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35–411 PDF 2007

PERSPECTIVES ON NATURAL

DISASTER INSURANCE

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 27, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–19

(

(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 

KENNY MARCHANT, Texas 

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 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 27, 2007 ................................................................................................. 1

Appendix: 

March 27, 2007 ................................................................................................. 47

WITNESSES 

TUESDAY, MARCH 27, 2007

Bennett, Malcolm N., President, International Realty & Investments, on behalf of The National Multi-Housing Council and The National Apartment 

Association ............................................................................................................ 22

Brown-Waite, Hon. Ginny, a Representative in Congress from the State of 

Florida ................................................................................................................... 16

Klein, Hon. Ron, a Representative in Congress from the State of Florida ......... 11

Mahoney, Hon. Tim, a Representative in Congress from the State of Florida ... 13

McCarty, Kevin M., Office of Insurance Regulation, State of Florida, on behalf 

of The National Association of Insurance Commissioners ................................ 18

Nutter, Franklin W., President, Reinsurance Association of America ................ 31

Porter, Robert W., Executive Director, ProtectingAmerica.org ............................ 23

Racicot, Marc, President, American Insurance Association ................................. 29

Spragens, Ann W., Senior Vice President, Secretary, and General Counsel, 

Property Casualty Insurers Association of America ......................................... 27

Taylor, Hon. Gene, a Representative in Congress from the State of Mississippi .................................................................................................................. 1

Thomas, Gary, Broker/Owner, RE/MAX Real Estate Services, on behalf of 

The National Association of Realtors ................................................................. 25

Valdivia, Andrew, CPCU, ARM, President, White & Company Insurance Inc., 

on behalf of the Independent Insurance Agents and Brokers of America ....... 20

APPENDIX 

Prepared statements: 

Brown-Waite, Hon. Ginny ................................................................................ 48

Klein, Hon. Ron ................................................................................................ 52

Mahoney, Hon. Tim .......................................................................................... 55

Bennett, Malcolm N. ........................................................................................ 62

McCarty, Kevin M. ........................................................................................... 68

Nutter, Franklin W. ......................................................................................... 86

Porter, Robert W. .............................................................................................. 99

Racicot, Marc .................................................................................................... 105

Spragens, Ann W. ............................................................................................. 111

Thomas, Gary .................................................................................................... 119

Valdivia, Andrew .............................................................................................. 130

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Klein, Hon. Ron: 

Written responses to questions submitted to Franklin W. Nutter ............... 139

Neugebauer, Hon. Randy: 

Statement of Janice M. Abraham, President and CEO, United Educators 

Insurance ....................................................................................................... 142

Statement of Charles Chamness on behalf of the National Association 

of Mutual Insurance Companies .................................................................. 150

(1)

PERSPECTIVES ON NATURAL 

DISASTER INSURANCE 

Tuesday, March 27, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:40 p.m., in the 

Rayburn House Office Building, Hon. Maxine Waters [chairwoman 

of the subcommittee] presiding. 

Present: Representatives Waters, Cleaver, Green, Murphy; 

Biggert, Shays, and Neugebauer. 

Ex officio: Representative Bachus. 

Also present: Representatives Watt and Feeney. 

Chairwoman WATERS. This hearing of the Subcommittee on 

Housing and Community Opportunity will come to order. Without 

objection, all members’ opening statements will be made a part of 

the record. 

I would like to start by introducing each of our witnesses. We 

have a panel of elected officials here, Members of Congress, who 

are with us today. 

On panel one we have: the Honorable Gene Taylor, representing 

Mississippi; the Honorable Ron Klein, representing Florida; the 

Honorable Tim Mahoney, representing Florida; and the Honorable 

Ginny Brown-Waite, also representing Florida. 

Without objection, the written statements will be made a part of 

the record. You will each be recognized for a 5-minute summary of 

your testimony. With that, let me just start with Mr. Taylor. 

STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSISSIPPI 

Mr. TAYLOR. Thank you, Madam Chairwoman. And I want to 

thank you for having a hearing to address a problem that affects 

not just south Mississippi, but 53 percent of all Americans; according to NOAA, 53 percent of all Americans live in a coastal community. In 17 States, from the Gulf of Mexico to the Atlantic Coast, 

the insurance industry, on a State-by-State basis, is pulling out. 

Long experience in south Mississippi is that, despite the efforts 

of south Mississippians to board up their homes, and to protect 

their goods, thousands of people lost everything they owned the 

night of Hurricane Katrina. That was the first tragedy. 

2

The second tragedy was that within days of the storm they were 

told that because there was wind and water that occurred—even 

though they had bought all the insurance that was available to 

them in both a wind policy and a flood policy—they were denied 

wind coverage. In fact, it seems the only people who were paid 

their wind claims in the beginning were people who were eye witnesses to the devastation of the storm. 

So now, Madam Chairwoman, what I’m going to ask you to do 

is—in response to the fact that the insurance industry apparently 

no longer wants to cover people for wind damage in coastal America, or will not provide that coverage at a cost that is reasonable—

to consider legislation that will expand the National Flood Insurance Program to include all natural perils. 

Under the rules of this House, it would have to be done in a way 

that pays for itself. Thus, any argument that this would be taxpayer-subsidized would be eliminated because under the new Rules 

of the House, that is not an option. But it does affect thousands of 

people. 

And quite frankly, people should be encouraged to get out of 

coastal areas in a time of a storm, rather than encouraged to stay 

behind with a camera to record the event. 

In my State, thousands of people have had to resort to hiring a 

lawyer, hiring engineers, and having to go to court. In fact, about 

the only people who have gotten justice were either eyewitnesses, 

or people who hired high-profile lawyers to settle their claims. That 

really shouldn’t be the case. 

In the case of the Flood Insurance Program, we allow the private 

sector to write that policy, but we also allow them to adjudicate the 

claim. So, as companies are issuing internal documents that tell 

their employees to blame everything on the water, and pay the 

flood claim immediately, that flies in the face of their contractual 

obligation to our Nation, to a fair adjudication of claims. 

So, the present system isn’t working. It’s not working for individuals who are affected by the storm, and it’s not working for our Nation’s taxpayers, who paid the difference. I would remind my colleagues that in the same year that the insurance industry had $45 

billion in profits, the National Flood Insurance Program lost $20 

billion. It doesn’t have to be that way. 

Our Nation stepped forward in the late 1960’s to come up with 

the National Flood Insurance Program, because there was a need 

that the private sector chose not to fill, and our Nation wisely filled 

that need. I think it’s time for our Nation to step forward once 

again for a need that needs to be filled that the private sector, for 

whatever reason, is choosing not to fill, and that is for all catastrophic—whether it’s a tornado in Alabama, an earthquake in 

California, a fire in the Pacific Northwest, as long as a person has 

built their home to the proper standards, as long as they have paid 

their premiums, as long as we can devise a program that is done 

in a way that pays for itself, the people of America ought to be protected. 

Because in south Mississippi right now, it is a common occurrence for people who had 3,000-, 4,000-, or 5,000 square-foot houses 

to be replacing them with 1,000 square-foot houses. First, because 

they weren’t paid their claim from the last storm, and now they’re 

3

being told, ‘‘If you do rebuild, you’re going to pay 4 or 5 or 6 times 

more for insurance than you did before.’’ Quite frankly, no one I 

know wants to pay more on an insurance note than they want to 

pay on a house note. 

It just stands to reason that we have to do better. We have to 

do better as far as building codes, and we have to do better as far 

as the national flood elevation maps, which were so grossly inadequate. It’s in the Nation’s best interest to do this for the 53 percent of all Americans who live in coastal America. 

So, Madam Chairwoman, we have had many opportunities to 

speak about this, but this is the first opportunity to actually offer 

a piece of legislation. And so, I would very much request that, at 

your convenience, some sort of a mark-up be held on H.R.—I believe it’s 94, with the opportunity to make the case for that, as a 

stand-alone measure. 

I welcome what my colleagues in Florida have to say today. I 

don’t believe reinsurance is the answer, but I am pleased to see 

such a large delegation recognizing that the problem does exist, 

and it exists not just for them, for Mississippi, for South Carolina, 

and Alabama, but for the 53 percent of all Americans who live in 

a coastal community, and who are looking to their Nation for some 

help. 

Chairwoman WATERS. Thank you very much, Mr. Taylor. I allowed you to give your testimony, because you told me that you 

may have to leave a little bit early. But if you could remain around, 

I will then move to allowing the members of the committee to give 

opening statements. 

And then, of course, for those members who wish to remain 

around for some questions, we would like to have you stay. But if 

not, we do understand that you all are under some time constraints. 

I would first like to thank the ranking member of the Subcommittee on Housing and Community Opportunity, Mrs. Biggert, 

for working with me to hold today’s hearing, ‘‘Perspectives on Natural Disaster Insurance.’’ 

This is not a prelude to legislation on this issue, although many 

of you are aware of the various bills that have been introduceed to 

address natural disasters. Some of the Members of Congress who 

have introduced bills, certainly, are here today. 

So let me just welcome the Members of Congress who are testifying before the subcommittee. Again, I ask you to stay, if you can, 

after you give your testimony, for questions. But if you have to 

leave, we do understand that. 

The issue of natural disasters and insurance has been front and 

center in the 110th Congress, as well as in the 109th Congress. If 

any of you have visited the Gulf Coast region since Hurricanes 

Katrina and Rita, you understand that it is essential that we come 

to grips with reality, and the potential for another major disaster. 

More than half of the City of New Orleans’s pre-storm population 

of nearly 450,000 remains absent from the City, and large areas of 

the City are still uninhabitable. The estimate of destroyed or severely damaged housing stock in the Gulf region is as high as 

300,000 units, representing billions of dollars in lost equity, pain, 

and suffering. 

4

We were not adequately prepared to deal with the aftermath of 

Katrina and Rita, and there are many who feel that we are still 

not ready for another major disaster. The National Flood Insurance 

Program estimates that it will reach its $20.78 billion limit in September of 2007, through claims payments and interest payments on 

outstanding debt. The NFIP has already borrowed more than $17 

billion, just to deal with claims from Hurricanes Katrina and Rita. 

So, if we have a hurricane season this year that is catastrophic in 

nature, will it be prepared to address the additional claims? 

Insurance is also one of the major obstacles to rebuilding in the 

Gulf region. Both the Louisiana and the State of Mississippi homeowners grant assistance programs have been slowed, in part, by insurance issues. 

Each time that I have visited the Gulf, and as recently as February, when the subcommittee held hearings in the Gulf region—

New Orleans and Gulf Port, Mississippi, I have heard countless 

horror stories related to the damage incurred as a result of the 

hurricanes in the Gulf region, and the problems with insurance. 

Insurance is one aspect of recovery that we need to be able to 

rely on after catastrophic catastrophe, to help make people’s lives 

whole again. The reverse has been true for many, and many insurance claims have gone unpaid, or the claims paid have not been 

commensurate with the damage to the property. People cannot rebuild without adequate financial resources in the aftermath of a 

natural disaster. 

However, cost is critical. And many are not able to afford insurance. While there are those who have limited and inadequate insurance, prior to a disaster, in places like California, many decided 

not to carry insurance at all, precisely because they believed that 

the government will become involved if a natural catastrophe occurs. We all know this is partially true. 

Many insurance companies do not offer flood damage insurance. 

Many homeowners have the option to obtain a policy under a State 

program, which is unaffordable for most, and it’s not carried by 

many, for this simple reason. In New Orleans, only one-half of the 

households had flood insurance under the government’s National 

Flood Insurance Program. 

Whether the cause of the damage is wind or water, most homeowners merely want to be able to get on with their lives, and have 

their insurance companies pay their claims. 

Last year, the House supported national flood insurance reform 

legislation, which takes important steps to make the National 

Flood Insurance Program work, but we still have major gaps in 

that program, and no program tied to natural disasters. 

Today’s hearing is a proactive step to establish an effort to answer several questions. What role do insurance companies play in 

natural catastrophes or disasters? How do insurance companies assist in the recovery process? Or do they undermine the process? Do 

the efforts of insurance companies support the rebuilding process, 

where there has been a natural disaster or catastrophe? Is there 

a role for the Federal Government, and the States in partnership, 

to provide insurance in the event of a natural disaster? What is the 

role of the reinsurance industry in natural disasters? 

5

I look forward to hearing from the rest of my colleagues who are 

on this first panel today and, of course, from the industry experts 

who will be on the second panel. I thank you, and I will yield to 

Mrs. Biggert. Is Mr. Bachus here? 

Mrs. BIGGERT. Yes. 

Chairwoman WATERS. Oh, there you are. I think I had better 

yield to Mr. Bachus. 

Mrs. BIGGERT. I would appreciate it. 

Chairwoman WATERS. Would you appreciate that? All right; 5 

minutes. Thank you. 

Mr. BACHUS. I was actually hoping that Mrs. Biggert would go 

first, so I could be more informed on the issue. But first of all, let 

me thank you, Representative Taylor. I know that the last 2 years 

have been very difficult for you, and for your district, and I appreciate your testimony. 

I also thank Chairwoman Waters and Mrs. Biggert for holding 

this hearing. 

Seven of the twelve most costly natural disasters in American 

history occurred in 2004 or 2005, including Hurricanes Katrina, 

Rita, and Wilma. Even if the frequency and severity of future 

storms remains constant, as coastal development and property values expand over time, loss exposures will keep growing with new 

record damages certain to occur in coming years. 

And this prospect has spurred continued pressure for government—you could call it involvement, or you could call it interference, depending on your philosophy—in the marketplace. 

One of my concerns for government involvement, or increased involvement, is that the track record in the past has not been sterling. Insurance has accumulated roughly $600 billion of surplus, 

with tens of billions of disaster reinsurance available, and additional tens of trillions accessible in the investment market, seeking 

the highest rate of returns. 

In fact, despite the enormous 2004 and 2005 losses, the insurance industry still achieved record growth in profits and surplus 

with relatively few insolvencies. The private market has now proven it has adequate capacity available to handle a $60 billion-plus 

event. The marketplace will not match the continued growth in 

coastal insurance demand, unless it can attract new capital by convincing investors that the rate of return outweighs the perceived 

risk. 

Investors want to know, will the government control prices with 

rates required to be arbitrarily broken down and subject to formal 

or informal rejection? Will the government dictate what coverage 

can be afforded or excluded, and for how long? Will the government 

mandate payment for other insurer’s losses through State-mandated subsidies of fair plans and guaranteed funds? And will government programs directly compete with the private market, undercutting fair prices through tax advantage, credit-subsidized 

State pools? 

If these questions continue to be answered affirmatively, no 

amount of government safety net will bring back the private market. Capital is highly mobile, and excessive government interference becomes the disease, not the cure. 

6

In particular, I am concerned about legislative proposals in the 

aftermath of Katrina to impose an enormous potential tax increase 

on all Americans to subsidize coastal insurance, largely in response 

to the actions by a small number of insurers who allowed their risk 

portfolios to be overextended in the Gulf Coast region. 

