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50–313 2009

S. HRG. 110–911 

AN EXAMINATION OF THE AVAILABILITY AND 

AFFORDABILITY OF PROPERTY AND CASUALTY 

INSURANCE IN THE GULF COAST AND OTHER 

COASTAL REGIONS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

THE AVAILABILITY AND AFFORDABILITY OF INSURANCE IN COASTAL 

REGIONS TO ADEQUATELY PROTECT AMERICANS’ HOMES, BUSINESSES, AND THEIR FAMILIES FROM NATURAL DISASTERS 

WEDNESDAY, APRIL 11, 2007 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

mstockstill on DSKH9S0YB1PROD with HEARING

(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

ALEX STERNHELL, Professional Staff 

SARAH A. KLINE, Counsel 

JENNIFER FOGEL-BUBLICK, Counsel 

ANDREW OLMEM, Republican Counsel 

JIM JOHNSON, Republican Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 

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(III) 

C O N T E N T S 

WEDNESDAY, APRIL 11, 2007 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 4 

Senator Menendez ............................................................................................ 6 

Senator Martinez .............................................................................................. 7 

Senator Allard ................................................................................................... 20 

Prepared statement ................................................................................... 63 

Senator Reed 

Prepared statement ................................................................................... 63 

WITNESSES 

Bill Nelson, U.S. Senator from the State of Florida ............................................. 9 

Charlie Crist, Governor, State of Florida .............................................................. 11 

Prepared Statement ......................................................................................... 65 

Edward Lazear, Chairman, Council of Economic Advisers .................................. 22 

Prepared Statement ......................................................................................... 69 

Response to written questions of: 

Senator Dodd ............................................................................................. 170 

Senator Shelby ........................................................................................... 170 

Walter Bell, Commissioner, Alabama Department of Insurance, on behalf 

of the National Association of Insurance Commissioners ................................. 32 

Prepared Statement ......................................................................................... 75 

Response to written questions of: 

Senator Dodd ............................................................................................. 173 

Marc Racicot, Former Governor of Montana, and President and Chief Executive Officer, American Insurance Association .................................................... 34 

Prepared Statement ......................................................................................... 94 

Robert Hartwig, President and Chief Economist, Insurance Information Institute ........................................................................................................................ 36

Prepared Statement ......................................................................................... 104 

Response to written questions of: 

Senator Shelby ........................................................................................... 176 

David Guidry, President and Chief Executive Officer, Guico Machine Works, 

Inc. ......................................................................................................................... 38 

Prepared Statement ......................................................................................... 125 

Harold Polsky, Homeowner ..................................................................................... 40 

Prepared Statement ......................................................................................... 131 

Franklin W. Nutter, President, Reinsurance Association of America ................. 43 

Prepared Statement ......................................................................................... 135 

Admiral James M. Loy (USCG–Ret.), Co-Chair, ProtectingAmerica.org ............. 45 

Prepared Statement ......................................................................................... 148 

Response to written questions of: 

Senator Dodd ............................................................................................. 178 

Senator Shelby ........................................................................................... 183 

Charles Chamness, President and CEO, National Association of Mutual Insurance Companies .............................................................................................. 48 

Prepared Statement ......................................................................................... 161 

Response to written questions of: 

Senator Dodd ............................................................................................. 237 

Senator Shelby ........................................................................................... 239 

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IV 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement from the Property Casualty Insurers Association of America ........... 242 

Statement from the National Multi Housing Council (NMHC) and the National Apartment Association (NAA) .................................................................. 249 

Statement from the National Association of REALTORS ................................. 253 

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(1) 

AN EXAMINATION OF THE AVAILABILITY AND 

AFFORDABILITY OF PROPERTY AND CASUALTY INSURANCE IN THE GULF COAST 

AND OTHER COASTAL REGIONS 

WEDNESDAY, APRIL 11, 2007 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 9:30 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

I want to welcome everyone to today’s hearing, ‘‘Availability and 

Affordability of Property and Casualty Insurance in the Gulf Coast 

and Other Coastal Regions.’’ Let me first of all thank the witnesses 

who are appearing before the Committee today. I want to particularly thank my colleague from Florida, Senator Nelson, and Governor Crist for appearing at the hearing today, and also Senator 

Landrieu, who was planning to testify this morning but was unexpectedly called back to her State on an emergency and will be unable to attend the hearing this morning. But her statements and 

supporting information she wants the Committee to be aware of 

will certainly be included in the record. 

Today’s hearing is on an important and timely topic: insurance 

in our Nation’s coastal regions. Although coastal areas comprise 

only 17 percent of the contiguous land area in the United States, 

55 percent of the Nation’s population lives within 50 miles of the 

coast; and by next year over 160 million Americans, more than half 

our population, will live and work along America’s expansive coastlines. It is critical that these Americans are able to adequately protect their homes, their businesses, and their families from natural 

disasters. 

We have all witnessed the devastation that nature can wreak 

across our country in the form of hurricanes, floods, tornadoes, and 

earthquakes. In 2005, Hurricanes Katrina, Wilma, and Rita destroyed hundreds of thousands of homes and businesses along the 

Gulf Coast. In 2004, Hurricanes Frances, Charley, and Ivan devastated parts of Florida. In the 1990’s, the worst natural disasters 

were geographically diverse: Hurricane Andrew in Florida in 1992, 

and the Northridge earthquake in California in 1994, and the Red 

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River floods in North Dakota in 1997. Each of these caused billions 

of dollars in destruction. 

In order to rebuild homes, businesses, and lives, Americans 

looked to, among other things, their insurers as well as their National Government for disaster assistance. Unfortunately, insurance coverage is becoming increasingly difficult to secure and afford. In many coastal areas from Texas, along the Gulf, and up the 

East Coast, insurers are pulling out of high-risk areas. Others are 

dropping certain coverages, such as wind storm coverage. Others 

are drastically raising rates and deductibles. Let me just read two 

examples from recent press articles of how these actions are affecting Americans’ lives and their livelihoods. 

A Chicago Tribune article on March 20, 2007, detailed the situation of Jeffrey O’Keefe, President of the Bradford-O’Keefe Funeral 

Homes in Mississippi, on Mississippi’s Gulf Coast, who has scaled 

back his insurance coverage. Before Katrina, Mr. O’Keefe paid 

$61,224 in annual premiums to insure his business, and now renewing that $7 million in coverage would have cost about $781,000. 

So he reduced his coverage from $7 million to $2 million, but he 

is still paying $122,000 in premiums—twice as much as before the 

storm. So he is paying much more for a lot less coverage in his 

business. 

A Palm Beach Post article from May 29, 2006, tells of Tracy Casper, who dropped her homeowners’ insurance after her premiums 

became unaffordable. The article, entitled ‘‘Insurance premiums 

force tough choices,’’ says, and I quote, ‘‘Tracy Casper felt ill Mother’s Day weekend. While plenty of people will remember opening 

sentimental cards, Casper remembers opening her wind storm insurance renewal notice. Her premium had skyrocketed 194 percent 

to $7,443. 

