’s the problem, right? 

What’s the problem with the market? And the State of Florida has 

come in, and they say that a 1 in 100 year event, we’re looking at 

potentially $70 billion worth of liability. And right now, with their 

own efforts on the State CAT fund, $6 billion in company retention, 

working with reinsurers today, we’re getting to about $38 billion of 

coverage. That leaves, by my math, $35 billion that we have openended liability. 

And what we found out, after they did all these heroic things in 

the State of Florida, that a lot of these companies were taking advantage of the lower reinsurance rates, and they were using it to 

buy higher cost reinsurance. 

But at the end of the day, whether they be your CAT bonds—

which only is $15 billion of a $35 billion problem in the State of 

Florida this month—and the reinsurance business, where, depending upon where the risk that you’re buying, whether it be a 1 in 

2 year risk at 80 percent, or a 1 in 100 year event, which could 

72

be a 10 percent premium, $100 million on $1 billion, gentlemen, it’s 

broken. 

Because when you add up all these things—I’m an old manufacturing guy, we call this cost of goods, right? These are costs, and 

then you have to earn a return on top of that. When you take all 

these costs to try to cover a $70 billion event using your products, 

and you divide by the number of homeowners insurance premiums 

out there, guess what? You can’t afford it. 

So, my question to you is, what can you guys do, instead of cost- ing me a 1 in 75 year event in the reinsurance business $200 million per $1 billion covered, what can we do to lower that to something that is affordable? Because that’s the problem. Nobody wants 

to be in the business today, but until you cover that liability, then 

the market is going to be broken. And it is broken. People can’t get 

insurance in Florida. If it wasn’t for Citizens coming in, there 

would be no private market. There would be no market for any 

kind of insurance. 

So, I hear what you’re saying. But the question, again, is that 

it’s too expensive. So what are you guys going to do in your industries—CAT bonds and reinsurance—to make your product affordable, so that people can afford the insurance? 

Mr. KANJORSKI. You could do what the Congress always has 

done, we could pass a law outlawing hurricanes. 

Mr. MAHONEY. That would be good. All right, why don’t we start 

out—I would like to hear from Mr. Ozizmir first, if he could be 

brief. 

Mr. OZIZMIR. I will take a first crack at that. I think one of the 

things that I would like to discuss is the actual composition of the 

CAT bond market, and I think— 

Mr. MAHONEY. I don’t—we don’t have time to go into that. I 

mean, what can you do to lower the rates? 

Mr. OZIZMIR. Well, I think—and the point would be this. In the 

CAT bond market, there is a big difference between the rate for 

non-peak risk and peak risk. For example, if you have a Mexican 

quake with a 1 percent expected loss, you will pay 2 to 3 percent. 

If you have U.S. hurricane risk at a 1 percent expected loss, you 

will pay 6 to 8 percent. 

The reason that’s important is that one of the reasons why there 

is a much higher rate for peak risk is that the insurance and reinsurance industry has a certain amount of capital. And if they are 

going to risk a significant amount of that capital in one location, 

they will charge a higher rate. 

My point would be a lot of people talked about the global capital markets being $50 trillion. If, in fact, the risk, over time, is spread 

throughout the entire global capital market, the $50 trillion, instead of just the insurance/reinsurance industry, we would have 

very good reason to expect that that extra premium that the people 

in California and Florida are paying, versus someone in a non-peak 

risk zone, will compress significantly. That is ultimately— 

Mr. MAHONEY. Yes, you know, but the problem is that—I’m an 

old venture capitalist, right? When people put up money and they 

risk everything, you know, you’re not going to do it for 8 percent 

or 10 percent. I mean, in the reinsurance industry, that’s what you 

guys are basically doing. You’re basically getting contracts with 

73

people and institutions and saying, ‘‘We need to pull down on these 

lines. You give up everything, but you get a high return.’’ 

Mr. OZIZMIR. I understand your comment, but— 

Mr. MAHONEY. I am asking—now I am talking to Mr. Nutter. 

Mr. OZIZMIR. If you don’t mind, one comment is that the situation I described, where investors today are earning 2 to 3 percent 

and risking everything in the CAT bond market— 

Mr. MAHONEY. I would argue—I hear what you’re saying, but I 

would argue that’s the reason you’re at $15 billion of something 

that may be a $1 trillion liability. It’s—we have a $35 billion liability today, which swamps the CAT bond market as it is structured 

today. 

But, getting to Mr. Nutter, I mean, what can we do to get the 

cost of reinsurance down, so that people can afford the product? I 

mean, what we do in this bill is we try to set a cap on the insurance company, what the liability of the insurance industry is, so 

that we can make prices affordable. But—and we’re trying to do it 

at a level that encourages, to a certain extent, the insurance companies continue to buy your industry’s products, because we think 

that we need to support the industry. 

But, you know, the fact of the matter is that everything to date 

hasn’t worked, because we have unfunded liability. And the reason 

why we have unfunded liability is because it’s too expensive. So, 

what can we do to encourage, you know, you to—you know, how 

do we get the rates lower, so that we can afford it? 

Mr. NUTTER. Well, if I could comment that the experiment that 

Florida has engaged in, where it not only created a hurricane catastrophe reinsurance fund in 1993, 1994, expanded it, as you 

know, this year at rates charged to insurance companies at 1/6 of 

what the private market thought appropriate. So, the experiment 

that you hope to achieve is what Florida is engaged in. 