And as Congressman Taylor said, we certainly witnessed some 

questionable conduct by a few of these insurance companies—I 

don’t think all of them—and I think some have been really unfairly 

the target of criticism or scrutiny, because of the actions of one or 

two. But certainly there has been some really questionable conduct 

on the part of one or more of our insurers. 

I don’t want that questionable conduct of one or more insurers 

to lead to an overreaction by this Congress, or by government officials, and we should not allow it to become the foundation for Federal excess, in covering up the resulting flight of capital. We should 

not force rural and middle America to pick up the tab and insure 

insolvent State programs and insurers that want to maintain their 

market share without buying reinsurance. 

Today, we will hear more testimony about whether the government should increase its involvement in disaster insurance. 

I applaud the leadership of Congresswoman Brown-Waite and 

her fellow Floridians on this. Members of this committee have a 

long history of trying to establish a Federal backstop for disaster 

insurance, going back well over a decade. Mrs. Brown-Waite has 

also worked with Representative Moore from Kansas on streamlining the non-admitted and reinsurance markets, increasing insurance availability by reducing excessive government regulation, and 

allowing the marketplace to function more freely, in a bill that 

passed the House unanimously last year. 

I am disappointed that Representative Jindal was not allowed to 

testify. He is not only an original co-sponsor of several bills to increase available disaster insurance for coastal consumers, but he is 

also the author of legislation to eliminate the tax penalty on longterm catastrophic reserves. 

According to insurance regulators, allowing insurers to look forward, as well as back, on catastrophic losses, would help to reduce 

short-term volatility in coverage available after an event. This critical fix should be considered as part of any comprehensive solution. 

Let me simply close by saying that, Congressman Taylor, I do—

your idea about an all perils coverage, as opposed to just water or 

wind, obviously, I think we—because of the events and experiences 

we have seen along the Gulf Coast, there is a need for us to at 

least consider some of what you—some of your advice. 

It does—it makes very little practical sense to have a property 

on the beach, where you have wind-driven water, and you find that 

the coverage—there is no coverage, because it was water, even 

though it was driven by the wind. And although that’s the way the 

policies were apparently designed, and I guess approved, by the 

State of Mississippi, and maybe the State of Alabama—if we’re 

going to have flood insurance, if we’re going to have a Federal program, if we’re going to have these policies, we certainly need to 

look at that. 

And I would say this. I would solicit your advice as we move forward, and will promise that I will keep, at least as one member of 

7

this committee, I will keep an open mind about this entire subject. 

And what I have read today is actually my opinion, now. That’s 

subject to change. So, thank you. 

Chairwoman WATERS. Thank you very much. I will yield 1 

minute to the gentleman from Connecticut, Mr. Murphy. 

Mr. MURPHY. Thank you, Madam Chairwoman. Just to say—I 

don’t have a formal opening statement, but just to say I look forward of the testimony of, certainly, my two fellow freshmen members, Mr. Klein and Mr. Mahoney, as well as their colleague, who 

has been leading on this issue for a very long time. 

For those of us who are new here, and who have watched what 

has happened to the Gulf Coast over the past several years, I think 

we, as well as many other people, understand that it’s not enough 

for us to simply close our eyes and hope that this situation gets 

better. 

Mr. Klein, in his written testimony, talks about a catastrophe financing plan at a national level, and I think that the members of 

this panel will find a lot of friends from throughout this country, 

who agree that this is a national concern. 

And although the colors may change as you go throughout the 

country on a map such as that, what we watched happen—not just 

to those people who had homes right on the water in Louisiana and 

Florida, but those who made choices to live in their hometowns 

miles and miles inward from those very coastal areas—that’s a national priority for many of us. 

I look forward to working with the chairwoman, ranking member, and those members of the panel on that national financing 

plan. Thank you. 

Chairwoman WATERS. Thank you very much. I yield 5 minutes 

to the ranking member of the subcommittee, the gentlelady from 

Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you very much, Chairwoman Waters, and 

thank you for holding this hearing today. I would also like to, 

again, thank Mr. Taylor for his hospitality and his testimony when 

we held the field hearings in Mississippi. 

I will keep my remarks short, so that we can hear from today’s 

witnesses. First, I, too, wish that Mr. Jindal had been invited to 

testify. He has some interesting market-driven proposals to address 

insurance catastrophe issues; they fall within the jurisdiction of the 

Ways and Means Committee, but I think they warrant our attention. 

Second, there are several questions that need answering today. 

Is it necessary for the Federal Government to provide reinsurance? 

Is there sufficient private reinsurance capacity? If the cost of reinsurance and insurance is rising in the most catastrophic-prone regions of our country, is it okay to let the marketplace assess the 

risk and price insurance accordingly? 

If private insurance and reinsurance prices are high and rising 

in the most catastrophic-prone regions of our country, but the insurance is available, is it wise to set up the Federal program that 

offers less expensive reinsurance, putting taxpayers on the hook? 

Third, I would like to mention that yesterday Chairman Frank 

and I introduced H.R. 1682, The Flood Insurance Reform and Modernization Act of 2007. After the 2005 hurricanes in the Gulf Coast, 

8

it became abundantly clear that the National Flood Insurance Program was at risk of becoming insolvent and needed an overhaul. 

The bill significantly reforms the program which provides flood 

insurance coverage for consumers. It does that by updating the Nation’s flood maps, increasing enforcement and accountability, and 

reducing the burden on the taxpayer. This bill has been a long time 

in coming, but before we consider the proposals to expand the National Flood Insurance Program, we need to reform it, and make 

sure that it works. 

I look forward to today’s testimony and I yield back the balance 

of my time. 

Chairwoman WATERS. Thank you, very much. We have two members who are with us who are not members of the subcommittee. 

I would like to request unanimous consent that they be able to give 

remarks, and without objection, such will be the order. 

I will yield, before going to Mr. Feeney, to the gentleman from 

Missouri. 

Mr. CLAY. Thank you, Madam Chairwoman. I will forgo any 

opening statement today in order to hear from our colleagues, and 

to let the other side present opening statements. Thank you. 

Chairwoman WATERS. As I understand it, Mr. Neugebauer, you 

wish to speak, or be recognized for purposes of presentation for 3 

minutes. I yield, to recognize you for 3 minutes. 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. Also, I ask 

unanimous consent to enter into the record testimony submitted by 

Janice M. Abraham, president and CEO of United Educators Insurance and Reciprocal Risk Retention Group, of Chevy Chase, Maryland. 

Thank you. Well, I appreciate this panel here, and I know that 

many of the people on this panel have been working tirelessly on 

coming up with a solution to this issue. 

Certainly, I am a firm believer, and agree with most everyone, 

that we need to come up with a solution that doesn’t portion liability when we have these events. When somebody runs into your car, 

or you back your car into a fire hydrant, what happens to your car 

doesn’t really matter. What happens to your car if you suffer damage to your car, you know, your insurance company is responsible 

for that. 

And so, I believe that the products that are offered along our 

coastline should be consistent, and that whatever the perils that 

might inflict damage to that house are covered. 

I think some of us—and I think the interesting part of this debate will be—is what kind of solutions that we put in place. I have 

said, and feel very strongly, that, quite honestly, having a flood insurance and then a wind policy and a hurricane policy, and having 

these divided coverages creates a very similar situation to what 

Mr. Taylor was alluding to. 

And so, what I would hope, as we move forward, is that we look 

for a policy, working with the insurance industry—I believe very 

strongly that the insurance industry needs to be driving this 

train—what are ways that we can encourage market solutions to 

this problem. I appreciate Ginny Brown-Waite trying to bring, in 

some way, an incentive to this process to—where the government 

has a—whatever minimal role it needs to take, in order to be able 

9

to encourage the private sector to come and offer products to do 

that. 

Now, what this is probably going to entail—and this is not something that everybody wants to hear but we have to make sure, also, 

that whatever kind of plan we put in place has to be actuarially 

sound. And so, in high-risk areas, the cost of that commodity, or 

the insurance, is probably going to be higher than in other places. 

I live in west Texas, and on that map, we’re susceptible to hail 

storms and tornadoes and wind storms out there. I am sure that 

we’re paying a higher premium for living in that area than some 

people who are not susceptible to that, but that’s just the part that 

goes with living in that area. I choose to live there, so whatever 

the fare is, that’s what I am going to pay to live there. 

But I don’t think we need situations where companies are trying 

to look for a way to get out of the liability, but they have an actuarially sound policy, and when these disasters happen, we have 

people down there with checkbooks, and not lawyers, trying to keep 

from paying the claims. 

And so, I look forward to this debate. I think this is a good process, with a lot of interesting proposals on the table, and I thank 

the chairwoman for holding this hearing. 

Chairwoman WATERS. Thank you, very much. I recognize Mr. 

Shays for 3 minutes. 

Mr. SHAYS. Thank you, Madam Chairwoman. And I thank the 

ranking member, as well, for this hearing. 

I just want to express, first, my particular admiration to Gene 

Taylor, who sat in on the Katrina hearings, and provided tremendous insight. And also, just for your whole attitude during what 

took place, how you dealt with it personally, no complaining. I 

think you should be very proud of the people in your State, and 

how they have responded. 

Just to say that I was there, a week after Katrina, and I was 

stunned to be both in Louisiana, where we saw, really, the bathtub 

of decay that occurred from the flooding of the levees into New Orleans. But then, to be 10 miles inland, in Mississippi, and see a 

water line 20 feet high. It literally was a water line on a bridge 

over a road. I was told that people used to bring their cars up there 

to protect them, 10 miles inland, and there was never any water, 

so to have 20 feet of just water blew me away. 

So, there is a part of me that says that kind of circumstance we 

need to deal with. But where I have a bit of an issue is folks right 

on the coastline who are clearly in a high-risk area, and so I am 

going to be curious how I sort that out. I think that insurance companies have figured into their whole calculations that kind of cost, 

and I would not want them to then put it on the rest of us. So 

that’s one point. 

I do think there is a difference between natural disaster and a 

terrorist attack. And so I feel like, very clearly, the government 

needs to step in. So I am kind of someone who has real reservations, but still somewhat of an open mind about what we do here. 

But I do see a difference between natural and terrorist attacks. 

But, again, I thank all of my colleagues, and I know Ginny 

Brown-Waite a little better than I know our new colleagues, and 

10

I have just tremendous admiration for all of you for being here. 

Thank you. 

Chairwoman WATERS. Thank you, very much. I recognize the 

gentleman from North Carolina, Mr. Mel Watt, for 3 minutes. 

Mr. WATT. Thank you, Madam Chairwoman, and I won’t take 3 

minutes. I want to express my appreciation to the chairwoman for 

convening the hearing, and my appreciation for her allowing me to 

sit in and be a part of it. 

The one thing that I think we all recognize in the aftermath of 

these hurricanes is that the insurance payment and adjusting process was broken in some ways, and that it had multiple parts to it—

flood insurance, private insurance, various and sundry other 

parts—and none of them were working all that well together. 

So, the result was that policyholders and non-policyholders came 

away, quite often, not feeling like they had been dealt with in the 

most effective way. And as we try to address that, the real concern 

I have is that we don’t duplicate each other’s efforts. 

We had a hearing in the oversight subcommittee on insurance in 

general. I wanted to be here today to make sure that, as we chart 

the next hearing in our oversight subcommittee, we don’t redo 

what another subcommittee has done, but we continue to build the 

factual record for us to make an effective legislative response to 

problems that have occurred. 

And it’s for that purpose I am here, and I appreciate the 

gentlelady, the chairwoman, and the ranking member, for allowing 

me to be a part of this, and I yield back. 

Chairwoman WATERS. Thank you, very much. I recognize Mr. 

Feeney for 3 minutes. 

Mr. FEENEY. I thank the chairwoman. This is obviously a very 

important issue to us in Florida. I have been a policymaker since 

1990 in the State legislature. 

We have a lot of experience with hurricanes. We learned some 

great lessons in 1993 with Hurricane Andrew. By the way, my son 

was born in the middle of that hurricane in Orlando. If I had 

known about his tempestuous personality, his name would probably be Andrew and not Tommy. 

But we learned an awful lot of lessons, and I worked with my 

good friend and colleague, Ron Klein, and with my good friend and 

colleague, Ginny Brown-Waite, in the Florida legislature. By the 

way, we all know if that storm had hit 20 or 30 miles north, Congressman Klein, we would have been looking at a $110 billion 

event, or more, and not a $20 billion or $25 billion event. So, in 

some ways, we were fortunate, as bad as it was. 

We learned a lot of lessons during that event. I think that Kevin 

McCarty, who will be testifying in the next panel, will share some 

of those lessons that we brought with us. 

I would say that no State, no contemporary State, has thought 

more, or more successfully, about how to deal with preparation for 

hurricanes, in terms of response, in terms of the market abnormalities that occur in the aftermath, than Florida. We have experienced 

it. If you watch the preparation that occurred, and how we dealt 

with four hurricanes in a 3-month period a couple of years ago, you 

will see that we have learned some very serious lessons. 

11

But perhaps nothing was more important as the lesson that the 

hurricanes were not a partisan issue. They’re an issue with—where 

people on the ground have real needs that swamped the ability of 

local or State governments. 

Since we have three Florida panelists here, I won’t go into those 

details. Plus, Mr. McCarty—I am glad they—all three of my colleagues from Florida and Mr. Taylor—are here. 

When we’re talking about the national CAT fund, or a State and 

regional CAT fund, or some of the reinsurance bolstering that Representative Brown-Waite has been a leader in, whether we’re talking about increasing reserve opportunities, all of these are important things. 

But I would like to reiterate what Mr. Neugebauer said, and that 

is, ultimately, that actuaries and markets need to drive this show 

wherever and whenever possible. When politicians and bureaucrats 

drive this show, we’re going to end up leaving responsibility in 

places where the incentives are all wrong and upside-down. 

One of the bills I have provides for catastrophic savings accounts. 

Representative Wasserman-Schultz and I filed that last year. We 

intend to file it again this week, and it solved some problems of tax 

equity. The Florida markets—some people now have deductibles, 

for those in the audience, of as much as $20,000 or more on their 

home in Florida. So we have a very different market than much of 

the country. 

Providing tax equity, getting people to think ahead of time about 

how they protect their homes, and how they have resources available, this doesn’t work for everybody. But there are a lot of people 

that this will help, and there are many ways that we can, at a Federal level, adjust policy consistent with actuarial soundness and 

markets that will not throw the baby out with the bath water, and 

end up with a socialized property and casualty market. 

With that, I thank the chairwoman, and yield back the balance 

of my time. 

Chairwoman WATERS. Thank you, very much. Now we will return to our panel. The Honorable Ron Klein. 

STATEMENT OF THE HONORABLE RON KLEIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA 

Mr. KLEIN. Good afternoon, Chairwoman Waters, and Ranking 

Member Biggert. I sincerely appreciate the opportunity to discuss 

natural disaster insurance before the subcommittee, particularly in 

light of the very helpful comments that were made so far today. 

I hope that our presence at this hearing emphasizes the seriousness of this problem and demonstrates our commitment to move 

forward in identifying a national solution. 