Today, appearing on our second panel, we have with us homeowner Harold Polsky, who was forced to sell his and his wife’s 

home in Florida because of rising insurance costs. We are also 

joined by a small business owner from the Greater New Orleans 

area, David Guidry, who has seen his insurance costs rise and 

faces great uncertainty about his ability to shoulder further increases. 

I would like to take a moment to personally thank the Polskys 

and Mr. Guidry for taking the time out of their schedules and time 

out of their work to come and speak with us at this public hearing 

this morning. It is critical that this Committee understand what 

this issue means to people around our country, and their testimony 

is going to help us do just that this morning in real terms with real 

faces. 

The lack of affordable insurance is a serious problem for millions 

of Americans across our country. Many States have attempted to 

address the lack of available and affordable insurance by taking 

measures such as setting up State insurance pools to cover wind 

and other damages. However, these States cannot be expected to 

shoulder the burden alone given the magnitude of the losses that 

have occurred over the past few years and that may occur in the 

years to come. This is a national problem—a national problem that 

demands national attention. As such, it deserves examination by us 

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as national leaders, and it is an appropriate area in which to consider national solutions. 

Let me be clear at the outset that any Federal actions must be 

carefully crafted to ensure not only that Americans have access to 

affordable insurance but also that taxpayers are not overly burdened by the risk of losses that are properly borne by insurers and 

reinsurers. With that in mind, I believe we can and should consider 

a number of steps to help Americans find affordable insurance, because without insurance, their homes, their businesses, their very 

futures will be put at unacceptable risk. 

There are four steps that I propose today that Congress and the 

administration take to provide relief for homeowners and businesses in the coastal areas of our Nation. 

First, given the acute challenges faced by working families and 

working business owners, I believe that we ought to provide relief 

in the form of tax deductions for homeowners’ insurance premiums 

in areas where premiums have been significantly increasing. Any 

deduction should be targeted to working and middle-income families who need it most and should be capped, both individually and 

on a national basis, so as not to exceed $100 million for the year. 

This homeowner’s insurance deduction can give homeowners some 

desperately needed short-term relief from skyrocketing premiums, 

and it could also help ensure that families in hard-hit areas are not 

forced to move while they seek longer-term solutions. I am not talking about a permanent program here, but one that could provide 

some immediate, short-term relief to get people on their feet and 

avoid the kind of problems that I mentioned already in this statement. 

Second, I believe that our Nation should increase our investment 

in mitigation activities so that communities, families, and businesses can protect against future losses. The current FEMA Mitigation Program provides $100 million in fiscal year 2007. This is, in 

my view, not enough to assist communities around the country to 

truly address the risk of loss to their residence. Mitigation efforts 

are critical, and we should at least double the amount of funding 

so that communities can assist individual homeowners to strengthen their homes, can find larger-scale mitigation projects to protect 

whole blocks of communities, and can help people relocate to safer 

ground. Additional funds should be used for revolving loans and 

grants to directly assist homeowners and business owners who 

want to make needed upgrades to help protect their properties. Increased mitigation efforts can help to decrease insurance costs, and 

they can also protect Americans from future devastation caused by 

natural disasters. I talked about a revolving fund here. I think if 

you have a vested interest, an equity interest in your home, then 

you ought to bear some responsibility for paying back those resources that helped you strengthen your residence or your business. 

Third, we must strengthen the National Flood Insurance Program. The National Flood Insurance Program is essentially the 

only insurer of flood risks in this country. As a result of Hurricane 

Katrina, this program has borrowed funds from the U.S. Treasury 

and is now over $20 billion in debt. Most of that, I would point out 

to all of you here, occurred as a result of Katrina. Actually, the 

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Flood Insurance Program is running fairly well. It ran into some 

debt problems but nothing of the magnitude that I have just described until we were hit by Katrina. These numbers now, the premiums alone on this, could reach $1 billion a year fairly quickly. 

And, again, I will point out here the Committee also dealt with this 

legislation in the last Congress under the leadership of Senator 

Shelby and Senator Bunning. We need to get back to this right 

away, in my view, and deal with the Flood Insurance Program in 

the country. The interest alone on this, as I said, will reach $1 billion annually, close to half of the premium generated in the program each year. Clearly, this program was not designed to handle 

a catastrophe of the magnitude of Katrina, as I mentioned. In order 

to ensure the future availability of flood insurance, we must 

strengthen this program and put it on a sound financial footing, as 

Senator Shelby, Senator Bunning, and others on this Committee 

worked so hard to do last year. 

Last, we need to gather additional information as we consider 

longer-term solutions here. Today’s witnesses offer a range of views 

and a number of proposals on what, if anything, should be done at 

the Federal level to improve the long-term availability and affordability of property and casualty insurance. This diversity of opinion 

is on one level healthy and positive, and I welcome it. On another 

level, however, it underscores the fact that there is a lack of consensus among stakeholders and policymakers about what national 

action, if any, is appropriate in the long term to help homeowners 

and businesses contend with rising property and casualty premiums. For that reason, I believe we ought to establish a shortterm national commission of insurance experts and other leaders to 

make recommendations to the U.S. Congress and to the executive 

branch in very short order. I look forward to working with my colleagues Senators Nelson and Martinez, Senators Landrieu, Lott, 

and others on this effort. 

The issues before us today are critically important to millions of 

Americans. Recent analysis predicts that the 2007 hurricane season will be unusually active, with 17 possible named storms, 9 possible hurricanes, and much higher than average likelihood of a 

major storm hitting U.S. shores. Today’s hearing is the first step 

toward looking at how we can assist in protecting Americans from 

natural disasters and assuring them that when disaster strikes, 

they will be able to rebuild their homes, their businesses, and their 

lives. 

I look forward to hearing from all of our witnesses today and to 

working with Ranking Member Shelby and my colleagues on this 

very important issue. 

With that, let me turn to Senator Shelby for any opening comments he wants to make. Then I will turn to our two colleagues 

from Florida, and to welcome Governor Crist for being here, and 

I thank you this morning for joining us as well. 

Senator Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Thank you, Chairman Dodd. 

Hurricanes Katrina, Wilma, and Rita caused more damage than 

any other natural catastrophes in U.S. history. The aftermath of 

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these storms is still being felt even in my State of Alabama and 

across the entire Gulf Coast. Both homeowners and businesses are 

struggling to rebuild and to get back on their feet. Available and 

affordable insurance is a critical part of that effort. 

In the case of the Gulf Coast, insurance has served this function 

for many people. It has protected them from financial ruin and has 

aided the recovery effort by injecting billions of dollars into the region from the payment of claims on insurance policies. Unfortunately, many were under- or uninsured, and the increasing cost of 

insurance in the region has slowed the economic recovery. 

As we examine the question of the availability and affordability 

of catastrophic insurance, I believe that there are several considerations that we should keep in mind. 

First, private markets are far more innovative than Government 

programs. The private sector is rapidly developing new ways to 

manage catastrophic risk, including the use of catastrophe bonds, 

catastrophe futures products, and securitization of insurance risk. 