Mr. MAHONEY. Yes, I didn’t hope to do anything, that’s not—you 

know, I represent a district in Florida, I don’t represent the system. 

Mr. NUTTER. I understand. My point was going to be that it 

doesn’t seem to be working. I mean, that’s what you are trying to 

help solve. Providing insurance companies with cheaper reinsurance at the State level, admittedly backed by assessments on consumers if there is a shortfall, hasn’t really worked to lower rates. 

Mr. MAHONEY. But why hasn’t it? 

Mr. NUTTER. Our argument would be that, in fact, if you—why 

hasn’t it worked? 

Mr. MAHONEY. Yes. 

Mr. NUTTER. Risk assessment in the State of Florida, in terms 

of the exposure of the properties, is so great, and the probability 

of loss is so great, that the rates needed to adjust. 

Maybe there is a sticker shock problem here with people in Florida. But at some point, the ultimate cost of repairing and replacing 

people’s homes and businesses has to be borne by someone, either 

those at risk or a subsidy by others, or government financial assistance. 

Mr. MAHONEY. So you are basically agreeing that the size of the 

loss is so great, that current commercial market products are so 

74

costly that it makes it unaffordable is what you’re saying? You’re 

agreeing with that statement. 

Mr. NUTTER. I am not saying it’s unaffordable for everyone. What 

I am saying— 

Mr. MAHONEY. For a $42,500 a year family of four in a $125,000 home who are paying $8,000 a year in homeowners insurance is—

somebody like that? 

Mr. NUTTER. As I said earlier, there is no question that those at 

low incomes or fixed incomes, for whom there is an affordability 

problem at the consumer level, need to be addressed. 

Mr. MAHONEY. Well, at the high end, Mr. Nutter, you know, all 

of my friends that don’t have mortgages, you know what they’re 

doing? They’re just not buying insurance. So the wealthy have 

solved the problem by saying, ‘‘The cost is so high, that it’s just 

cheaper for me to pay off my mortgage, and not to have insurance,’’ 

right? Now, the other problem a person with $42,500 has is that they 

have a fixed income, being a schoolteacher. But yet, when the rate 

goes up by the insurance company, guess what happens on their 

mortgage on a monthly basis? 

So, again, the question I get back to is the fact that let’s talk 

about the real problem. The real problem is that we can’t get 

enough affordable insurance. And the CAT bond thing, I think, is 

interesting. I am hoping you’re right, that people will be willing to 

lose their principal and get an 8 percent return. I’m skeptical. I 

think that’s maybe one of the reasons why the market is so small. 

But, certainly on the reinsurance side, the rates are so great, and 

the return is so great, it’s great for the investor, but it does nothing 

for the person making $42,500 a year, and his $8,000 premium. 

Mr. NUTTER. I don’t think there is any question, Mr. Mahoney, 

that in looking at this legislation that you and Mr. Klein have proposed, that—it is not clear what the residual effect is going to be 

at the consumer level for what you have proposed. That’s why more 

thought needs to be given to whether this proposal is sufficient to 

have value at that consumer level. There is no quid pro quo built 

in to the legislation about what States or insurance companies can 

or will do to help the consumer at the consumer level. 

The State of South Carolina did something creative, by creating 

catastrophe reserve funds for consumers, so that they can build 

up—not unlike 401(k) or a medical savings account—funds for that. 

That’s the kind of thing at the consumer level that perhaps would 

help. 

Mr. MAHONEY. Yes, and I just hope you realize that I—everything we did with this bill was to try to make the private markets 

work. At the end of the day, we know one thing, that over 250 

years, there is nothing wrong with the homeowners insurance marketplace. And what we have to do is we have to solve this timing 

event, and we have to solve the problem of unfunded liability. 

That’s what is creating the instability. 

And the problem is that the cost of your products are so great, 

and the liability is so great, that the average homeowner can’t afford it. This bill solves that problem. Thank you. 

Mr. KANJORSKI. Thank you. I ask unanimous consent that the 

New York Times magazine article, ‘‘In Nature’s Casino,’’ dated AuVerDate 0ct 09 2002 17:57 Jan 08, 2008 Jkt 039539 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 K:\DOCS\39539.TXT HFIN PsN: TERRIE
75

gust 26, 2007, highlighting some of the work Dr. John Seo, one of 

the witnesses here today, and a report published by the Georgetown University, titled, ‘‘Coastal Disaster Insurance in the Era of 

Global Warming: the Case for Relying on the Private Market,’’ 

which Mr. Echeverria helped write, be submitted as part of the 

record. If there is no objection, so ordered. 

Gentlemen, I want to thank you for participating in the second 

panel. I apologize that we held you over this late. As you picked 

up, our two erstwhile freshmen here did a yeoman’s job in putting 

a bill together with a great attempt to solve a problem not only in 

Florida, but for most of the coastal United States. 

And I daresay I think, as a result of this hearing, we have moved 

considerably further along that line to accomplish that end, with 

your assistance and aid. And thank you very much for your testimony. 

With that, the Chair notes that some members may have additional questions for this panel, which they may wish to submit in 

writing. Without objection, the hearing record will remain open for 

30 days for members to submit written questions to these witnesses, and to place their responses in the record. This hearing is 

adjourned. 

[Whereupon, at 6:21 p.m., the hearing was adjourned.] 

(77)

A P P E N D I X

September 6, 2007

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