The 2005 hurricanes illustrated all too well how quickly a natural disaster can change the lives of millions. The most devastating 

of the storms, which struck from Louisiana to the Florida panhandle, also dealt unprecedented losses through residential, commercial, and industrial property. Hurricane Katrina, in particular, 

opened many eyes to the problem of natural disaster financing, and 

showed that it is up to us to make sure that we are adequately prepared to handle a disaster of catastrophic proportions, because it 

is simply a matter of time before the next one hits. 

12

As such, we must think ahead, proactively, to develop a plan to 

address natural disasters before the next one hits, rather than simply continuing to operate without a catastrophic financing plan at 

the national level. 

We have seen the consequences of large-scale disasters, and the 

physical and economic destruction that accompanied them, and 

must act responsibly and prepare to act responsibly. 

We are all familiar with the sights and stories of Hurricane 

Katrina, but we must also recognize that families across the United 

States face a variety of other threats that could rise to the level 

of catastrophic proportions, and hit without warning. Many residents in California certainly remember the devastation caused by 

the North Ridge earthquake, which killed 60 people, injured 3,800, 

and caused $43 billion in property damage. 

Even with California’s history of seismic activity, only about 14 

percent of Californians currently have earthquake policies, which is 

a real eye-opening statistic. It only takes one day of devastation 

from an earthquake, fire, volcano, flood, or hurricane to make us 

wish that we had thought ahead to establish a national system to 

deal with catastrophic financing. 

The economic impact accompanying natural disasters resonates 

throughout our 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 for 

disaster relief. This money, which we all agree was entirely necessary to spend, comes from taxpayers throughout our 50 States, 

not simply from those affected regions. 

Those who say that natural disasters are a regional problem limited to coastal States are dead wrong. Until we are able to develop 

a national financing mechanism to provide certainty for large-scale 

natural catastrophes, each taxpayer throughout the United States 

will continue to be responsible following a catastrophic event. 

On the local level, more and more families across the country are 

facing the real prospect of being dropped by the property insurance 

company. Hundreds of thousands of homeowners in my home State 

alone have been dropped, or slated for non-renewal by their insurance companies, even after they paid premiums for 15 to 20 years 

without making a claim. Those who remain insured are confronted 

with crippling premiums, which in some cases are forcing homeowners to make tough decisions about whether they can go without 

property insurance, which of course you can’t do if you have a 

mortgage. 

Take the case of one of my constituents. We have an individual 

in my district who was paying $3,100 a year for homeowners insurance in 2005. She is now coping with a premium that reached 

$16,000 this year. That’s a $12,900 increase over 2 years. How can 

we possibly expect families to make payments each year to protect 

their homes. 

Skyrocketing insurance premiums are posing a real threat to 

homeownership, particularly among our most vulnerable populations, such as the elderly. Older Americans, many of whom are 

on fixed incomes, may even have to lose their homes outright. 

The property insurance crisis, as I said, is not isolated to Florida, 

either. Last year, property insurers indicated they planned to stop 

13

offering new coverage in Maryland, and in Virginia’s coastal markets. Property insurance carriers have also stopped writing new 

policies for residents in parts of Delaware, New Jersey, and Connecticut, no matter where in the State the damage may be. 

Furthermore, tens of thousands of homeowners in New York, 

North Carolina, South Carolina, Alabama, and Texas have also 

been dropped. It is impossible for property owners to be able to get 

reliable coverage in these markets, and it’s precisely for this reason 

that we need to have a national solution. 

Over the last number of weeks, I have worked closely with Mr. 

Mahoney, Ms. Brown-Waite, Mrs. Maloney, and others, including 

Mr. Taylor, who has a number of ideas, as well. We have been 

working with Chairman Frank, who has asked us to work on this, 

and who also believes the natural solution is necessary. We are 

now discussing this issue with consumer groups and other interested parties, and we are assembling bi-partisan, multi-regional 

groups of Congressmen who collectively recognize the problem on 

a large scale. We’re looking forward to a well-developed idea with 

a national backstop, much of which will be identified with the private sector and private sector financing ideas. 

We will also be working to develop incentives for mitigation 

standards, including property owners’ exposure—reducing property 

owners’ exposure to natural disasters, which will be an important 

part of reducing the national exposure. We want to encourage responsible development through building code standards and other 

means. 

The time for action is now. With the Federal Government clearly 

in the position of being the de facto insurer of last resort, we hope 

to establish a more efficient system to foster predictable coverage 

at reasonable rates. 

Again, I would like to thank the subcommittee for holding this 

hearing today on this very important issue, and I am looking forward to working with all of you, Chairwoman Waters and others, 

and Ranking Member Biggert, to develop an appropriate solution. 

Thank you. 

[The prepared statement of Mr. Klein can be found on page 52 

of the appendix.] 

Chairwoman WATERS. Thank you, very much. 

The Honorable Tim Mahoney. 

STATEMENT OF THE HONORABLE TIM MAHONEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA 

Mr. MAHONEY. Thank you, Chairwoman Waters, and Ranking 

Member Biggert, for holding this important hearing today, and allowing me to discuss problems that the people of my great State 

of Florida are having, coping with the devastating impact of natural disasters and their struggles to meet those challenges by having access to comprehensive and affordable homeowner insurance. 

Before I begin summarizing the insurance crisis facing my district in the State of Florida, I want to make sure that this committee understands that this isn’t just a problem for Florida; it’s 

a national problem. States all around the Gulf Coast, from Texas 

all the way up to Maine are facing similar situations, due to hurricanes. My colleagues in California, with earthquakes and fires, and 

14

my friends in Oklahoma and Ohio, with tornadoes and floods; we’re 

all facing the same challenge. 

The single biggest investment most Americans have is their 

home. The increased occurrence and severity of natural disasters, 

whether they be hurricanes, tornadoes, earthquakes, fires, or volcanoes, has caused insurance premiums to rise. In 2 years, the Gulf 

Coast region was struck by seven major hurricanes. Just one of 

those hurricanes, Hurricane Katrina, caused more than $40 billion 

of insured losses; approximately $15.5 billion of that amount was 

the result of homeowners’ claims. 

Up until the moment Katrina ravaged New Orleans and the Gulf 

Coast, my district, District 16, was the single biggest disaster area 

in the Nation, with no less than 4 major hurricanes destroying 

homes and businesses. Today, 3 years after Hurricane Charlie ravaged the town of Punta Gorda, you can still see the scarred downtown, and a community working heroically to rebuild. 

Despite no major storms during the 2006 hurricane season, many 

Florida homeowners have seen their insurance premiums double or 

triple during this past year. Earlier this month, one Florida insurance company won an arbitration case that will allow it to raise 

premiums on more than 22,000 customers by an average of 75.8 

percent. 

As anyone who has ever had a mortgage, knows, insurance is a 

requirement. And the payment of your insurance is non-negotiable. 

This has created a vicious cycle of terror for our seniors living on 

fixed incomes and our middle class families struggling to provide 

for their children. 

The toxic cocktail of rising gas prices, skyrocketing property 

taxes, and exorbitant homeowners’ insurance costs have created a 

situation for the first time in our State’s history where we have 

more people leaving Florida than coming. It is so acute that the 

real estate industry has a name for these people, ‘‘Half-backs.’’ 

They move to Florida from the north, and due to the out-of-control 

costs, they leave Florida, and move halfway back, to places like 

Georgia, Tennessee, and North Carolina. 

Madam Chairwoman, in fact, one in five businesses in Florida 

cannot get property insurance. In January, the Florida legislature 

passed legislation that was intended to provide consumers with 

rate cuts. Following the passage of this legislation, a Florida insurance commissioner estimated that the average rate cut for homeowners would be approximately 24 percent. 

However, according to one Florida newspaper, Florida’s biggest 

private insurers are asking for price cuts far less than State estimates. For example, State Farm, a Florida insurance company, requested a rate reduction plan that seeks to reduce the average premium in Florida by only 7 percent. Likewise, USAA’s requested 

plan would decrease premiums by a mere 3.1 percent. 

The situation is so severe that, in order to have insurance, the 

people of my State had to get into the business. Today, the State 

runs Citizens Insurance Company, the largest provider of homeowners’ insurance in the State. The solution to our insolvent insurance company was to make it more competitive, by offering fire and 

theft coverage, as well, clearly the best solution our elected leaders 

could find when the market failed. 

15

The affordability of property insurance is not the only obstacle 

facing my constituents. Millions of Florida’s hardworking families 

have paid their insurance premiums on time for years. And despite 

the increased cost. In addition, many of these families have never 

filed a claim on their policy. Insurance companies have rewarded 

these responsible homeowners not with rebates, but with non-renewal notices. 

Just a few weeks ago, Nationwide announced that it would continue with its earlier decision to non-renew policies in Florida. As 

a result, 25,000 Florida homeowners will be receiving notices that 

their policies will soon be canceled. The recent action by Nationwide, as well as similar decisions by their competitors, communicate that the market is broken, and that they are willing to be 

part of a solution. 

As these companies profit from the freedom, stability, and prosperity this Nation offers, I believe that the industry should consider its corporate responsibility, and join with Congress and the 

American homeowners in finding a solution to this crisis. 

Chairman Frank, at a press conference on this very subject, 

made the statement that, ‘‘The role of government is to step in 

when markets fail.’’ I am here, Madam Chairwoman, to testify that 

in my beloved State of Florida, the insurance industry is broken, 

and as a result, the State is facing an economic crisis. 

Floridians are giving up their American dream, and are being 

forced into foreclosure, or to make decisions not to take their prescription medicine, so that they can afford to pay their homeowners’ insurance. Or, they’re being forced to sell their homes in 

a depressed real estate market, and leave the State. 

It is clear that homeowners across the country need a national 

catastrophe insurance program. The program that we in Congress 

create must assist our private insurance industry, to help them 

manage risk. Nobody got into the homeowners’ insurance business 

thinking that they would ever need to underwrite the devastation 

of an Andrew or a Katrina. 

Secondly, the homeowner needs to be protected, as it relates to 

the availability of homeowners’ insurance. The policies they purchase must be comprehensive, eliminating the loophole between 

wind and water. 

Finally, responsible legislation must ensure people take responsibility for their decisions to live in high-risk areas. Good legislation 

should not give people and builders a blank check to ignore risk. 

Good legislation must provide homeowners and builders with incentives to mitigate risk by employing state-of-the-art technology. 

Again, I would like to thank Chairman Frank and Chairwoman 

Waters for their leadership on this issue, and I thank this committee for the opportunity to testify on behalf of the people of my 

State of Florida. 

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

55 of the appendix.] 

Chairwoman WATERS. Thank you, very much. 

The Honorable Ginny Brown-Waite. 

16

STATEMENT OF THE HONORABLE GINNY BROWN-WAITE, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF 

FLORIDA 

Ms. BROWN-WAITE. I thank the chairwoman for holding this 

hearing for and giving us the opportunity to present testimony. 

The insurance crisis that Florida and other coastal States are 

facing is imminent; and I am very grateful that this committee has 

taken an interest so early in the 110th Congress. 

I have been working on this issue with my colleagues for the past 

3 years, and while we have made some headway, the perception 

that natural disaster insurance availability and affordability is only 

a Florida problem could not be more wrong. 

While it is true that Florida is feeling the effects more acutely, 

lawmakers in Louisiana and Mississippi are having a hard time 

luring insurance companies back to their States. And consumers as 

far north as Massachusetts, Chairman Frank’s great State, a State 

that has not experienced significant natural disaster in a decade, 

are also losing their coverage. 

Congress cannot wait for the market to completely collapse before we decide to act. And I thank you for your leadership on this 

issue. 

I have introduced my bill, H.R. 91, the Homeowners Insurance 

Protection Act, and H.R. 330, the Homeowners Insurance Availability Act. I am also working with my colleagues Ron Klein, Tim 

Mahoney, Carolyn Maloney, and Vern Buchanan on a bipartisan 

solution to the property and casualty insurance crisis facing this 

Nation. 

Additionally, my counterparts in the Senate introduced a version 

of my bill. The proposals are simple and specific. Both of these bills 

create a Federal catastrophic fund to provide the stability needed 

in today’s market. 

The main reason that States are losing providers is the skyrocketing cost of reinsurance. Those representing the insurance industry will testify that they have plenty of capacity. But what they 

won’t tell you is that it is not affordable. In 2002, the cost of reinsurance accounted for 71 cents of every dollar a homeowner spent 

on insurance, and just 4 years later, in 2006, reinsurance accounted for 44.5 cents of every dollar homeowners’ spent. 

Madam Chairwoman, I ask for unanimous consent to submit this 

chart from the Florida office of insurance regulation, detailing the 

soaring cost of reinsurance. 

Chairwoman WATERS. Without objection, it is so ordered. 

Ms. BROWN-WAITE. I appreciate that. Until the market stabilizes, 

and reinsurers provide a product that is available and affordable, 

the Federal Government must have that role. 

Both of my bills accomplish just that. H.R. 330 would divide the 

Nation into 6 different regions, so the Federal Government could 

sell reinsurance policies to the insurers. This Federal fund would 

only be available if a 1-in-100-year event or higher occurred. And 

this reinsurance would be a fraction of the cost, potentially as low 

as a quarter of what the current industry costs are. 

H.R. 91 takes a different approach. The Federal Government 

would sell reinsurance policies directly to States, not private insurers, that have established State catastrophic funds. This approach 

17

is more comprehensive, and better for our Nation, because under 

this bill, States would have to take the responsibility for planning 

for natural disasters by enacting strong building codes and committing at least 35 percent of their State funds toward mitigation. 

Under H.R. 91, States would also have to establish a passthrough mechanism, so that any savings insurers realized from my 

bill are passed on to the consumers, as we all believe that they 

should be. 

H.R. 91 also establishes tax-deferred reserves for private insurers. These act as kind of a savings account for insurers to plan for 

future catastrophic disasters, instead of relying so heavily on expensive reinsurance from the private market. Insurers could not 

use them unless there is a 1-in-100-year event or higher. 

The role and responsibility of H.R. 91 is also considerably less 

than some of the other proposals that are before Congress. Under 

the bill, the Federal catastrophic fund could not be used unless a 

1-in-200-year event or higher occurred. Additionally, once the reinsurance fund is triggered, States must still pay 10 percent of the 

cost so that the Federal Government is never on the hook for the 

full cost of the natural disaster. 

In short, the bill offers a multi-layered approach to covering natural disasters. First, the primary insurers cover homeowner losses, 

and the States provide coverage. Then, finally, the Federal Government provides coverage, if need be. 

Many members representing non-coastal States have asked me 

why they should support a national catastrophic fund. These members and their constituents forget that they already are paying 

under the fragmented insurance system that we operate under 

today. Congress is the insurer of last resort, even today, as we 

found out in Katrina. 

Many of these projects are needed to help people rebuild their 

lives. Florida has even been a recipient of these funds from the 

Federal Government. But wouldn’t it be nice if Congress already 

had a fund, a reinsurance fund, filled with insurer premiums, not 

tax dollars, to pay for these resurrection projects? For the first 

time, Congress would be proactive, instead of reactive. How unique. 