Already, newly designed sidecar transactions have allowed the 

market to significantly expand its capacity for catastrophic risk 

over the past 2 years. 

Second, the market is a better risk manager than the Government always. It is worth noting that we have yet to have a catastrophic situation inflict losses that our insurance markets were 

not able to absorb. Certainly there could be a catastrophe that our 

markets would not be able to handle, and we should consider how 

to address such a catastrophe for the future. In the overwhelming 

number of cases, however, our insurance markets can, and they do, 

effectively manage the risk. 

While some in the insurance industry may favor the idea of the 

Government covering the most expensive risk, I doubt taxpayers 

would look favorably on paying for losses that insurance companies 

can and should bear. Our experience has shown that the Government-operated insurance programs have a record of financial mismanagement. The program most familiar to the Members of this 

Committee is the National Flood Insurance Program. This program 

is not actuarially sound, was never actuarially sound, and is currently in debt in excess of $20 billion, as the Chairman noted. 

Based on this experience, any consideration of a national catastrophic insurance program should have to address several key 

questions. 

One, how would it ensure that its pricing is actuarially sound 

and not influenced by political considerations? 

Two, what types of coverage would it provide? 

Three, would it cover $1 million vacation homes? 

In a time of fiscal constraint, what impact would it have on the 

Federal budget? 

And, finally, if it is truly for catastrophic events, is it likely that 

it would benefit only citizens living in one State and a few other 

select areas at the expense of all Americans? 

Recent events have demonstrated once again diversification is essential in managing catastrophic risk. As devastating as Katrina 

was, it would have been far worse had it resulted in a wave of insurance company insolvencies. One of the primary reasons insurance companies remained solvent was because they diversified 

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their risk. Some estimates show that around half of the insured 

losses from Katrina, Wilma, and Rita were ultimately absorbed by 

insurers outside the United States. This diversification appears to 

have enabled U.S. insurers to bear the financial losses inflicted by 

the storms. As a result, policyholders could turn to solvent companies to pay their claims, and they did. Some policyholders, however, were not made whole, and we should focus on where the market failed and examine whether the market or the Federal Government is best positioned to fill those gaps. 

As always, I support a comprehensive examination of every facet 

of this very complex set of issues. This Committee has a rich history of doing just that on a number of very difficult topics, and I 

believe, Mr. Chairman, that is where that examination should take 

place. 

Thank you. 

Chairman DODD. Thank you very much, Senator Shelby. 

We have been joined by Senator Martinez—excuse me, Senator 

Menendez, although Senator Martinez is here as well. 

STATEMENT OF SENATOR ROBERT MENENDEZ 

Senator MENENDEZ. You are in good company, Mr. Chair. The 

President did that to me, too. 

[Laughter.] 

Mr. Chairman, let me—and I never mind being confused with 

Senator Martinez, by the way. You know, the other day I voted for 

him. 

[Laughter.] 

Let me thank you and Senator Shelby for holding an important 

hearing on the availability and affordability of property and casualty insurance in coastal regions. We all remember the Gulf Coast 

and how it was struck by several hurricanes in 2004 and 2005, and 

Katrina alone caused more than $40 billion in insured losses, including approximately $16 billion from homeowners’ claims. 

However, the availability and affordability of such insurance is 

not just a Gulf Coast problem; rather, it is a national problem. People in States from Massachusetts to my home State of New Jersey, 

to Florida and to Texas are facing similar situations because of 

hurricanes, and residents of other States across this country face 

similar challenges, whether they come from tornadoes, fires, earthquakes, or floods. 

In my State of New Jersey, we have 127 miles of Atlantic coastline and more than 80 miles of bay side coastline. More than 51 

percent of New Jerseyans live in counties that the National Oceanic and Atmospheric Administration lists as exposed to hurricane 

risk. And as of 2004, New Jersey ranked fifth in the Nation with 

$506 billion worth of insured coastal property that is vulnerable to 

hurricanes. While we were not directly hit by the hurricanes of 

2004 and 2005, all we have to do is look back to 1999 when Hurricane Floyd damaged 76,000 homes, 4,000 businesses, and 9 New 

Jersey counties were declared disaster areas. 

So as the Committee that is responsible for housing issues, we 

all know that the American dream of owning a home has been a 

powerful force throughout our history. The average family invests 

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more in their homes than they invest in the stock market, the 

money market, or their retirement savings plans. 

Unfortunately, skyrocketing insurance premiums and insurance 

availability are posing real threats to the American dream of homeownership. According to the Department of Banking and Insurance, 

last year rates increased 8 to 12 percent in New Jersey, or up to 

about 15 percent on average in coastal areas. And that is for those 

who can get coverage, Mr. Chairman. The fact of the matter is that 

several insurance companies in New Jersey have made a business 

decision to stop offering coverage in our coastal areas, and I am 

certainly not happy with that. 

More and more homeowners in my State have been dropped or 

are slated for nonrenewal by their insurance companies. A recent 

report in the Asbury Park Press had Richard Ray, a 72-year-old retiree, who lives six blocks from the ocean in Bellmawr, receiving a 

letter from his insurance company in January informing him that 

his homeowner’s insurance policy would not be renewed in February. The property insurance crisis is clearly a major one. It is not 

isolated just to New Jersey. Mr. Ray is one of many Americans who 

are now facing owning a home without the proper and much needed insurance, and without that, the single biggest asset that he has 

is exposed to enormous risk. 

So, Mr. Chairman, I look forward to working with you and the 

Ranking Member to make sure that we ensure the dream of most 

people, their retirement security, the essence of their financial security, and that we can do so in a way that is thorough and efficient and make sure that that dream remains alive. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Senator Menendez. 

We have been joined by our colleague from Florida, Senator Nelson, as well as a Member of the Committee, Senator Martinez. I 

will begin with the Member of the Committee, and then I will turn 

to Senator Nelson before we hear from the Governor. 

Senator Martinez. 

STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Well, thank you, Mr. Chairman. I appreciate 

so very much you and Ranking Member Shelby holding this very, 

very important hearing. I am a little under the weather this morning, but I could not pass the opportunity to be here with our Governor and an opportunity to introduce him before the Committee 

as well. 

As has been noted, the skyrocketing cost of property insurance 

is a problem that has been largely driven by the devastating hurricanes that we have seen in the last couple of years. And let’s be 

clear from the outset that the skyrocketing property insurance 

rates are a national concern and have the potential to become a national crisis. 

It is a national problem because 90 percent of the people in our 

Nation live within 200 miles of a coastline. There is the risk crisis 

because insurance companies in my State and others have already 

shown that the current marketplace is not working for them. State 

Farm has chosen to stop writing business in Mississippi. This year, 

Allstate Floridian will send notices to an additional 100,000 

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Floridans that their homeowners’ policies will not be renewed. 

Even in Northeast States that have not seen recent hurricane activity, we are witnessing a constricting of the market. We are indeed facing a crisis in both the availability and affordability of 

property insurance, and I believe the Federal Government can play 

a reasonable and responsible role in helping the marketplace better 

address the needs of our consumers. 

We live in a world that will always have risk. In light of past 

disasters and in expectation of future ones, we have got to find a 

better way to spread and finance the risk. I support the creation 

of a national catastrophic fund in order to stabilize and strengthen 

the insurance market and encourage proper disaster mitigation. 

The economic distress brought by disasters affects us all. With a 

national catastrophic fund, we have an opportunity to minimize 

risk nationwide and ensure our economy is able to absorb losses 

from large and small disasters. 

But the looming insurance crisis will not be fixed with a national 

backstop alone. This is a multilayered problem that requires a multilayered approach. Among other things, I believe we should provide tax incentives that encourage homeowners and businesses to 

prepare for disasters. I also support increased funding for hurricane research because, in order to better prepare for disasters, it 

is imperative that we know more about them. 

I am so glad that we are meeting here today to discuss some of 

these initiatives, and I am also so proud to be able to introduce 

Florida’s Governor, my Governor, to this Committee. 

Charlie Crist is a public servant defined by his tireless devotion 

to the citizens of Florida. He has been a Florida State Senator, an 

Education Commissioner, and our Attorney General. In 2006, he 

sought and won the Governor’s seat, and on January 2, 2007, was 

sworn in as Florida’s 44th Governor. In his public career, Governor 

Crist has worked to pass laws that dramatically toughened penalties for the identity theft and counterfeiting and dealing of prescription drugs. He proposed and worked to pass Florida’s landmark civil rights legislation, the Marvin Davies Civil Rights Act of 

2003, to pursue those who engage in willful discrimination. He also 

won approval for legislation targeting those who distribute illegal 

spam on the Internet. 

Since his first day in office, my good friend, Charlie Crist, has 

tackled the issue of property insurance affordability. One of the 

first things he did after becoming Governor was call our Florida 

legislature into special session to deal with the Florida insurance 

crisis. The State succeeded in addressing that issue in the best way 

that it could, and now Florida is rightly looking to the Federal Government to step in and play its appropriate role. 

The Governor is working tirelessly with the entire Florida delegation in a bipartisan way to find a resolution, and I know I speak 

for all Floridians when I say we are proud to bring him before this 

Committee. 

Before closing, I would like to add that in case you have not seen 

the hurricane predictions for this season, we could very well be in 

for a lot of activity. The forecast is calling for nine hurricanes, with 

a prediction that five will be major ones, Category 3 or higher. We 

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dodged a bullet last year, but asking for the hurricanes to miss us 

2 years in a row is like betting against the house. 

Chairman Dodd, thank you for holding this hearing and tackling 

this very important issue this year. 

Chairman DODD. Thank you very much, Senator Martinez. That 

is the reason we are holding the hearing now, is to try and get in 

front of this as early as we can and come up with some ideas. And 

no one has been more insistent upon that than the two Members 

from Florida in talking to this Committee, and no one more insistent within the delegation of Florida than my friend and colleague, 

Senator Nelson. I can see him coming almost on a daily basis to 

me. In addition to saying hello and wondering how my daughters 

are doing, he was also wondering when we could have a good hearing on the subject matter of the availability and affordability of 

property and casualty insurance. So I am pleased to welcome Senator Nelson here. 

I would point out to the Committee, I know you have another 

Committee hearing in the Commerce Committee, but I want you to 

know if time permits, please come and join us here on the dais as 

we hear from other witnesses, and you are welcome to be a part 

of this hearing as well. 

STATEMENT OF BILL NELSON, U.S. SENATOR FROM THE 

STATE OF FLORIDA 

Senator NELSON. Thank you, Mr. Chairman, and thank you for 

permitting me to be a pest with you ever since our telephone conversation on November the 8th, the day after the election, when it 

became apparent that you were going to be Chairman of the Committee. I am grateful to you and Senator Shelby for your kindness 

in having this hearing, and indeed, Senator Martinez and I are 

quite honored to have our Governor here, who has to deal with this 

on a daily basis. 

Mr. Chairman, the long and short of what is facing us is that the 

Big One is coming. In 2005, you may have thought that that was 

the Big One, and we in Florida in 2004 may have thought that four 

hurricanes within the span of 6 weeks, hitting virtually every county in Florida, might have been the Big One. But remember that 

Katrina was a Category 3, and it did to the Mississippi coast what 

you would expect a Category 3 to do. It just so happened on the 

back end of that hurricane and the winds coming counterclockwise 

from the north to the south in the city of New Orleans, that for 

reasons other than wind damage, the canals filled up, the drainage 

canals filled, and then emptied into the big drainage canals. The 

water rose. The pressure on the sides of those canals increased, 

and in two places they were breached, thus filling up the bowl of 

New Orleans with water, with the consequence that we are well in 

excess of that 2005 year, in excess of over $200 billion worth of 

damage, of which the Federal Government’s share at the end of the 

day is going to be in excess of half of that. And that was a Category 

3. 

The Big One is coming, and it is a Category 4 or 5 hitting at a 

high-density, urbanized part of the coast, and it is not just Florida. 

It could be anywhere up that Atlantic seaboard. It could be anywhere on that Gulf Coast. Or it could be an earthquake in San 

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Francisco. It could be an earthquake in Memphis. And when the 

Big One hits, at the end of the day, just like Katrina, the Federal 

Government is going to pick up the tab. 

So the question is: How can you rationally devise a system so 

that we know ahead of time and it gives certainty to the marketplaces that Senator Shelby was talking about so that the marketplaces can provide a commodity which is essential today? Insurance 

is not a luxury. If you want to own a home, you have got to have 

insurance because you cannot get a mortgage without insurance. 

And, oh, by the way, three major industries in this country—construction, real estate, and banking—all depend on homeownership 

and home building. So everything fits together. 

So then when you look at it, you find out there is no consensus. 

The insurance industry is split nine ways to Sunday. The insurance 

industry is in a war with the reinsurance industry. The reinsurance industry is saying that the private marketplace can solve the 

problem, and it cannot on risk of this magnitude. When the Big 

One hits, it is a $50 billion insurance loss storm, minimum. The 

private marketplace cannot supply that. There is no one State that 

can withstand that kind of economic hit, and there is no one insurance company or reinsurance company or series of reinsurance 

companies that can withstand that kind of hit. 

Therefore, that brings us to the table today. What is the appropriate role? Well, with everybody so split and with the fact that the 

Federal level of Government has discharged to the States ever 

since the 1930’s, through the McCarran-Ferguson law, the responsibility of the regulation of insurance, then the question is begged 

to be answered: How do we build that consensus? And it is the bill 

that Senator Martinez and I and others—most of them the Gulf 

States, both Senators from Mississippi, Senator Landrieu are 

signed on—that takes the model of what we did in Florida in the 

mid-1990’s, inheriting a paralyzed marketplace, not just in South 

Florida where Hurricane Andrew hit—-and it was a Category 4 

that hit not the high-density, urbanized area. It hit South Dade 

County, a relatively lessened urbanized area. And yet the paralysis 

of that marketplace spread over the entire State. 