Consider this. Since its enactment in 2001, not one dollar of the 

TRIA fund has been spent. Yet, insurers have allocated additional 

capacity to terrorism risk. Prices have declined, and purchase rates 

have increased. In 2003, only 27 percent of companies purchased 

terrorism reinsurance. In 2005, 58 percent purchased this insurance. Again, without one dollar of TRIA funds ever being spent. 

I don’t propose that my bills are the silver bullet, or the final answer. However, they are part of the solution. 

There is only one State in the Nation not susceptible to natural 

disasters, and that is North Dakota. Every other State in the union 

is prone to hurricanes, earthquakes, and tornadoes. Either Congress moves everyone to North Dakota, or we enact real, meaningful, proactive solutions to a crisis that affects this whole Nation. 

Let’s look at who supports the bill: Realtors, bankers, and certainly homeowners are very supportive of these concepts. 

Again, Madam Chairwoman, I thank you for your indulgence in 

holding this hearing, and for helping to shine the light on the need 

for this kind of Federal action. 

18

[The prepared statement of Ms. Brown-Waite can be found on 

page 48 of the appendix.] 

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

thank all of the members for their patience. I would like to thank 

you for your concern. I would like to thank you for having decided 

that you’re going to make this a priority on your legislative agenda. 

We are confronted with a serious problem in this country. We do 

need your effort to help us solve it. I have been in the Gulf, I don’t 

know how many times now. I have been with Mr. Taylor. I feel as 

if I know his district, his area very well, having gone there so many 

times. I know his passion for trying to help us come up with some 

answers, and I look forward to working with all of you. Thank you 

very much for being here today. 

With that, we will call our second panel: Commissioner Kevin M. 

McCarty, Office of Insurance Regulation, State of Florida, on behalf 

of The National Association of Insurance Commissioners; Mr. Andrew Valdivia, CPCU, ARM, president, White & Company Insurance, Incorporated, on behalf of The Independent Insurance Agents 

and Brokers of America, from California; Mr. Malcolm Bennett, 

president, International Realty and Investments, on behalf of The 

National Multi-Housing Council, not only from California, but from 

my district; Mr. Robert Porter, executive director, 

ProtectingAmerica.org; Mr. Gary Thomas, also from California, the 

Orange County area, broker/owner, Re/MAX Real Estate Services, 

on behalf of The National Association of Realtors; Ms. Ann 

Spragens, senior vice president, secretary, and general counsel, 

Property Casualty Insurers Association of America; Mr. Marc 

Racicot, president, American Insurance Association; and Mr. Frank 

Nutter, president, Reinsurance Association of America. Welcome. 

Without objection, your written statements will be made a part 

of the record. You will each be recognized for a 5-minute summary 

of your testimony. Let us begin with Commissioner Kevin M. 

McCarty, Office of Insurance Regulation, State of Florida. 

STATEMENT OF KEVIN M. McCARTY, OFFICE OF INSURANCE 

REGULATION, STATE OF FLORIDA, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

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

Ranking Member Biggert, and members of the subcommittee. 

Thank you very much for the opportunity to testify today on behalf 

of the National Association of Insurance Commissioners regarding 

this very significant issue of natural disasters, and the response of 

the Federal Government. 

I applaud your leadership on this very critical issue of national 

importance that is not only an insurance issue, but it is an economic recovery issue. My name is Kevin McCarty, and I am the insurance commissioner from the State of Florida. 

We have heard from a number of representatives from our State 

on some ideas on how to resuscitate the property market in our 

State. 

I also serve as a chairman of the National Association’s property 

and casualty insurance committee, as well as its committee on catastrophe insurance. Through these working groups, State insurance commissioners from around the country have been involved in 

19

research and analysis of the impact of natural disasters on our 

economy and society for the last 20 years. 

Insurance commissioners from across our country are working to 

find solutions to manage the catastrophic risk exposure to their respective States, exposure that, as we know, grows with increased 

real estate development, rising property values, and expanding 

commercial development in catastrophically-prone areas. 

The NAIC currently is engaged in developing a comprehensive 

national plan, discussing a structure for governance for a multistate plan for a multi-state catastrophe fund. 

In addition, the NAIC has adopted resolutions, both in December 

of 2005 and again in June of 2006, supporting a national disaster 

plan and calling for a Federal commission to further study the 

issues, weigh the alternatives, and focus this very important debate. 

We have a national problem that demands a comprehensive and 

rational national solution. Our current approach is not working. It 

is a post-event outpouring of Federal taxpayers’ money. As generous and compassionate as the American people are, the current 

system leaves much to be desired. For those who would argue that 

this is merely a coastal problem, I would point to the roughly $110 

billion in relief allocated following Hurricane Katrina. 

Attached to my testimony, Madam Chairwoman, is a State-byState breakdown of taxpayer dollars allocated for Katrina. From 

the great State of California, your State’s share, Madam Chairwoman, is $13 million. And yet, that money leaves no infrastructure or legacy behind to ensure that your constituents are taken 

care of when a catastrophe falls on the State of California. 

And, again, this is not a coastal problem. The Great Lakes and 

Plains States will contribute approximately $26 billion to Katrina 

relief. The NAIC believes that a more proactive system, which prepares the public and mitigates the potential for catastrophe damage, is more practical, less expensive, and better for all taxpayers, 

in the long run. 

Currently, the United States is the only industrialized nation in 

the world not to have a Federal catastrophe plan. A multi-layered 

approach, encouraging personal responsibility, maximizing the private sector, and a third layer of Federal participation with the government’s commitment to reinsure State entities, is the cap stone 

of our recovery. We will proactively help any catastrophic recovery, 

as well as provide stability in our housing market, by allowing 

State entities to diversify their risk. 

Accomplishing this goal is likely to lure additional private capital, which is a critical part of any economic solution, stimulating 

more availability, more competition, and ultimately, lower premiums for everyone. 

A key component of any comprehensive plan must emphasize 

mitigation efforts. From responsible land use plans that tell us 

where to build, better building codes that tell us how to build, and 

retrofitting programs that strengthen what we have already built, 

these programs may come with some up-front costs, but ultimately 

will save many dollars in investment. But, moreover, will save 

American lives. 

20

A comprehensive national strategy should also find ways to expand private capacity. Many non-U.S. insurers are able to deduct 

reserves from future catastrophe losses, tax free, which potentially 

gives them a competitive edge over U.S. counterparts. The inability 

to build catastrophe reserve forces insurers to prepare financially, 

as if they were going to have a major storm in multiple locations 

every year. 

Given the variety and complexity of these concepts under consideration, the NAIC strongly endorses the concept of a national commission to weigh the merits of each of these plans, and the best 

mix of solutions. And whatever we come up with must be answered 

in the context of, ‘‘Will this make insurance more available and affordable?’’ 

Thank you, Madam Chairwoman. 

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

68 of the appendix.] 

Chairwoman WATERS. Thank you, very much. 

Mr. Andrew Valdivia. 

STATEMENT OF ANDREW VALDIVIA, CPCU, ARM, PRESIDENT, 

WHITE & COMPANY INSURANCE INC., ON BEHALF OF THE 

INDEPENDENT INSURANCE AGENTS AND BROKERS OF 

AMERICA 

Mr. VALDIVIA. Good afternoon, Chairwoman Waters, Ranking 

Member Biggert, and members of the committee. My name is Andrew Valdivia, and I am pleased to be here today on behalf of the 

Independent Insurance Agents and Brokers of America, also known 

as the ‘‘Big I.’’ 

I currently serve as the California State and national director for 

the Big I. I am also president of White & Company Insurance, Inc., 

in Santa Monica, California, a full-service agency that serves clients in Santa Monica and the surrounding area, with both commercial and personal insurance. 

As a Californian, and as your constituent, I first would like to 

thank you, Madam Chairwoman, for holding this important hearing on an issue that has not only impacted Californians, but millions of Americans in communities across the country. 

Our members approach the issue of natural disaster insurance 

from a very simple perspective. We are here to serve the consumers’ needs, whether it is helping them secure coverage to protect their families and their homes prior to an event, or assisting 

consumers after an event, to ensure that claims are paid quickly 

and fully. 

The Big I strongly believes that our industry must come together 

with policymakers to find a national solution that will encourage 

and ensure participation in at-risk markets. We welcome all reasonable ideas that lead us to a healthy and competitive insurance 

marketplace. 

The Big I believes that the private market cannot handle, and 

is not handling, catastrophic risks. Private market coverage is 

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

an availability problem, rather than simply an affordability problem. Many insurers have either stopped writing new business in, 

or withdrawn completely from at-risk markets. The natural disVerDate 0ct 09 2002 16:31 Jul 16, 2007 Jkt 035411 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\35411.TXT HFIN PsN: TERRIE
21

aster insurance crisis currently threatening the marketplace is not 

an insurance company issue. It is a consumer issue. 

As the conduit between the insurance companies and the consumers, the Big I recently joined the Natural Catastrophe Policy 

Holders Coalition, as an ex-officio member. The coalition is an alliance of policyholders who have joined together to address issues related to the availability and affordability of catastrophe insurance. 

In fact, we are working with two other witnesses here today, the 

National Multi-Housing Council, and the Realtors, as part of this 

coalition. 

I would particularly like to stress that this is not simply a Gulf 

Coast problem. It is a national problem. Whether it’s hurricanes on 

the Gulf Coast, tornadoes in the Midwest, or earthquakes in California, we all face some risk of natural disaster. 

In California, we are particularly susceptible to the earthquake 

risk. In fact, AIR Worldwide estimates that if there were a 7.9 

magnitude quake in San Francisco, the losses could top $100 billion. To put that into perspective, the insured losses from Hurricane Katrina, the costliest natural disaster on record, were just 

over $40 billion. 

California did try to proactively deal with this risk by creating 

the California Earthquake Authority, or CEA, whose goal is to provide a basic level of residential earthquake coverage to Californians. Despite CEA’s existence, only 12 percent of Californians 

have residential earthquake insurance. 

The commercial earthquake market in California is equally precarious. While the CEA offers some earthquake protection for the 

residential market, it does not offer policies to the commercial market. The primary source of commercial earthquake coverage is the 

non-admitted market, which is under strain, as a number of commercial policyholders in California are unable to secure coverage at 

reasonable prices. 

Put simply, insuring against natural disasters is a national problem that requires a national solution. Only a program that is national in scope will be able to generate enough capacity to cover the 

most devastating events. The Big I believes the best solution is for 

a Federal role to be in place before the events happen, to have a 

mechanism that encourages the private sector to handle as much 

risk as possible, and to only trigger Federal involvement as a last 

resort upon private market failure. 

Specifically, the Big I supports a Federal catastrophe reinsurance 

program. We are also open to a number of potential solutions with 

limited Federal involvement, including insurer tax-free reserving, 

and catastrophe savings accounts, among others. 

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

whether it is through mitigation, enhanced building codes, or financial incentives to mitigate risk. While it may be a difficult task, we 

believe that any solution will likely need to be comprehensive in its 

approach. 

We also urge you to consider legislation introduced that would 

establish a national commission to study the issue, and recommend 

solutions. A good commission could develop a comprehensive approach, and provide momentum that may be necessary for a legislative solution. 

22

In conclusion, we commend you, Madam Chairwoman, for convening today’s hearing. Achieving consensus within the insurance 

industry for a solution to this growing problem has been elusive. 

But we hope your continued focus on this issue will encourage the 

private and public sector to develop new and innovative solutions. 

We stand ready to assist your efforts in any way we can. 

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

130 of the appendix.] 

Mr. GREEN. [presiding] We thank you for staying within the allotted amount of time. And Mr. Bennett, you will now be recognized for 5 minutes. 

STATEMENT OF MALCOLM N. BENNETT, PRESIDENT, INTERNATIONAL REALTY & INVESTMENTS, ON BEHALF OF THE 

NATIONAL MULTI-HOUSING COUNCIL AND THE NATIONAL 

APARTMENT ASSOCIATION 

Mr. BENNETT. Thank you, and good afternoon, Chairwoman Waters, Ranking Member Biggert, and distinguished members of the 

subcommittee. My name is Malcolm Bennett, and I am the founder 

and president of International Realty & Investment, a firm that 

specializes in property management and real estate sales and investment in Los Angeles, California. 

I am here today representing two trade organizations: The National Multi-Housing Council, and The National Apartment Association. With their combined membership, they represent owners, 

development, managers, and builders of residential properties. 

We would like to commend you, Madam Chairwoman, for holding 

this meeting today, and say that our members are extremely concerned about the future stability of the insurer’s market being able 

to withstand continued catastrophic events, be they disaster or terrorism. As property owners, we are looking for some assurance that 

there is some insurance available now and in the future, that is not 

only available, but is affordable. 

As a California multi-family property owner and manager, I find 

it increasingly difficult to be able to still deliver affordable housing 

with the unpredicted rising cost of natural and disaster insurance 

costs. My industry colleagues have national property portfolios that 

include the Gulf Coast and the East Coast, and they are continuing 

to have enormous problems in attaining coverage since the 2005 

hurricane seasons. 

As Congress continues to explore ways to address this critical 

issue, we welcome the opportunity to participate in this discussion. 

We strongly feel that any Federal initiative should include relief for 

the commercial real estate sector, as well as the residential. Previous policy debates focused primarily on homeowners coverage, 

not realizing the very important part that the industrial and commercial plays in this. 

As you know, Katrina had a devastating impact on the property 

insurance market across the States. California felt the rippling effect with skyrocketing premiums, reduced limits, and a higher deductible for earthquake insurance. While most of the attention was 

focused on the wind storm coverage in the Gulf Coast States, it is 

important to understand that the risk pool includes earthquakes, 

23

tornadoes, hurricanes as well, so California property owners and 

others in the Gulf Coast were impacted by this, as well. 

As an industry, we expected rising premiums as a result of the 

2005 hurricanes, but they far exceeded our worst case expectations. 

Property owners with catastrophic exposure such as wind and 

earthquake reported significant costs ranging anywhere from 100 

to 400 percent increases in their policies. 

My real estate portfolio is limited to California, where earthquake premiums present the biggest challenge to property owners. 

After the 1994 earthquake, the insurance industry acted the same 

way it did after 9/11 and Katrina, which resulted in increasing 

pricing and limiting availability. 

Even though I live in California, we do have the California 

Earthquake Authority, as was previously mentioned, but multifamily is excluded from that. I have no choice in purchasing earthquake insurance; it’s just unaffordable. The only way I would possibly be able to afford it would be to pass the cost on to the residents, but in most areas in Los Angeles, rent control would bar us 

from being able to do this. 

Large and new apartment owners managing national portfolios 

face the same challenge that we have. It’s not uncommon for owners of low-income housing tax credit properties not to purchase 

earthquake insurance unless mandated by their lender, because 

unlike market rents, these properties offer no rent adjustment, and 

no option to offset the costs, because those rents are based on 

household levels. 

The uninsured properties then remain at risk, leaving the owners and lenders exposed. It’s really not clear if the government solution exists at this time for this crisis, or if one will come from 

the private market. 