The model that we used, we brought people together on a consensus-building—then it was called the Academic Task Force. It 

was headed by the presidents of the State universities. They went 

out, they hired the best staff. They sought people’s opinions. They 

came together. They made 16 recommendations to me and to the 

Governor. We then went to the legislature, and we adopted 15 of 

those 16 recommendations and, indeed, restored the private marketplace. 

What is that role? Senator Martinez and I have filed a six-pack. 

There is an additional bill that would be a seventh that we ought 

to look at, which is what is the Federal legislation that would 

incentivize the States to form a regional compact, a regional catastrophic fund. We tried that back in the 1990’s. The rest of the 

States did not want to participate. Florida had to do it on its own. 

But Florida saw from the 2004 experience of four hurricanes that 

all of that catastrophic fund, which is a reinsurance fund, was depleted. 

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11 

And so what we are facing is the question of what is the appropriate Federal role when, in fact, at the end of the day, on the experience of Katrina, the Federal Government is going to pay a lot 

of the tab. And I am just as pleased more than I can tell you, Mr. 

Chairman, that you have said that you support this consensusbuilding bill, because you will hear in the testimony today from all 

these experts there is no consensus. And there is no way, no idea 

of how you would even build a rate structure on a national catastrophic fund. We have got to determine that. 

Should we change the Tax Code so that insurance companies can 

reserve for catastrophe without having to pay taxes on it and fence 

it off? But there is no consensus on that within the industry. 

Should we change the Tax Code to reserve an individual person, 

a homeowner, to reserve for catastrophe without paying taxes on 

it? There is no consensus on that. 

And all the other bills that Senator Martinez and I have filed in 

this six-pack, there has to be a high-level national emergency commission on catastrophe. And maybe at the end of the day you are 

not just looking at hurricanes, but you are looking at earthquakes. 

And who knows? Maybe at the end of the day, you might even be 

looking at the question of floods, all within what is the proper Federal Government role to backstop these huge natural catastrophes 

that, in fact, are so catastrophic economically as well as personally. 

So it is my pleasure, Mr. Chairman, to introduce our Governor, 

who has taken a very strong leadership role in this, because people 

at home are hurting. They cannot afford their homeowner insurance premiums, and when that is combined with taxes in Florida, 

the homeowners’ real estate taxes, people are being eaten out of 

their house and their home. And I wanted to, along with Senator 

Martinez, welcome our Governor, Governor Charlie Crist. 

Chairman DODD. Well, thank you very much, Senator Nelson, for 

that, and Senator Martinez as well, both of you, for introducing 

your Governor. We are pleased to have him as our lead witness 

this morning. 

Charlie Crist was elected in November 2006, served as the Attorney General of your State prior to that, and we are pleased that 

you are here this morning to talk about this issue as it affects your 

State and the Gulf States as well. So, Governor, welcome. 

STATEMENT OF CHARLIE CRIST, GOVERNOR, STATE OF 

FLORIDA 

Governor CRIST. Thank you very much, Mr. Chairman, and 

thank you, Senator Shelby as the Ranking Member, and Members 

of the Committee. I thank you for the opportunity to testify here 

today regarding the availability and affordability of property and 

casualty insurance, and I applaud you, Mr. Chairman, for your 

leadership on this critical issue. I want to thank my friends, Bill 

Nelson and Mel Martinez, for their leadership on this issue as well. 

A few weeks ago, our Senators introduced an array of legislative 

options addressing insurance reforms. As you know, they call it the 

‘‘six-pack,’’ and it may have a seventh. I am so proud to work with 

Senators Nelson and Martinez, along with our Florida Members of 

the House of Representatives, to move toward the creation of a national catastrophic insurance fund. 

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12 

The role of the Federal Government in protecting the American 

homeowner from skyrocketing homeowner’s insurance has been debated for many years. Conceptually, the idea remains the same. 

The debate now focuses on the millions of Americans impacted by 

increased property insurance rates. Traditional insurance market 

mechanisms are not adequately managing catastrophic risk, and 

the financial strain on consumers can be felt from coast to coast. 

Hurricane Katrina reminded us all of what a natural disaster 

can do, not only to a specific region but to our Nation as a whole. 

No specific area of our country is immune to natural disasters or 

exempt from paying the recovery costs thereof. In the past, congressional action created a bridge to homeowners in the form of national flood insurance. Congress has the opportunity once again to 

provide homeowners relief in the form of a national catastrophic insurance plan. 

During my campaign for Governor last year, I traveled our great 

State, and I listened to the concerns of the people of Florida. Floridians are being forced to choose between paying skyrocketing insurance premiums or selling their homes. I have heard from many 

Floridians who are worried that soaring premiums are threatening 

their chance to raise their family in a Florida home. This is not the 

American dream. 

The hurricane seasons of 2004 and 2005 produced eight named hurricanes that hit our Florida, costing the State $33 billion in 

property loss. As a result, the number of carriers providing property insurance coverage has been on the decline, and market concentration has diminished as well. Florida now relies on a greater 

number of carriers, often smaller, recently formed domestic insurers that provide coverage, rather than a handful of nationally 

known insurance companies. The dramatic increased cost of reinsurance, increased projected cost of building materials and labor, 

and projection of future catastrophes have all contributed to significant premium increases paid by Florida policyholders. 

Commensurate with these issues, Florida’s Office of Insurance 

Regulation, headed by Kevin McCarty, and in conjunction with our 

new CFO, Alex Sink, has received a substantial increase in the 

number of rate change requests from insurance providers. Floridians understand the risk of living in our beautiful State. Our State 

has made immense progress in reinforcement efforts and stricter 

building codes to protect our citizens when the next storm surely 

will come. However, these efforts are not enough to convince the insurance industry that Floridians are a worthy risk. 

As Florida’s new Governor, I have heard directly from our people 

that immediate insurance relief was needed. The people of Florida 

cried out. They needed help, and we answered their call. Earlier 

this year, the Florida Legislature did meet in a special session, 

seeking solutions to runaway property insurance rates. We worked 

together in a bipartisan way. We focused on results, not on politics 

or the process. Together, we achieved a momentous step forward in 

reducing property insurance rates for our people. 

The legislature passed meaningful property insurance reform, 

providing much needed relief to the people of Florida, and I must 

at this time thank our Senate President, Ken Pruitt, and our 

Speaker, Marco Rubio. 

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The work of the Florida State Legislature has begun to address 

the insurance crisis in our State, but Federal action is also necessary. I implore Congress to take the next step to ensure the affordability and availability of property insurance. I know that each 

of you has chosen to serve the people of your State, with the end 

goal of improving their lives and their well-being. Like me, you 

want your citizens to have the opportunity to own a home without 

the worry of losing it to out-of-control property insurance rates. 

Mr. Chairman, you have been a leader on consumer issues in 

Connecticut and in our country, and I applaud your efforts. Let me 

please be clear. This crisis is not an exclusive issue for Florida. 

Many other States are also facing insurance crises. 

In February, I had the privilege of working with my fellow 

Southern Governors, including Governors Barbour, Riley, and 

Kaine of Virginia, in drafting a resolution urging our Congress to 

create a national catastrophic fund. Governors throughout our Nation deal firsthand with the impact of natural disasters, as do you. 

I am also proactively working with Governor Schwarzenegger of 

California, Governor Spitzer of New York, and Governor Perry of 

Texas to advance a national fund proposal. Governors understand, 

as you do, the need for such a program and look forward to working with you to formulate this legislation, much like as Senator 

Nelson and Senator Martinez have already done in their forwardthinking approach. 

The problem of insurance availability and affordability in the 

Gulf Coast area has been widely publicized, but it is a problem that 

is now affecting other States as well. Mr. Chairman, as you probably know, the Connecticut Department of Insurance recently conducted a study of its homeowners’ insurance market and determined that insurance availability within 1,000 feet of the shore is 

difficult to find in the traditional market today. Coverage that is 

available typically is 2 or 3 times more expensive now and often 

available only through a specialty market. Similar problems are 

being felt from Cape Cod to the Carolinas. The response from insurers is aimed at coastal exposure, but it ignores the very real 

possibility that the next major catastrophe will not even touch a 

coastline. Our country has a relatively brief history, but in that 

time virtually every region of the country has experienced some 

form of catastrophic event. The hurricanes in the Gulf are only our 

most recent reminder of the risk from natural disasters, but we 

would be naive to think that they are the last. We are all vulnerable to natural disasters. Most of the States you all represent have 

been impacted by hurricanes or tornadoes or wildfires or blizzards 

or drought. Whether you live in Connecticut, Alabama, New York, 

Hawaii, New Jersey, Ohio, Kentucky, North Carolina, or any other 

State, we are all at risk. 

That is why it is time, I believe, for Congress to move forward 

and listen to the American people and create a national fund. A 

Federal catastrophe fund would provide protection for American 

homeowners throughout the country. A national program would 

spread the risk across our country, thus strengthening our insurance markets. Capital for the plan could come from a portion of the 

property insurance premiums already collected by insurance companies. The funds could grow tax free, provide the financial capamstockstill on DSKH9S0YB1PROD with HEARING

14 

bility to cope with the catastrophic risk, and allow affected regions 

the ability to recover more quickly from the natural disasters they 

may suffer. This Federal backstop, as Senator Nelson refers to it, 

for insurers is an essential step to addressing our insurance crisis. 

The situation is not just an issue of lowering insurance rates to 

our citizens. It is also an issue of using taxpayer dollars in the 

most efficient manner. Our current policy for managing the devastating effects of catastrophic natural disasters relies heavily on 

our Federal Government. Consider the $110 billion allocated so far 

to facilitate recovery and rebuilding following Hurricane Katrina. 

As generous as compassionate as the American people are, this current system leaves much to be desired. 

The subject we are discussing today is not new. What are new 

are the insurance industry’s record profits, to the tune of $68 billion in 2006 alone. That is according to a Wall Street Journal article from January 23, 2007. The insurance industry as a whole has 

enjoyed lavish prosperity in recent years. I believe it is time for the 

American people to participate in that prosperity by way of reasonable insurance costs. 

Our Nation’s response to natural disasters is one of defense. Mr. 

Chairman, the Committee has a unique opportunity to play offense 

by changing the mind-set within the Government. This change can 

be made by creating a national catastrophe fund that will ultimately protect our bosses—the American people. 

The time is now to bring all the stakeholders to the table to do 

what is right. I ask you to refocus our national effort away from 

large-scale funded recovery after a disaster to proactive prevention. 

A national catastrophe fund will create this transition. Clearly, this 

practice makes the issue a national one, not only a local or a regional problem. 

For example, it is estimated that the Great Lakes and Plains 

States will contribute approximately $26 billion to Katrina initiatives. However, these tax dollars are not risk based, and they will 

leave little legacy that guarantees relief for the next natural catastrophe, regardless of where that natural catastrophe would strike. 

A national plan would also raise the bar for disaster preparedness and recovery. By encouraging States to adopt stronger building codes and emergency response capabilities, we would undoubtedly mitigate future economic damage while developing a cultural 

preparedness that will create a safer environment for all of the citizens of the United States. 

Today, we must ask ourselves: What will make insurance more 

available and more affordable for the people that we all serve? I 

believe a national catastrophe fund will achieve that goal. 

I thank you again for holding this hearing, Mr. Chairman and 

Senator Shelby, for inviting me here today, and for your continued 

interest and leadership on this crucial issue. I look forward to 

working with Congress to solving the insurance crisis facing our 

citizens. I thank you for your time and for your attention and for 

your compassion, and I want to again thank my colleagues and my 

friends, Senator Bill Nelson and Senator Mel Martinez, who serve 

the people of our State so ably and so well. 

Thank you, sir. 

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Chairman DODD. Thank you very much, Governor, for your testimony. We thank our colleagues as well for their observations. 

Let me just ask one question, if I can, of you, Governor, and that 

has to do with—and I think you referenced this in your comments. 

What has happened to the presence of private insurers as a result? 

Some have suggested that as a result of the Cat fund which was 

established in the State that the private industry has felt challenged by that and the result has been one of the contributing factors for them not staying in the State? What evidence do you have 

that that is the case? 

Governor CRIST. Well, I think the opposite is the case now, Mr. 

Chairman. What is happening is we have expanded that catastrophe fund as it relates to Florida-specific. That is intended to encourage more insurers to come to the State, and they are coming. 

As I mentioned in my prepared statement, many of them are domestic, and some of them are smaller companies. But it is creating 

greater competition and more choice for the consumers of the State 

of Florida. 

Recently, one company offered new rates that are 34 percent 

lower than they were just a year ago. Two other companies’ rates 

are more than 20 percent lower than they were just a year ago. 

And additional companies, one in particular wants to bring $100 

million of coverage to our State that did not do so before this special session we had just in January. 

Chairman DODD. So you actually think it is having the effect of 

attracting insurance companies. 

Governor CRIST. I believe that it is, and we also have in Florida 

something that may be unique. We have a Citizens Property Insurance Company that is run by the State. This company came into 

being a number of years ago as a result of the catastrophes that 

we were facing. It offers greater competition. It was set up originally to be the insurer of last resort, required by law to only provide the highest rates. The special session changed that law. They 

now can compete. And what the old threat used to be in Florida 

by the insurance industry was, because the old mind-set used to be, 

the only way you can improve the insurance market in your State, 

Florida, is to allow rates to increase so you will attract more. 

Well, that is exactly what was killing our citizens, were the increased rates. Senator Nelson was right in his comments, the double whammy of pocketbook issues in our State, our insurance premiums, as well as property taxes. And we are working on both. 

But this insurance company that is run by the State now can 

compete, and what insurance companies used to say to us in the 

private market is, If you do not allow us to raise our rates, we will 

leave your State. Well, we do not want them to leave, but if they 

leave now, we have protection for our people, and we owe them 

that. 