But what we do know is that continued occurrence of catastrophic events, whether they’re natural disasters or terrorism, will 

result in significant cost and impact to our Nation. We realize that 

the solution will not be an easy one to identify, and no one size fits 

all. 

On behalf of The National Multi-Housing Council and The National Apartments Association, we hope to work with Congress to 

identify and support a viable legislative initiative that will offer 

long-term stability for the insurance market, and we have certainly 

joined with other stakeholders in this. 

I would like to thank you for the time to present the views on 

the multi-family industry, and thank you very much. 

[The prepared statement of Mr. Bennett can be found on page 62 

of the appendix.] 

Chairwoman WATERS. Thank you, very much. 

Mr. Robert Porter. 

STATEMENT OF ROBERT W. PORTER, EXECUTIVE DIRECTOR, 

PROTECTINGAMERICA.ORG 

Mr. PORTER. Thank you, Madam Chairwoman, Ranking Member 

Biggert, and members of the subcommittee. My name is Bob Porter, and I am the executive director of ProtectingAmerica.org. I appreciate the opportunity to appear before you today. 

24

ProtectingAmerica.org is a nonprofit organization committed to 

finding better ways to prepare and protect American families from 

the devastation caused by natural catastrophes. Our organization 

was formed in the summer of 2005, right before the onslaught of 

Hurricanes Katrina, Rita, and Wilma, and is chaired by James Lee 

Witt, former Director of FEMA, and Admiral James Loy, former 

Deputy Secretary of Homeland Security, and former commandant 

of the U.S. Coast Guard. 

ProtectingAmerica.org’s more than 200 members from some 27 

States include the American Red Cross, and other first responders, 

emergency management officials, insurers, municipalities, small 

businesses, and Fortune 100 companies, along with thousands of 

private citizens. 

We support the creation of a comprehensive national catastrophe 

management solution that protects homes and property at a lower 

cost, improves preparedness, and reduces the financial burden on 

consumers and taxpayers, all in an effort to speed recovery, protect 

property, save money, and save lives. 

The simple fact is that catastrophe can and does occur virtually 

anywhere in the country. The unfortunate reality is that tens of 

thousands of our fellow citizens are not able to pick up their lives 

where they left off before these catastrophes occurred. Every national and international forecasting agency has predicted that the 

worst of these storms is yet to come. 

Max Mayfield, the recently retired director of the National Hurricane Center, has said that he wished Katrina was the worst storm 

he would ever see in his lifetime. Current and projected climate 

signals indicate that U.S. hurricane activity this year will be 75 

percent above the 1950 to 2006 average. 

Notwithstanding the well-documented problems with the response to Katrina, when catastrophe strikes, Americans have historically done a remarkable job of coming to the aid of those in 

need. All Americans owe our first responders an enormous debt of 

gratitude and thanks. 

While little can be done to completely eliminate the actual catastrophe, we must break the cycle of build, destroy, and build again 

in the same way and in the same place. ProtectingAmerica.org believes that we should reduce the enormous taxpayer subsidy of recovery efforts that currently exist. Taxpayers from Maine to Montana are already paying for the Nation’s natural catastrophe response. We believe that the time has come for a better solution. 

Our solution would include privately financed State catastrophe 

funds to provide more protection at a lower cost to consumers. 

These State-level CAT funds would serve as a backstop to the private insurance and reinsurance markets, and would generate investment earnings that, in addition to helping pay claims, would be 

used for mitigation, prevention, preparation, and first responder 

programs. 

We also support the creation of a national catastrophe fund that 

would serve as a backstop to participating State funds in the event 

of a mega-catastrophe, such as another Katrina, or a North Ridge 

earthquake. 

These State catastrophe funds would be financed through mandatory contributions by insurance companies in each participating 

25

State, in an amount that reflects the risks of the policies. Actuarially sound premiums, not tax dollars, would support these funds. 

Qualified State funds would be required to set aside a minimum of 

$10 million, up to a maximum of 35 percent of investment income 

for first responders and prevention and mitigation programs. 

Qualified State funds would be able to purchase reinsurance 

from the national backstop program. Rates for this coverage would, 

again, be actuarially based, and would only be available to qualified State programs that have established prevention and mitigation funding. 

How would this all work? In the event of a major catastrophe, 

private insurers would be required to meet all of their obligations 

to their policyholders. Should catastrophic losses exceed those obligations, the State CAP fund would kick in. In the event of an extraordinary catastrophe, the national backstop program would provide benefits to the State, and help pay remaining claims. 

Because this is an opt-in State-by-State program based entirely 

on risk, the likelihood of a taxpayer subsidy is virtually eliminated. 

This approach requires pre-event funding, and relies on private dollars from insurance companies and States most exposed to catastrophe. 

Madam Chairwoman, all of the elements I have mentioned are 

contained in legislation currently pending before the Congress. 

These bills have strong bipartisan support, and the support of 

members from across the Nation. That support, and your hearing 

today, is indicative of renewed concern in Congress that protection 

and preparation for massive natural catastrophe must be a national priority. 

Our organization commends you and Chairman Frank for making this national priority a priority of this committee. Thank you. 

[The prepared statement of Mr. Porter can be found on page 99 

of the appendix.] 

Chairwoman WATERS. Thank you, very much. Now we will hear 

from Mr. Thomas, Mr. Gary Thomas. 

STATEMENT OF GARY THOMAS, BROKER/OWNER, RE/MAX 

REAL ESTATE SERVICES, ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS 

Mr. THOMAS. Thank you, Chairwoman Waters, Ranking Member 

Biggert, and members of the subcommittee, for inviting me to testify here today before the Subcommittee on Housing and Community Opportunity, and present the views of the National Association 

of Realtors, NAR, on the issue of natural disaster insurance. 

My name is Gary Thomas, and I am a Realtor from Aliso Viejo, 

California, where I am CEO of RE/MAX Real Estate Services, one 

of the six largest RE/MAX brokerages in the Nation. 

In 2001, I had the honor of serving as the president of the California Association of Realtors. Currently, I serve as chairman of 

Real Estate Business Services, a subsidiary of the California Association, and as liaison to NAR’s public and Federal issues group. 

NAR is the largest trade association, representing more than 1.3 

million members, involved in all aspects of the residential and commercial real estate industries. 

26

The catastrophic events of 2004 and 2005 has shown the need for 

a comprehensive, forward-looking natural disaster policy. NAR believes that any real solution to the insurance problems now facing 

this country must go beyond a discussion of natural disaster insurance, and include a comprehensive natural disaster policy that addresses, but is not limited to, insurance availability and affordability. 

Such a policy should take into account the responsibilities of 

multiple actors, including property owners, insurance companies, 

and each of the different levels of government in preparing and 

paying for future catastrophic events. My testimony today offers 

suggestions for what Realtors believe must be included in a comprehensive natural disaster policy. 

The availability and affordability of property insurance is, at its 

core, a consumer issue. The importance of available and affordable 

insurance to homeowners, commercial property owners, and those 

who would like to own their own home or place of business, cannot 

be overstated. This is something that your constituents, Madam 

Chairwoman, have long understood in California, since we have 

dealt with problems of insurance availability and affordability numerous times, most recently after the North Ridge earthquake. 

The inability to obtain affordable insurance is a serious threat to 

the residential real estate market, impacting not only single family 

detached homes, but condominiums, cooperatives, and rental units, 

as well. Homeowners’ insurance is a necessary component in securing a mortgage and buying and selling a home. 

NAR believes that people who bear the risk should pay a fair 

share, by obtaining and maintaining adequate insurance coverage. 

However, if insurance is not available or affordable, many make 

the unfortunate, but understandable, decision to purchase only the 

minimal amount of, or type of, insurance required. This is precisely 

the decision made by many Californians—buying the required 

property casualty coverage, but forgoing earthquake insurance, due 

to its high cost. 

The problem with this rational economic decision is that if the 

big one hits, and people are not insured for that type of catastrophe, then every American taxpayer will pay. 

Property owners should have confidence that their homes and 

businesses will survive future catastrophic events. Appropriate 

mitigation measures can help to create that confidence. Federal 

and State governments can provide incentives to property owners 

to undertake appropriate mitigation measures for their homes and 

businesses. Research shows that every dollar spent on mitigation 

saves society an average of $4. 

NAR believes that States are the appropriate regulators of property insurance markets. However, there may be a role for the Federal Government to intervene in insurance markets to prevent 

market disruption and insolvencies. The level of intervention, however, must be set at a level that will not interfere with the normal 

market forces. 

Finally, an essential part of a comprehensive natural disaster 

policy is a recognition of the basic responsibility of government, at 

all levels, to build and maintain infrastructure. The failure of the 

27

levees protecting New Orleans during Hurricane Katrina contributed significantly to the loss of life and property from that storm. 

According to USA Today, the Army Corps of Engineers has identified 146 levees nationwide—including 42 in California—that pose 

an unacceptable risk of failing in a major flood. Moving forward, 

we believe that all levels of government must do a better job of 

shouldering their respective responsibilities. 

We stand ready to work with you, Chairwoman Waters, the Committee on Financial Services, and others in Congress, to develop a 

responsible natural disaster policy that addresses the needs of consumers, the economy, and the Nation. 

NAR is working with others, including two organizations represented here today, The National Multi-Housing Council, and The 

Independent Insurance Agents and Brokers of America, as members of The National Catastrophe Policy Holders Coalition. NAR 

will continue to work with these and other organizations to help 

develop and advocate for a comprehensive solution. 

And I thank you very much for inviting me to speak. 

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

119 of the appendix.] 

Chairwoman WATERS. Thank you, very much. 

Ms. Ann Spragens. Thank you, very much. 

STATEMENT OF ANN W. SPRAGENS, SENIOR VICE PRESIDENT, 

SECRETARY, AND GENERAL COUNSEL, PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA 

Ms. SPRAGENS. Thank you, very much. My name is Ann 

Spragens, and I am senior vice president, secretary, and general 

counsel of the Property Casualty Insurers Association of America, 

or PCI. 

PCI is a trade association representing over 1,000 property casualty insurers that write almost 40 percent of the homeowners insurance, and 40 percent of the commercial property insurance sold 

in the United States. Thank you for the opportunity to appear before you today. 

Insurers, regulators, and consumers all want the same thing: a 

healthy and competitive insurance market in which consumers can 

choose a variety of coverage options from a variety of financially secure insurers. PCI is a strong believer in the power of markets to 

solve most problems, but at the same time we believe there are 

some risks in some areas that market solutions alone may not have 

the tools to address. 

These are the mega-catastrophic risks that if not addressed can 

undermine the economies in these critical areas of the country, and 

insurers need to work with State and Federal policymakers to develop innovative solutions that promote increased insurance availability and responsible economic development. 

PCI wants to work with State and Federal legislators to develop 

and implement viable, long-term solutions that create insurance 

markets that consumers, companies, and public policymakers can 

rely on. 

We think that the best way to accomplish this is to design solutions that meet the unique needs of consumers in each State. The 

solution to market disruptions in Louisiana, South Carolina, or 

28

Massachusetts will look much different from those crafted by Florida legislators, because local conditions are different. That’s why 

we favor a State-by-State approach backed up, at a very high level, 

by a Federal liquidity protection. 

We believe that the Federal Government can play an important 

role in stabilizing certain markets against the risk of mega-catastrophes by providing high-level Federal liquidity support for responsibly-managed State funds. 

Given the very serious catastrophe lessons we have seen over the 

last several years, and the significance of this issue for our membership, our organization has devoted considerable time and effort 

to developing a range of sound public policy solutions, including 

market reforms, stronger loss reduction and prevention, and new 

approaches to financing catastrophic risk. 

PCI suggests several major areas for consideration. First, we 

need to do more to control and reduce catastrophe exposure, including: State and local governments updating their building codes in 

catastrophe-prone areas; the establishment of Federal incentives 

for greater investment in loss reduction and prevention; responsible 

restriction of development in catastrophe-prone areas; and taking 

greater steps toward preparedness. 

Second, we believe Congress should complete its efforts to reform 

the National Flood Insurance Program, and we support your bill, 

Mrs. Biggert. We would like to work with you to smooth out some 

of the administrative concerns to make that a really good solution. 

Third, we must expand private sector capacity to handle the risk, 

and the best way to accomplish this is for State legislators to give 

insurance markets greater freedom to respond to the exposures we 

face. As many have said, it is very important to attract the industry. 

We also encourage a review of two additional proposals. First, we 

endorse establishing voluntary tax-deferred catastrophe reserves, 

such as H.R. 164 proposes, introduced by Representative Jindal. 

While there are provisions in this bill PCI believes should be modified, we urge your review and debate of this bill, as well. And we 

believe Americans would be very surprised to find out insurers 

didn’t have the accounting mechanism necessary to do what that 

bill would propose. 

Second, we will be examining specific steps that might be taken 

to remove regulatory legal accounting or tax barriers to further 

growth of the catastrophe bond market, an alternative funding 

mechanism. 

And, finally, with regard to government involvement, as I mentioned in my introductory remarks, PCI believes that there is a 

role, properly structured, for the Federal Government to play in assisting the financing of mega-catastrophe risk, and we believe it 

should be given serious consideration by Congress. 

We believe the growth in natural catastrophe exposure is of sufficient magnitude in some States that they may need to consider a 

State natural catastrophe funding facility. Recent events show that 

the industry can respond to very severe catastrophe events, but private markets may not always have the capacity to fund increasingly more frequent exposure to mega-catastrophes, or to a series 

of very large events in a single season. 

29

PCI believes, for example, that the Florida Hurricane Catastrophe Fund provides the basis for ongoing improvement in regard 

to that program. 

Where major catastrophes exceed the limits of the market and 

State catastrophe funds, it may be necessary for the Federal Government to offer liquidity protection to State catastrophe funds at 

a very high level, so as to maintain stable markets and avoid widespread insurer insolvencies, and assure stable and healthy markets. 

Again, let me thank you on behalf of PCI and its members for 

this opportunity to respond to your questions and provide you with 

our input on possible solutions. We commend Congress for its leadership on this issue, and pledge to work with you to address an 

issue that is so critical to Americans and our Nation’s economy, because we believe that any solution is between government efforts 

and free markets for stronger homes and safer families. Thank you. 

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

111 of the appendix.] 

Chairwoman WATERS. Thank you, very much. Mr. Marc Racicot? 

Correct me if I did not pronounce it correctly. 

STATEMENT OF MARC RACICOT, PRESIDENT, AMERICAN 

INSURANCE ASSOCIATION 

Mr. RACICOT. I think that’s close enough, Madam Chairwoman. 

It has been a lifelong problem. I don’t think it will be corrected this 

afternoon, but thank you for being so thoughtful. 

Good afternoon, and thank you for the opportunity to appear before you. I am Marc Racicot, president of the American Insurance 

Association, and I do genuinely appreciate the opportunity to testify this afternoon. 

Hurricane Katrina focused renewed attention on the role of the 

private sector insurance industry in managing natural catastrophe 

risk, undoubtedly. Fortunately, in our view, the insurance industry 

is well-positioned to do that. To do so, however, insurers must be 

allowed to measure, reduce, and fund these exposures. By contrast, 

quasi-governmental CAT funds, or Draconian regulatory restrictions and new legal liabilities not only fail to address the true problem, they also threaten the viability of our Nation’s private insurance mechanism. 

In responding to Hurricane Katrina, the insurance industry performed extremely well under very difficult circumstances. To date, 

claims payments have totaled about $40 billion. More than 95 percent of the claims have been successfully resolved. Yet, in spite of 

the fact that less than 1 percent of homeowners’ claims across the 

Gulf have resulted in lawsuits, it is those claims that have received 

most of the attention. 

As a Nation, we must make sure that we are prepared for, and 

can respond quickly to, future catastrophes. Insurers are fully committed to working with local, State, and Federal policymakers to 

assure that this happens. I have testified before this committee on 

two other occasions and have recently shared our perspectives with 

the southern governors at their meeting in Washington last month. 

Each time I have had the chance to talk with policymakers, I have 

strongly urged them to act carefully. 

30

Thankfully, last year’s hurricane season was remarkably mild, 

but hurricane experts are calling for another active season in 2007, 

and each day more and more people populate our Nation’s most 

vulnerable coastal communities. I am here today to, again, urge appropriate scrutiny, but also appropriate care. 

As this committee sorts through the various Federal legislative 

proposals that have been introduced into this Congress, the reality 

is that there are no quick fixes or easy answers. Moreover, punitive 

measures directed at insurers, including recently introduced bills to 

repeal the McCarran-Ferguson anti-trust provision, are wholly unrelated to the issue at hand. They will do nothing to improve the 

availability or affordability of coastal insurance. In fact, the cruel 

irony is that they will have a serious and detrimental effect on the 

very markets that they purport to assist. 

The reform agenda we have developed discards the path of least 

resistance and instead relies upon sound financial capital market 

and environmental principles. It consists of four major components: 

mitigation and land use planning; regulatory and legal reforms; tax 

incentives; and National Flood Insurance Program reforms. 

We are also working to identify other measures that could be put 

in place to address concerns expressed about the availability and 

affordability of natural catastrophe insurance. These measures 

would be designed to preserve the essential role that the private 

insurance sector plays in response and recovery, while at the same 

time recognizing the post-Katrina challenges that are still facing 

many coastal communities. 

As this committee is well aware, several bills have been introduced this year to address different aspects of the natural catastrophe issue, and I would like to offer just a couple of comments. 

First, on the Homeowners Insurance Protection Act, it would create a Federal reinsurance mechanism to encourage States to establish CAT funds, based on the premise that large-scale natural catastrophes are uninsurable by the private sector. 

We respectfully, but strongly, disagree with that premise. Even 

after Hurricane Katrina, private sector capacity for natural disasters has grown. Ironically, the single greatest threat to private sector risk transfer is not the force of hurricane winds, but legislation 

and regulations that displace available private capital, or make it 

economically unfeasible for private companies to operate in coastal 

markets. 

Despite the seeming promise of short-term relief, CAT funds are 

no panacea for natural catastrophe risk, and they can lead to 

generational inequities among policyholders on fair, geographic, 

and cross-sectional subsidization, and increased building in catastrophe-prone regions. They have all the wrong incentives. 

The Multiple Peril Insurance Act of 2007 would expand the coverage offered by the deficit-laden NFIP from flood-only policies to 

policies that include flood and wind coverage. While the bill promotes the concept of risk-based pricing and local government mitigation, concepts that we clearly support, it displaces available private market financial capacity and claims handling capabilities and 

expands, rather than fixes, an already costly Federal program. 

31

As an alternative, we believe there are better ways to resolve disputes among wind versus water claims, and we would be happy to 

explore them with the committee. 

Finally, Madam Chairwoman, and members of the committee, 

unquestionably, these are tough and complex issues. The private 

property casualty insurance mechanism, the system we have in 

place, like any human enterprise, is not perfect. It is not without 

blemish. But it has been in place since the Civil War, and it takes 

good care of millions of Americans, and pays out about $250 billion 

a year. 

The last thing we want to do—or any government can afford, for 

that matter, in the name of reform—is to irreparably compromise 

the capacity of the industry to continue doing just that. Thank you 

very kindly. 

[The prepared statement of Mr. Racicot can be found on page 105 

of the appendix.] 

Chairwoman WATERS. Thank you, very much. 

Mr. Frank Nutter. 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA 

Mr. NUTTER. Madam Chairwoman, Ranking Member Biggert, 

and members of the committee, I am Frank Nutter, president of 

the Reinsurance Association of America. The RAA is a national 

trade association representing property casualty organizations that 

specialize in assuming reinsurance. 

Reinsurance is commonly referred to as the insurance of insurance companies, and one of the most common purposes for utilizing 

reinsurance is for a primary insurance company to transfer the risk 

of losses for catastrophic events. 

Clearly, any debate about whether there should be a Federal catastrophe fund should include an analysis of the private reinsurance market to provide catastrophe capacity as well as the capacity 

of insurers to underwrite and retain this risk. Global reinsurers 

view U.S. catastrophe risk as an essential component of their diverse assumed risk portfolios. That important role is best demonstrated by looking at the 2004 and 2005 hurricane seasons. 

In 2004, 4 hurricanes that hit Florida resulted in $30 billion in 

insured damage. While reinsurers have no direct relationship to insurance consumers, the global reinsurance industry paid approximately one-third of these losses to the insurance companies that 

did have losses from insurance consumers. 

The hurricane season of 2005 was a year of unprecedented losses. 

Katrina, Rita, and Wilma produced losses estimated to be as high 

as $60- to $65 billion. The reinsurance industry ultimately will pay 

approximately one-half of all of these losses. 

In what some may see as a counterintuitive measure, the capital 

markets have actually greatly enhanced reinsurance capacity following Hurricane Katrina. As they did in 1993 after Hurricane Andrew, and in 2002 after the terrorism losses of 9/11, the capital 

markets promptly provided reinsurance capital and capacity. Since 

the fall of 2005, approximately $32 billion in new capital has been 

raised and committed to reinsurance markets. The private reinsurVerDate 0ct 09 2002 16:31 Jul 16, 2007 Jkt 035411 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\35411.TXT HFIN PsN: TERRIE
32

ance market is financially strong and diverse, and reinsurance capacity is adequate, even for most peak catastrophe markets. 

The RAA believes that natural catastrophe risks are insurable in 

the private insurance and reinsurance markets, and that State catastrophe funds significantly displace the private market. They are 

not a long-term solution. 

The model of the Florida catastrophe fund is one that offers insurers inexpensive reinsurance premiums up front, because it is 

back-loaded. When a hurricane occurs that requires the Florida 

CAT fund to pay losses in excess of its cash balance, as in 2004 

and 2005, the CAT fund in Florida issues bonds. The bond debt is 

not paid by insurance companies who receive the cheap reinsurance 

up front, it is paid by assessing and taxing Florida policyholders of 

other lines of insurance. 

In essence, the Florida CAT fund, which only covers residential 

exposures, has disintermediated the reinsurance market, and in its 

place, put the insured public, commercial, and residential. The 

irony of Florida is that the people who vilified insurers in 2005 and 

2006, together with other policyholders, are now their reinsurers. 

State catastrophe funds also violate one of the fundamental tenants of insurance, and that is risk spreading among various risk 

bearers. Private insurance and reinsurance, however, spread the 

risk globally. State funds do not reduce the vulnerability of people 

to natural catastrophes. Rather, they are cost-shifting mechanisms. 

There is no free lunch; someone will have to pay for these losses. 

We do not believe that the creation of a Federal reinsurance program solves a homeowner’s insurance availability problem. We believe that policymakers should remove regulatory constraints from 

the private insurers market’s ability to willingly insure risk. If policymakers follow competitive free market principles, a Federal natural disaster reinsurance fund is unnecessary. 

With respect to a Federal fund, I would offer the following 

thoughts. First, the idea of a Federal fund has been debated for 

many years. Unfortunately, many of those proposals are often with 

very low attachment, or trigger points, and by doing so, these will 

compete with the private reinsurance market which is providing 

capacity. 

Second, there is no assurance that a Federal reinsurance program will result in more availability of homeowners insurance. 

Third, a Federal fund that sells reinsurance to State catastrophe 

funds concentrates all of the risk associated with natural catastrophes in government programs. A private market diversifies this 

risk, spreading it globally. 

Some have suggested that a Federal program is appropriate, because we are all paying for disaster recovery now, implying that 

Federal taxpayers are on the hook for disaster losses. While natural disasters do occur in all States, except, apparently, North Dakota, most are modest potential costs, compared with a few other 

regions; 97 percent of all earthquake insured losses have occurred 

in California, and since 1900, 75 percent of all hurricane losses 

have occurred in Florida, Louisiana, and Texas. 

The natural disaster related losses in other States are paid for 

by insurers in those States, based upon risk premiums. Federal disaster assistance primarily applies to immediate and temporary 

33

shelter and food, infrastructure repairs, and emergency response. 

These losses would not be covered by a Federal reinsurance program, therefore, it would be expected that taxpayers would continue to support them. 

As others, we too look forward to working with the committee on 

any solutions that are put forward, and appreciate the opportunity 

to testify. 

[The prepared statement of Mr. Nutter can be found on page 86 

of the appendix.] 

Chairwoman WATERS. Thank you, very much. I appreciate all of 

the panelists who are here today, testifying before this subcommittee to help us better understand and get a handle on a public policy approach for dealing with what is a serious problem in 

this country. 

I want to make sure that I understand the industry as well as 

I possibly can, so I am going to address one or two questions to Ms. 

Spragens, Mr. Nutter, and Mr. R-a-c-i-c-o-t. 

[Laughter] 

Chairwoman WATERS. On the one hand, we have insurance companies that are saying, ‘‘I’m leaving.’’ Allstate and State Farm, I 

think, in the Gulf region, said that they were going to leave, that 

they could not be responsible, and bear the kind of risk that they 

were confronted with, and could be confronted with, possibly, in the 

future. We have ideas that are emerging about government reinsurance involvement. 

We also hear that the property casualty insurers are making a 

profit. So how do we reconcile all of this? Why, then, if private reinsurance is so good, why can’t it reduce the costs more? And if they 

can’t, why shouldn’t the government get involved to see if they 

can’t drive those costs down? 

Mr. RACICOT. Madam Chairwoman, I am assuming you are addressing that question to me, or multiple questions to me. 

Chairwoman WATERS. Yes. 

Mr. RACICOT. All of which I think are very relevant questions, 

and good questions. 

Let me start with the last question, first, and that is concerning 

industry profits, and place it in the proper perspective. I urge you 

to remember that, in fact, property casualty companies are responsible for claims that sometimes have tails as long as 20 years or 

longer, number one. Number two, out of the last 20 years, only 2 

out of those 20 years have the property casualty companies of this 

country experienced an underwriting profit. And number three, in 

2005, the claims in Louisiana alone wiped out 25 years of homeowners premiums in the State of Louisiana. 

So, we need to place those figures in the proper perspective. Because what happens is that they have to have capital available to 

address claims with long tails. They also have to make certain that 

they can expand in other areas and offer new products. They have 

shareholders, of course, that they have to address. And so, at the 

end of the day, that’s the right context. 

When you’re talking about some of the insurance companies 

that—and I don’t have the inside information to be able to represent their position precisely—but my understanding from public 

accounts is that they have decided not to write new business in 

34

those particular areas that you were referring to, and that they 

have a great deal of capital. 

I know our companies have a great deal of capital still down in 

the Gulf, but it doesn’t go as far, and it doesn’t go as far because 

the models have changed. With the frequency of hurricanes, you 

have to build that into the modeling, actuarially, to determine what 

is an appropriate premium. So as a consequence of that, you have 

to be very careful. 

The regulatory climate and environment is very difficult and oppressive. If you think about it for just a moment, what kinds of signals are being sent to insurers to try and entice them into some 

of the Gulf States? The attornies general bring suits, contracts are 

abrogated, and there are suspensions of the capacity to have any 

regulatory freedom. If you’re in the State on a given day, you may 

be commanded to be there for some significant period of time beyond your voluntary choice. 

Those signals, just like they would send a signal to Home Depot, 

or the mortgage bankers, or to real estate people, or anybody else, 

are disincentives for those who would like to come back into a 

State, because they are fearful that they will not be able to do business. 

So that, I think, describes the present existing situation. It’s not 

that there is not capacity, as Mr. Nutter has indicated. It’s just 

that you cannot charge a premium that is risk-based, based on 

cost. And, secondly, the environment is so hostile and so difficult 

to do business in, that sometimes even though they want to come 

back, they are fearful about entering into that territory. 

Chairwoman WATERS. One last one. Let me just say that there 

are those who would say that the insurance companies have enjoyed some protections and to—that is something that should be repelled, because of the ability to at least discuss, or share information, places you in a position of being able to have premium cost, 

I suppose, that cannot be challenged by anybody because of the 

ability to have this protection. What do you say about that? 

Mr. RACICOT. Well, Madam Chairwoman, I would say that it’s always possible to reinvent another scheme. But the invention of a 

new scheme here, which has worked exceptionally well for 62 

years, would bring absolute chaos to the industry. 

And, frankly, there are 5,000 property casualty companies in this 

country that—some are very, very large, and some are very, very 

small. And it would be those that are larger that could do their 

own actuarial analysis. 

This is all done by the light of day by independent modelers. 

Data is shared or provided by all of these insurers. It’s distilled, 

analyzed, and scrutinized. And then, actuarial analyses are put out 

for everyone to utilize. It would be all the small companies who 

would be disenfranchised by movement in that particular direction, 

and, as a result of that, there would be a lack of competition, and 

less of a good bargain for consumers. 

Chairwoman WATERS. Thank you. Just one last question. Do the 

private property casualty insurers use the same claims adjusters 

that we use with our National Flood Insurance Program? 

Mr. RACICOT. I believe, Madam Chairwoman, that is a voluntary 

choice. There are many companies in the country who actually can 

35

contract with, and act as agents of, the U.S. Government to carry 

out the duties of adjusting claims for flood programs all across the 

United States. 

Chairwoman WATERS. That has been identified as a potential 

problem—claims being pushed off to the National Flood Insurance 

Program rather than being assumed by the private insurer. Have 

you heard any discussion about that? 

Mr. RACICOT. Well, Madam Chairwoman, I have not seen demonstrated evidence. I certainly wouldn’t suggest to you, however, 

that there are not imperfections in the system. Any human system 

or institution has some imperfections. But when you realize that 

only 1 percent of the claims in this country that were a consequence of Katrina are actually being litigated, that’s a fairly good 

record. 

Chairwoman WATERS. Thank you very much. Yes? 

Mr. NUTTER. Madam Chairwoman, if I might respond to your 

first question, if I could, please. With respect to reinsurance and 

the cost, keep in mind a couple of things. 