Chairman DODD. How much is in your fund in the State? And 

can it deal with the kind of situation that Senator Nelson described? 

Governor CRIST. Not a $50 billion situation, but it is up to about 

$9 billion now, and we intend to increase it. That is why we feel 

that, you know, this is sort of a mosaic and there are lots of pieces 

to the puzzle across the board on this issue that will benefit Conmstockstill on DSKH9S0YB1PROD with HEARING

16 

necticut, that will benefit Florida, that will benefit Alabama, and 

every State in our country. 

I had the opportunity—I guess you could put it that way—to be 

in California at a World Series game and witnessed the earthquake 

that stopped that game. Any State you are in in our country can 

suffer from a natural catastrophe. That is why I think it is so important that you have been kind enough to hold these hearings 

today. 

Chairman DODD. Senator Shelby. 

Senator SHELBY. Senator Nelson, one of the concerns I have 

about establishing a national catastrophe fund is that it may increase the chances of financial crisis following a natural disaster. 

Under your legislation, the national catastrophe fund would provide reinsurance to State insurance funds. Just as the Flood Insurance Program has failed to charge actuarially sound rates, the national catastrophe fund is very likely to underprice the reinsurance 

it would provide to State insurance funds. This is a concern of 

mine. This price break would likely be passed on by the State 

funds to their customers in the form of rates that are not actuarially sound. This could have two results. 

First, because State insurance funds would charge below-market 

prices, they would underprice private insurers and obtain a significant share of the insurance market in their States. As a consequence, insurance risk could become concentrated in State insurance funds. 

Second, the failure of the State insurance funds to charge actuarially sound rates, Governor, means that they would probably not 

collect enough premiums to cover their obligations. Accordingly, the 

net effect of a national catastrophe fund would be to concentrate 

insurance risk in undercapitalized State insurance funds. When a 

natural disaster hits a State—Florida, Alabama, or anywhere—risk 

will not be spread among numerous well-capitalized firms in the 

private market, but concentrated in one financially impaired State 

fund. 

Senator Nelson, do you have any concerns that your legislation 

at this point—and I know it is subject to change—would concentrate too much risk in State insurance funds? Do you understand my concern? 

Senator NELSON. Yes. Senator Shelby, I see problems with the 

national catastrophe fund, but not in the way that you have stated 

them, and—— 

Senator SHELBY. Why? 

Senator NELSON. And I am going to answer that, but let me just 

say that the six-pack of bills that we have filed is purely to get the 

ideas on the table. What I have urged you for the last year, and 

the Chairman more recently, is to get that emergency commission 

going so that consensus can be built, because nobody has all of the 

answers and, in fact, if they do, they do not want to share them 

or they want to just protect their turf. And that is what is going 

on in the industry today. 

Now, what I see, the biggest problem with a national catastrophe 

fund is not what you have said; it is the fact that you are going 

to have a Star Chamber up there setting rates that will not have 

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the accountability to the people. And whenever you have that, that 

is not a good thing. 

Senator SHELBY. Let me stop you, though. Do you believe that 

any fund we set up should be actuarially sound? You know the 

Flood Insurance Program is not actuarially sound. It is in debt of 

$25 billion now. Do you believe it should be actuarially sound? 

Senator NELSON. In theory, yes. 

Senator SHELBY. In theory? What about practice? 

Senator NELSON. Well, in practice. Take, for example, the National Flood Insurance Fund. It would be great if you could have 

it actuarially sound, but that means you are going to have to hike 

all of the premiums, and politically that may not be available to 

you and to the rest of the Senate and to the Congress. Therefore, 

the Federal Flood Insurance Program has been subsidized by the 

Federal Government for the last number of years since its existence. That is a perfect example of a response to your question 

about these other funds. 

Now, what these other funds do, if Florida had not had that catastrophe fund after the four hurricanes in 2004, it would be ‘‘Katy, 

Bar the Door’’; the insurance companies would have fled the State 

of Florida. Is Florida’s fund actuarially sound, to take your question back? The answer to that is technically no, because when the 

fund is drained, it under Florida law goes out to assess the people 

of Florida through the ratepayers of insurance policies. 

Senator SHELBY. Well, my concern is that we should not dump 

everything, including the risk in my home State on the coast, on 

the taxpayers, as you well know. 

Governor Crist, you recently enacted—— 

Senator NELSON. May I respond to that? 

Senator SHELBY. Yes, go ahead. 

Senator NELSON. But the fact is that your taxpayers from northern Alabama that do not have much of the risk that your people 

from the south coast of Alabama do, they are paying it because, remember, in excess of $100 billion for Katrina has been paid by the 

National Government. 

Senator SHELBY. By the taxpayers. 

Senator NELSON. By the taxpayers. 

Senator SHELBY. I understand that. 

Senator NELSON. So at the end of the day, the Federal taxpayer 

is paying it now. We ought to devise a system—— 

Senator SHELBY. Just because the taxpayer is paying it now, if 

we are looking at a future catastrophe fund, shouldn’t we make 

that, the best we can, actuarially sound? 

Senator NELSON. And that is the reason for the consensus commission. 

Senator SHELBY. OK. I hope you are on the right track; otherwise, this legislation will go nowhere. 

Governor Crist, your recently enacted insurance reforms greatly 

expanded the financial obligations of Florida’s insurer of last resort 

and largest property insurer, Citizens Property Insurance Corporation. Citizens was allowed, as I understand it, to cover policyholders who could obtain insurance in the private market and to 

write additional lines of insurance. I think you mentioned this earlier. 

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Governor CRIST. Yes, sir. 

Senator SHELBY. Your reforms also expanded the amount of reinsurance the State Hurricane Catastrophe Fund could provide to approximately $32 billion. Is that correct? 

Governor CRIST. I think so. 

Senator SHELBY. Yet despite the expansion of the financial obligations of Citizens and the catastrophe fund, your reforms did not 

increase the financial resources available to cover these obligations. 

Your reforms reduced the rate Citizens charges, and the catastrophe fund, as I understand it, has approximately $1 billion in 

cash. Critics have said that your insurance reform plan was not fiscally sound and that Florida has nowhere near enough money to 

cover all the promises made to insurers and taxpayers. The solvency of both Citizens and the catastrophic fund now depend on 

the levying of assessments on all Florida policyholders following a 

hurricane or an incident. However, a recent study found that the 

assessments that would have to be levied in the event of a real disaster on all policyholders in Florida to cover claims following a hurricane—not before, but following—would range from approximately 

$1,700 per household for a moderate hurricane to $14,000 per 

household for a major hurricane. 

Governor, if faced with levying such assessments, is it possible 

that you would seek to waive them and look for other sources of 

funding, such as us, the Government, to cover the shortfall? 

Governor CRIST. Thank you for the question, Senator. Some of 

your comment was not accurate. We have more in the fund. It is 

about—— 

Senator SHELBY. Correct the record if we were wrong. 

Governor CRIST. Sir? 

Senator SHELBY. You said it was not accurate. Correct the 

record. 

Governor CRIST. I was about to. 

Senator SHELBY. OK. 