To the extent that there are concerns about or observations about 

the insurance industry’s profitability in recent years, some of that 

is a function of the fact that insurers did lay off risk to the reinsurance industry. If you looked at the flip side of the coin, you would 

find the reinsurance industry was relatively unprofitable in 2001, 

2004, and 2005, largely because it served the purpose of bearing 

the risk that the insurance companies laid off. 

And, secondly, you have mentioned a couple of specific companies 

by name, and I certainly don’t represent State Farm or Allstate, 

and wouldn’t presume to. But my understanding is that State 

Farm reinsurers entirely within the corporate group—so, a Federal 

or government reinsurance program—really does nothing to address reinsurance costs for what is often the most significant and 

major insurer in the market. 

What the State Farms, Allstates, and others have to do, however, 

is look at their risk exposure, to balance it against the premiums 

that the regulatory system allows to charge, and make certain that 

they remain financially sound and viable to meet their claim obligations. 

Chairwoman WATERS. Thank you, very much. Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Madam Chairwoman. My first question, I guess, is to Governor Racicot. I guess that some people must 

have known your name, in order to vote for you, or how to pronounce it. 

Mr. RACICOT. I think at some point it becomes so bizarre they 

can’t forget it. 

Mrs. BIGGERT. Maybe so. Insurance is currently regulated at the 

State level, and in many States, it seems that prices and coverage 

are highly regulated. This is not the case in my home State of Illinois. In fact, we always talk about its being a model for insurance, 

because it takes the free market approach to pricing. 

Do you think that States should relax or rethink price controls 

as a way to attract more insurers, thereby increasing the availability of insurance for consumers? 

Mr. RACICOT. Well, I do believe, Mrs. Biggert, that, in fact, that’s 

a sterling example of how the competitive influences of a private 

36

enterprise system can work with virtually any commodity or service. 

I think you would see some similar signs of that with the auto 

market in New Jersey, as well. It’s certainly not occupying the 

same posture as the regulatory climate in Illinois. But I think 

that’s a very good example of how you can drive a better bargain 

for consumers by opening up the market. 

Mrs. BIGGERT. And then I understand that the AIA disagrees 

with the catastrophic coverage proposals currently before Congress. 

I think you mentioned that. 

Could you explain how that is different from the availability of 

terrorism insurance in the private market, and why a Federal 

backstop might be more appropriate with terrorism insurance, 

rather than this? 

Mr. RACICOT. Yes, ma’am, to the best of my ability. The bottom 

line is, from our perspective, you should keep as much capacity in 

the private sector as humanly possible, because that is how you 

produce the best bargain for the people of this country. 

There have been some instances, however, over the course of 

time, where it has been necessary to look at a partnership between 

government and the private sector, because there has been an inability to be able to quantify risk. The Flood Program is one of 

those instances. 

Another instance is terrorism. When you think about it, you determine a premium and risk and what it’s going to cost by having 

past historical information from which to draw a judgement, after 

distilling all the circumstances over a long period of time. Secondly, 

you are able to keep abreast of what it is that’s unfolding presently. 

The industry does not have any history with terrorism. Secondly, 

we do not have top secret intelligence reports every single day. It 

is virtually impossible for us to calculate a level of premium. And 

as a consequence of those two circumstances, reinsurers don’t offer 

reinsurance. There is some capacity, but it is so expensive and so 

small, that it’s really not very meaningful. 

Mrs. BIGGERT. So, with the national—or catastrophes, you have 

more experience that you are able to at least have some actuarial 

or underwriting capabilities? 

Mr. RACICOT. Yes, ma’am. We do believe that there are important bridge mechanisms that sometimes have to get you from one 

place to another. But you always have to keep your eye, ultimately, 

on maintaining as much of a private market as possible, because 

it produces the best bargain. 

So, we believe there is plenty of capacity if we have the right signals, the right regulatory climate, the right environmental policies. 

If people quit building on sandbars, we will be in a situation where 

we can make certain we respond to the needs of the day. 

Also, at the end of the day, people have to make value judgements about where they want to live and how much they want to 

pay to live there. 

Mrs. BIGGERT. Thank you. And, Mr. Nutter, would a national reinsurance program negatively affect the amount of capital the insurance industry would receive from investments? 

37

Mr. NUTTER. I don’t think there is any question, Mrs. Biggert, 

that State government or Federal Government programs are going 

to be far more competitive than the private sector can be. They pay 

no taxes, have no capital charge, and often don’t have a risk-based 

rate. 

Certainly, the Florida experience is that the Florida hurricane 

catastrophe fund has just disintermediated the private reinsurance 

market. I would assume that a Federal program would do the 

same. It seems to me to be a mistake to take off the table a capital 

commitment from the reinsurance community worldwide, that 

wants to write catastrophe risk in the United States. 

Mrs. BIGGERT. So the free market creates a more diversified insurance? 

Mr. NUTTER. Your question to Governor Racicot is a good one, 

about a competitive rating environment in Illinois. Reinsurance 

rates and terms are not regulated, either. Reinsurers are regulated 

for solvency, if they are licensed in the United States. 

What you have is a reinsurance market that is highly competitive, globally, and in fact, has attracted capital after every one of 

the major natural and manmade acts, catastrophe events, in the 

last 15 years. It attracts capital to serve this market. A competitive 

rating serves a competitive market very well. And the reinsurance 

market is a good example of why that’s true. 

Mrs. BIGGERT. Thank you. I yield back. 

Chairwoman WATERS. Thank you. Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. Could you go 

back again through the kind of signals, negative signals, that were 

sent as a result of Rita and Katrina by the officials? You were saying there were negative signals. Can you just— 

Mr. RACICOT. Yes, sir. There are—let me just take them, without 

mentioning any individual State. But at least one State in the Gulf, 

where almost instantaneously, litigation and investigation began, 

and efforts to try and change contracts, both private litigation and 

official investigations by various governmental authorities. 

Now, my understanding is that there has been no criminal activity ever discovered or pled, or any court actions presently proceeding in that specific direction. 

But when you set about to say that the contracts that you have 

entered into are no longer sacrosanct, as they have been throughout our history, and suggest that rules are going to be suspended, 

and that there is a regulatory climate that you can’t depend upon, 

that sends signals. It would to Home Depot, if they were being told 

that it doesn’t matter what a sheet of plywood costs, we’re going 

to sell it for $3.50 here, in the State of Mississippi. 

Mr. CLEAVER. Yes. The industry paid out $55 billion in claims 

and losses in the Gulf Coast. 

Mr. RACICOT. I believe, sir, it was around $40 billion, as a result 

of Hurricane Katrina. 

Mr. CLEAVER. Okay, $40 billion, and profitability reached an alltime high. Now, we don’t have the numbers in yet, but since Rita 

and Katrina there are still—profitability numbers in the industry 

are still climbing. 

Mr. RACICOT. The last 2 years that has been true, yes, sir. The 

previous 18 it was not. And there are long—as I mentioned before, 

38

there are long tails on claims, and there are huge capital requirements. If you’re going to diversify and provide more products in 

more areas, of course you have to have the capital to back it up. 

Mr. CLEAVER. Well, yes. But let’s stay with the profitability. If 

you are—if you just spent out record numbers in losses, the industry doesn’t appear to have been hurt. If your profitability rises at 

the highest level ever, and let’s assume that maybe the claims were 

not paid until 2007. The 2007 chart is just going to the sky. 

I mean, you’re getting ready to have—I’m not mad at you—but 

the industry is getting ready to have the biggest boom ever, right 

on the heels of the worst catastrophe in the history of the United 

States. 

Mr. RACICOT. Well, Congressman, I think last year, of course, we 

were very blessed not to have a great deal of hurricane damage. 

And as a consequence of that, the Lord has shown us some mercy 

throughout that period of time. In addition to that— 

Mr. CLEAVER. I’m not sure the Lord is involved in the insurance 

industry. But I have this insurance information institute printout, 

and there is not a business in this country that wouldn’t like to 

have this. 

Mr. RACICOT. Well, Congressman, I don’t think that’s an entirely 

fair analysis. I don’t think there is any doubt that over the last 2 

years, that the property casualty companies of this country—and as 

I mentioned, there are 5,000 of them—experienced a profit gain. 

There is no question about that. 

But when you compare their generation of some revenue gain 

over the course of the last year, you will find it’s in the range of 

about 15 percent. And the Standard and Poors average is around 

18 percent. So, when you take a look at other industries, you don’t 

find that the industry is in a situation where they have exorbitant 

returns on capital. 

Mr. CLEAVER. Yes? 

Mr. NUTTER. If I could supplement the answer, let me go back 

to something I said earlier to Chairwoman Waters. Some of the 

reasons for the insurance companies’ profitability is that they laid 

off risk to the reinsurance market. 

Mr. CLEAVER. Yes. 

Mr. NUTTER. If you had that chart for the reinsurers, what you 

would see is the following: in 2005, the reinsurance market had a 

combined ratio of 129. What that means is that with losses and 

loss adjustment expenses, it paid $1.29 for every dollar of revenue. 

Lost money. In 2004, it was 125. It paid out $1.25 for every dollar 

of revenue. 

So, the profitability of the insurance companies is, to some extent, a mirror image of what happens in the reinsurance market. 

The reason that I mention that is that some of the proposals being 

considered by the Congress are effectively to put the government 

in competition with the private reinsurance sector, not the private 

insurance sector. 

It would seem to me to be counterintuitive to disintermediate the 

reinsurance market, when, in fact, it is serving the role of being 

the risk-bearer for these catastrophe losses to a fairly significant 

degree. 

39

Mr. CLEAVER. Well, you know, I would really like to see the reinsurance charts, because this appears to fit into what our colleagues 

have said earlier—you heard the Members of Congress who were 

here—about what has happened with insurance. And having gone 

to the Gulf Coast region, and spoken with people down there, you 

know, if the numbers are accurate, your 1 percent—you’re saying 

that only 1 percent of the claims were in litigation, maybe that’s 

one of the few spots on the planet where we don’t have enough lawyers. 

Because I can’t understand it. I have run into very few people 

who—and we had lunch with Senator Trent Lott in Gulfport, I 

guess it was, Gulfport, and I have not heard anyone, not one person, say, ‘‘That insurance company really did treat us well. And I—

this is a great day for America.’’ 

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

Mr. NEUGEBAUER. Thank you, Chairwoman Waters. Ms. 

Spragens, I have a question from one of my colleagues, and I will 

just read that question for you. 

Instead of increasing Federal interference in the insurance marketplace, are there ways that the Federal Government can reduce 

regulatory burdens to increase competitive options and coverages 

available for consumers? For example, according to a 2005 Government Accountability Office report, the Liability Risk Retention Act 

has had an important effect in increasing the availability and affordability of commercial liability insurance for certain groups, allowing members to benefit from the consistent prices, targeted coverage, and programs designed to reduce risk. 

Shouldn’t Congress be looking at attracting new capital, through 

elimination of unnecessary Federal burdens, such as expanding the 

Liability Risk Retention Act with appropriate fixes? 

Ms. SPRAGENS. Thank you very much for that question, because 

it has two important parts, and I want to try to answer both of 

them. 

First, in terms of the opening up of the Risk Retention Group 

Act, our members are very interested in discussing that. You mentioned Janice Abraham in your opening comments, who is one of 

our members. We are going to be discussing that with them, to try 

to find that right balance between the interests of those who are 

insured by risk retention groups, the groups themselves, and insurers, to find the right balance, and take a look at that very thing. 

And we look forward to working with you on that. 

But you also asked about opening up and reducing other government—Federal Government—burdens. And there is a very important one that I alluded to in my opening comments, and that has 

to do with the tax-deferred catastrophe reserve. 

I really do think Americans would be quite surprised to find out 

that insurers can only reserve for past events. What that means—

and this goes to your questions about profits—is that in that rare 

event when Mother Nature has been kind, and we do show a profit—which, by the way, was for all lines, all products, inland marine, ocean marine, jewelers, all that, it’s all there—that all those 

occasions when we do, mixed in there is the amount we are actually spending on catastrophes most years. 

40

The other thing is, the only way we can show that to you is a 

profit. We don’t have the option of diverting it before taxes into a 

reserve, where it can be called upon to increase availability, in the 

event of a catastrophe down the road, because we can’t reserve for 

future events. 

And, you know, there is an important historical precedent for 

that. It goes back to ancient Egypt. There were 7 years of plenty 

followed by 7 years of drought and famine. And during those 7 

years of abundance, the grain that wasn’t needed was put into reserves. And during the drought, and during the famine, people did 

not starve. And that is exactly the position that the insurance industry is in today, because we don’t have the ability to use the 

money that isn’t needed in a given year, and put it into a reserve, 

to be able to call upon it without a pretty heavy tax hit, which reduces its benefit to policyholders. 

And so, we would strongly encourage you to consider taking that 

old, old lesson, and make it possible for insurers to be able to set 

aside funds that aren’t needed, before it becomes profit, and before 

it becomes heavily taxed. 

Mr. NEUGEBAUER. Actually, banks have that option available to 

them. I believe they can set up loan loss reserves. And I think they 

get to do that after tax. Is that correct? 

Ms. SPRAGENS. It’s a before-tax need. 

Mr. NEUGEBAUER. I mean before tax, yes. 

Ms. SPRAGENS. It’s a before-tax need. 

Mr. NEUGEBAUER. Yes, I’m sorry. Next question for Mr. Nutter. 

I understand that the unofficial amount of reinsurance sold for catastrophes in 2006 was around $90 billion, claims for 2005, the 

largest on record, amounted to $60 billion. And many insurance experts estimate that the industry could withstand a single event in 

the $100 billion range and remain solvent. 

How do you see the reinsurance market growing over the next 

several years, and do you expect them to be able to increase their 

capacity? 

Mr. NUTTER. Thank you for the question. It is my understanding 

from market reports that the amount of reinsurance capacity purchased in 2006 was—in the private market—was probably in the 

$75 billion range. If you add the Florida Hurricane Catastrophe 

Fund, which is a government fund, it gets to the $90 billion range. 

The larger number that you cited would really also reflect the 

fact that some insurance companies retain all of the risk, and they 

don’t reinsure it at all, and other companies retain much of their 

risk, and then only reinsure some. 

If the past is, in fact, prologue, the reinsurance market has 

grown in capacity in 2005 and 2006. Estimates are that it grew by 

30 percent in 200, and from 2006 to 2007, it grew by another 14 

percent. The capital markets have replenished losses. The capital 

markets have seen this as an opportunity to invest. Reinsurance 

capacity has increased from—certainly from 2001, where reinsurers 

paid 60 percent of the losses associated with the events of 9/11, and 

continue to grow. I see no reason to think that would not continue. 

Mr. NEUGEBAUER. Thank you, very much. 

Mr. NUTTER. Thank you for the question. 

Chairwoman WATERS. Mr. Green? 

41

Mr. GREEN. Thank you, Madam Chairwoman, and I thank the 

witnesses for appearing today. 

Let me move quickly to Ms. Spragens. Ms. Spragens, in your paradigm of a reserve, how is the interest on the untaxed dollars handled? 

Ms. SPRAGENS. It needs to be building up inside the reserve during the time that it’s there. This is for the purpose of maximizing 

its benefit to policyholders, sir. The taxes are paid at a later date, 

when that money is taken down. 

Mr. GREEN. Governor, permit me to ask you about your comment 

on wind versus water. You indicated that you have some thoughts 

on it that you would share with us, in terms of how it should be 

handled. How would you handle wind versus water? 

Mr. RACICOT. I think, Congressman, that there are several different possibilities. A couple that I would mention to you at the 

very beginning is, number one, you could try to make certain that 

you were in a situation where, for example, the NFIP could be 

amended to require Federal participation in State-sponsored mediations, to determine the extent of damage caused by wind versus 

water. 

Number two, you could encourage greater coordination on the 

marketing and sales of Federal flood and private property insurance. I think that there are many ways that you could try to bring 

more precise definition and protocol to this particular situation. 

This has obviously been highlighted, it’s a matter under extraordinary scrutiny. There ought to be as much clarity and definition 

as we can possibly bring to bear as part of the process going forward, and I think there are ways to do that. 

Mr. GREEN. Let me move quickly to Mr. McCarty. My suspicion 

is that you have some opinions that will differ slightly from the 

governor’s. Can you at least give us some of your thoughts? 

Mr. MCCARTY. Yes, thank you very much. First of all, I would 

like to address the issue of the private marketplace, and maximizing the private marketplace, and allowing the capital markets 

to grow. And I share that, because I think a free market is critically important. 

But axiomatic to a free market is willing purchasers and willing 

sellers. And, unfortunately, for homeowners, they are required to 

buy homeowners’ insurance. They are required to buy the risk of 

hurricane. And, unfortunately, we’re getting fewer and fewer sellers. So we really don’t have a free market of willing buyers and 

willing sellers, because we tell the policyholders and homeowners 

in Florida, ‘‘You must have wind exposure.’’ And I think that’s the 

appropriate and prudent thing to do. 

Unfortunately, when you compare Florida, which has the risk of 

hurricanes, California, with the risk of earthquake, Illinois doesn’t 

really have catastrophic risk, with the exception of flooding, which 

is already taken care of in the Federal Flood Program. They do 

have the risk of earthquakes, but most people in Illinois do not 

purchase earthquake coverage— 

Mr. GREEN. Let me interrupt you— 

Mr. MCCARTY.—because it’s not required. 

Mr. GREEN.—just a moment, and ask you to respond quickly to 

the notion of a reserve. 

42

Mr. MCCARTY. We would—the reserve concept, I think, is a very 

good concept. I think we have to make sure that reserve is in a separate account, to ensure that it is used for the use and benefit of 

payment of claims, and not dividend to the stockholders. 

But to set aside reserves for the future, the United States is 

about the only country in the industrialized world that does not 

have some mechanism for tax deferment. And if we had done this— 

Mr. GREEN. Let me intercede one more time, because my time is 

about up. Governor, back to you. Governor, you are a former litigator, are you not? 

Mr. RACICOT. I am a former prosecutor, yes, sir. 

Mr. GREEN. I would consider you as litigator, as a prosecutor. 

And it is your belief that litigation somehow of a—what is perceived to be a legitimate claim of liability is somehow a negative? 

Mr. RACICOT. No, sir, not a legitimate claim. 

Mr. GREEN. Okay. Well, do you not believe that the legitimacy 

of the claim lies within the mind of the person who sees the damages, and has to assess the damages, and make some determination? This is why we have lawsuits, because lawyers differ in opinions. 

Mr. RACICOT. I think that is entirely accurate. If you are proceeding in good faith, and with the— 

Mr. GREEN.—opinion that the attorney general for the State of 

Louisiana and Mississippi proceeded in something other than good 

faith, representing the people of those States? 

Mr. RACICOT. I don’t know that I could offer a precise view about 

his— 

Mr. GREEN. Was it not implicit in your statement that there was 

something untoward happening, because— 

Mr. RACICOT. What I said in my statement is that when you create an environment within which you are going to revisit contracts 

that people have knowingly and voluntarily entered into, you have 

sent a very bad signal about how business can be conducted in— 

Mr. GREEN. If you are the attorney general of the State of Montana, or governor, and you perceive that your people have been 

wronged, do you not file lawsuits to protect the interests of the people that you represent? 

Mr. RACICOT. If there is evidence to support them, that allows for 

you to be able to prove your cause beyond a reasonable— 

Mr. GREEN. Is it your contention that there is not evidence to 

support the notion that wind and rain, coupled with—together, 

should cause one to at least consider the possibility that the water 

was driven by wind, and that the water driving—the wind driving 

the water created the problems such that it’s the wind, and not the 

water damage that— 

Mr. RACICOT. I think that’s a legitimate question that may be 

subject to litigation, and that is not what I am confusing the situation with. 

What I am talking about is whether or not a State, as a matter 

of practice and climate, is sending the right signals, trying to attract business enterprise into their individual States. 

Mr. GREEN. States have the right, under the Constitution, to litigate. You would not oppose this. 

Mr. RACICOT. I would not. 

43

Mr. GREEN. And we have judges and juries that make decisions. 

I cannot believe that you would want to have States that legitimately perceive their citizens to have been wronged not to take appropriate action to litigate. 

Mr. RACICOT. I wouldn’t— 

Mr. GREEN. You would have done this, as governor, wouldn’t 

you? 

Mr. RACICOT. I wouldn’t ask you to believe that, sir. In fact, I 

would have a hard time believing that’s what I would want, as 

well. 

Mr. GREEN. Well, it seems to be implicit in your statements that 

the people of Mississippi are not being properly represented by 

those who would litigate on their behalf. 

Mr. RACICOT. No, sir. What I am saying is that when you create 

an environment, contribute to or precipitate circumstances where 

you set about— 

Mr. GREEN. How the circumstance— 

Mr. RACICOT.—to abrogate contracts voluntarily entered into— 

Mr. GREEN. Governor, how are those circumstances being created? 

Mr. RACICOT. Well, by—in a number of different ways, in a number of different— 

Mr. GREEN. Give us some of those ways, Governor. How did— 

Mr. RACICOT. I just told you. When you set about, regulatorily, 

to suspend the ability to have your rates fixed in a competitive environment based upon sound actuarial analysis, when you require 

insurance companies to remain in a State if they happen to be 

doing business in your State on that particular day, beyond— 

Mr. GREEN. But you spoke earlier about litigation. 

Mr. RACICOT.The point where they would voluntarily choose to 

remain. 

Mr. GREEN. Did you not speak about lawsuits earlier? 

Mr. RACICOT. When there is a— 

Mr. GREEN. I yield back. Thank you, Madam Chairwoman. And 

thank you, Governor. 

Mr. RACICOT. Yes, sir. 

Chairwoman WATERS. Thank you. Thank you very much. To the 

members of this panel, we have a few minutes left, and I would 

like to recognize each member for an additional 2 minutes. And I 

will start with the panel here, asking this question. 

Of all the possibilities for public policy that you have heard to 

address this problem, which do you support, if anything? All perils? 

H.R. 91, H.R. 330, or do you have something of your own that you 

would recommend today? 

Mr. MCCARTY. Thank you, Madam Chairwoman. I am here in 

the capacity of the National Association of Insurance Commissioners, and also wearing another hat as, obviously, as a commissioner in the— 

Chairwoman WATERS. Do you have a recommendation? 

Mr. MCCARTY. Our recommendation is for the endorsement of 

the concept of having a commission to evaluate and focus attention 

on a number of these issues. Each one of them has a valuable contribution— 

44

Chairwoman WATERS. All right. Okay, I am going to have to 

move along. I only have 2 minutes. Mr. Valdivia? 

Mr. VALDIVIA. Thank you, Chairwoman Waters. The Big I supports H.R. 330. Also, we support S. 292, the coalition. 

Chairwoman WATERS. Okay. 

Mr. VALDIVIA. Yes. 

Chairwoman WATERS. Thank you. Mr. Bennett? 

Mr. BENNETT. Yes, Congresswoman. At this point, we are still 

looking at all of the complex issues, and we have not made a determination on any at this point. 

Chairwoman WATERS. All right. Mr. Porter? 

Mr. PORTER. We support H.R. 91, but we are open to additions 

to that. We want to work with the committee to broaden that. 

Chairwoman WATERS. Okay. Mr. Thomas? 

Mr. THOMAS. Yes. We are still looking at all of the issues, but 

we, in concept, support the insurance commissioner’s recommendation. 

Chairwoman WATERS. Okay. Ms. Spragens? 

Ms. SPRAGENS. We would support the notion of a Federal credit 

facility, or a loan, because that would not put you into the business 

of insurance, and you would not have to be asking for cross-subsidies from other States or other citizens, and therefore, creating 

divisiveness among your constituents. 

Chairwoman WATERS. If the reinsurers are losing money, 

wouldn’t they be glad to get out, if we could step in and do a better 

job? 

Ms. SPRAGENS. Well, ma’am, as you may have noticed, we’re taking a lot of strong questions right now, and you could be in this 

chair if you had gotten into the insurance business. 

And so, we urge you, instead, to think about a loan, think about 

the possibility that if States really do have a market failure—and 

that’s the important thing, we don’t think States ought to be creating CAT funds unless there is a market failure, which means our 

reinsurer friends aren’t there— 

Chairwoman WATERS. Okay. 

Ms. SPRAGENS.—create a CAT fund, and that provides reinsurance. At that point, our reinsurance friends may want to come in 

and take part of it, which they would be more than welcome— 

Chairwoman WATERS. Thank you. All right. 

Ms. SPRAGENS.—economical. 

Chairwoman WATERS. Thank you. And I like the chair that I am 

in. 

[Laughter] 

Chairwoman WATERS. All right. Let us move to Mr. Racicot. 

Mr. RACICOT. Thank you, Madam Chairwoman. Of those bills 

pending, obviously, we want to see the National Flood Insurance 

Program reforms enacted. 

We would like to see the tax incentives and reserve questions 

visited by the Congress. We would also like to make certain that 

any of the mitigation efforts that we have proposed are considered 

and that catastrophe savings accounts be enacted, and allowed as 

an option for taxpayers across the country. 

Chairwoman WATERS. Thank you. Mr. Nutter. 

45

Mr. NUTTER. Yes, thank you. To the extent that we have a view 

on all of these, the only one that we think is a viable option is really looking at a commission, to see if we can bring together a consensus on an approach. 

Chairwoman WATERS. Thank you. Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Madam Chairwoman. I will just ask 

one question, too, if we can go down, and it’s similar. 

If private insurance and the reinsurance prices are high and rising in the most catastrophic-prone regions of our country, but the 

insurance is available, is it wise to set up a Federal program that 

offers less expensive reinsurance, but putting the burden on the 

taxpayers to pay for it? 

Mr. MCCARTY. And the short answer to that is we believe that 

if it’s available, and not affordable, then therefore, it’s not available. So there needs to be some alternative to a mega-catastrophe, 

when all the wheels fall off, for our system, for us to have a mechanism that maximizes the private sector, but at the same time 

makes the government more efficient. 

Mrs. BIGGERT. Thank you. Mr. Valdivia. 

Mr. VALDIVIA. We believe that there is a legitimate role for the 

Federal Government when there is a marketplace failure. 

Mrs. BIGGERT. Mr. Bennett? 

Mr. BENNETT. Yes. I concur that if the market, the current market, is not working, then we need to look to the government, or 

some other mechanism to build in a backstop to make it affordable, 

which would encourage more people to enter it. That way, the risk 

would be spread longer over a larger number of people, just like 

the pool for the catastrophic loss, which includes all those areas. 

Mrs. BIGGERT. Mr. Porter? 

Mr. PORTER. I think in my statement I made it clear that 

ProtectingAmerica.org supports the public/private partnership, 

where you would have State and Federal catastrophic funds that 

would be paid for by private insurers. 

Mrs. BIGGERT. Mr. Thomas? 

Mr. THOMAS. Only in the case of mega-catastrophes and the capacity failure by the carriers. 

Mrs. BIGGERT. Okay. Ms. Spragens? 

Ms. SPRAGENS. We recommend that you start your thinking at 

the level of a high-level Federal loan, as was outlined to you. 

Mrs. BIGGERT. Mr. Racicot. 

Mr. RACICOT. Mrs. Biggert, we do not believe that it is a panacea, and that is a very dangerous enterprise to undertake. And if 

you’re looking for an example, probably the National Flood Program would be the good example. 

Mrs. BIGGERT. Okay. Mr. Nutter. 

Mr. NUTTER. Mrs. Biggert, I question your assumption. Reinsurance capacity is, in fact, expanding, and we’re in a moderating 

price environment. It operates like classic economics. And, indeed, 

this would be exactly the wrong time for government to get into the 

reinsurance business, at a time when the market is trying to serve 

these catastrophe-prone areas. 

Mrs. BIGGERT. Thank you, thank you. 

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

46

Mr. CLEAVER. Thank you, Madam Chairwoman. I need some 

short answers, because I don’t have enough time. 

Ms. Spragens, the judge actually followed up on my question 

with regard to the reserve fund that you mentioned earlier. And 

then, Mr. McCarty actually spoke to where I was going, which was 

would there be any safeguards that reserve dollars would not end 

up as paid dividends to stockholders? 

Ms. SPRAGENS. We have to remember that insurance is just 

about the most heavily regulated industry out there, and State insurance regulators have extensive reporting requirements. We believe this will actually add to the transparency, and permit them 

to see exactly where those profits—pre-profit—can go. 

Mr. CLEAVER. Okay. 

Ms. SPRAGENS. And so we believe it’s heavily regulated, and you 

would be satisfied with that. 

Mr. CLEAVER. Yes, I would, with heavy regulation. You mentioned the 7 years of famine, 7 years of growth. Now, you do know 

that the prophet speaking for God said to the people after the famine, ‘‘I will restore to you the years that the locusts hath eaten.’’ 

And that’s kind of where we are going. We want the insurance 

companies to restore to the people what the lawyers have eaten. 

And I’m not sure that God is too heavily involved in the insurance 

industry. But if you want to throw him out here, I have some stuff. 

[Laughter] 

Chairwoman WATERS. Amen. 

Ms. SPRAGENS. Should I respond? 

Chairwoman WATERS. Mr. Green. 

Mr. GREEN. Just a closing comment. I believe it was Kennedy 

who said, ‘‘Here on Earth, God’s work must truly be our own.’’ I 

think we’re doing God’s work today. And I yield back. 

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

thank the panel for being here today, for your patience, and for the 

valuable information you have shared with us. 

I would also like to ask unanimous consent to include in the 

record the information that was shared with us by Mr. Neugebauer 

when he earlier spoke about—before he made his presentation. 

I also would ask unanimous consent that the statement of Janice 

M. Abraham of United Educators Insurance, and the statement of 

Charles Chamness, on behalf of the National Association of Mutual 

Insurance Companies, be made part of the record. Without objection, such is the order. 

Thank you very much. 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. 

With that, this hearing is adjourned. Thank you. 

[Whereupon, at 4:59 p.m., the hearing was adjourned.] 

(47)

A P P E N D I X

March 27, 2007

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