Governor CRIST. Yes, thanks. It is about $9 billion that we have 

in reserve. 

Senator SHELBY. Not $1 billion? 

Governor CRIST. Right. 

Senator SHELBY. Not $1 billion in cash but $9 billion in reserves, 

that is your—— 

Governor CRIST. It is my understanding we have the ability to 

pay $9 billion, yes, sir. 

Senator SHELBY. OK. 

Governor CRIST. And it almost sounds like you are making my 

case for a national catastrophe fund by way of explanation of how 

at-risk many States, including yours, could be. 

Senator SHELBY. Absolutely. 

Governor CRIST. And that is why I think it is so important, Mr. 

Chairman, that we have this discussion. Florida has been responsible and we have responded to the needs of our people, just as you 

would respond to the needs of the people of Alabama. And what we 

have done in a responsible way is provide for a market and a climate and an opportunity to lower rates so that people do not have 

to sell their homes, that they can stay in the Sunshine State, if 

they wish, and not risk their homes as a result. We have done it 

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in a way that is prudent, that is sound, that is responsible, but as 

I said earlier, there are many pieces to the puzzle. And we look to 

our friends at the Federal level because we are a union, we are a 

United States, and we all have a duty to each other. And that is 

what I am imploring you to do today, is give us a hand and help 

us, too, as we would help Alabama. 

Senator SHELBY. Well, I think you are right in that regard. We 

are a union. We are in this together. But, on the other hand, if we 

have learned one thing from the Flood Insurance Plan—I think it 

came into being in 1968, more or less—it is insolvent today. It was 

always actuarially unsound. And if we are ever going to learn a lesson, we ought to learn a lesson there. And as we move forward in 

this area, whatever we do, we ought to make it as actuarially 

sound as we can, and we should look, I believe, at insuring milliondollar homes—a lot of times they are a third home—you know, at 

a cut rate, at a subsidized price, flood insurance, for example, and 

other things. 

Governor CRIST. May I respond to that, Mr. Chairman? 

Senator SHELBY. Yes. 

Governor CRIST. Thank you. Well, I do not disagree with some 

of your comments, but I think it is important not only to look at 

the Flood Program but look at the Katrina experience and let us 

learn from it. As Senator Nelson ably pointed out, the Federal Government is giving the money anyway. It is already happening. And 

it just strikes me from a common-sense point of view that if we can 

do it proactively before the storm or disaster would hit, we can, you 

know, have premiums come in, we can earn interest in this fund, 

instead of shelling out the money that the taxpayers end up paying 

ultimately anyway. Wouldn’t that be smart? 

And the final point that I will make—and then I will be quiet, 

Mr. Chairman—is that we have a national defense in this country 

to protect us from foreign invasion. That makes sense, and it is 

right and it is just and it is appropriate. Wouldn’t it make as much 

sense to have a fund to protect us from natural disaster as well? 

Don’t we have a duty to protect our people, whether it is from a 

foreign invasion or from a natural or catastrophe? Our duty is to 

protect and serve, and I think we share that duty. 

Senator SHELBY. I would just respond to that. I think we share 

a lot of views in this regard. My thought is to make it as actuarially sound as we can. 

Governor CRIST. I do not disagree. 

Senator SHELBY. Not open-ended for the taxpayers to take a hit. 

Thank you, Mr. Chairman. 

Senator NELSON. Mr. Chairman, if I could just add one comment, 

Senator Shelby, you may want to consider one of the other ideas 

that is out here on the table, which is a regional catastrophe fund, 

so that those who are most at risk on that particular natural catastrophe would create a regional catastrophe fund that would insure—in effect, a reinsurance fund insuring against that catastrophe. Then you pinpoint more the risks to the ratepayers and can 

make it, what you said, actuarially sound. 

Senator SHELBY. Well, I think we should leave everything on the 

table as we go forward, but we should go forward. 

Thank you, Mr. Chairman. 

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Chairman DODD. Thank you, Senator Shelby. 

Let me just make one additional comment. I see Senator Allard 

is here as well, and he may have some questions for the Governor 

and our colleagues. 

One of the things that occurs to me, as I am listening to this idea 

of the national fund or regional fund, we have to be careful what 

we wish for in some cases, because certainly what will come with— 

one of the problems with the Flood Insurance Program was it was 

open-ended. Basically, it was a check-writing process, no matter 

what the circumstances were. And as I pointed out in the opening 

comments here, but for Katrina, actually the Flood Program was 

working relatively well. Katrina blew it out of the water, and for 

those reasons, we are probably going to have to do what the Committee did last year under the leadership of Senator Shelby, and 

that was to have a forgiveness with FEMA; otherwise, it is just 

never going to be paid, not at $20 billion, $25 billion. 

But I can see when you come along with either a regional or national fund, all of a sudden watching a national regulator start dictating to States and localities where building can occur, under 

what circumstances, a variety of other steps that I suspect may run 

into a bit of a buzz saw when you get the National Government 

mandating now property needs to be managed and handled in a 

way that—I can just hear the reaction if that happens to some extent. 

So as I think about this option, also be conscious of the fact that 

if you are asking for a national program to provide financial relief, 

expect as well that national entity to probably have some very rigid 

guidelines and standards that the States may find a little difficult 

to accommodate, particularly when you consider the attractiveness 

of some of our coastal States and the appetite to have homes and 

businesses located in some of the most beautiful areas but some of 

the most vulnerable areas as well to natural disasters. 

And so as we look at this, we need to keep conscious of the possibilities of having some negative reactions to the kind of restrictions 

that may be placed on what happens under local zoning and planning. 

Senator Allard, do you have any comments or questions you want 

to make? 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Well, Mr. Chairman, I have an opening statement I would like to make a part of the record, if I might, and then 

I do have one brief question. 

Chairman DODD. Yes. Certainly, go ahead. 

Senator ALLARD. You have talked about how property insurance 

rates are skyrocketing out of control. I guess you made that comment. Did we have some sort of artificial restrictions on how fast 

insurance rates could increase on property and flood insurance and 

whatnot prior to Katrina? Did we have any cap at all that restricted the increase in property rates at all? 

Governor CRIST. Not that I am aware of, no. 

Senator ALLARD. I just wanted to check and make sure of that 

because if we had some artificial restriction on how those rates increased prior to the floods and whatnot, then all of the—if those 

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were removed for some reason, then you could have an artificially 

high increase. That is the point I am trying to get to. 

Governor CRIST. That is a great question. No, sir. 

Senator ALLARD. OK. So this is strictly just a market phenomenon that has occurred in that area down there, and the rates 

have increased, according to the insurance companies, based on the 

risk. 

Governor CRIST. Dramatically. One of your colleagues—if I 

might, Mr. Chair, one of your colleagues, Senator Menendez, indicated that they have risen not only in Florida but in his New Jersey as well. 

Senator ALLARD. And why has the increase—I can understand 

the increase in Florida, Louisiana, and whatnot. But why? Is it 

that New Jersey is along the coast? 

Senator MARTINEZ. The next panel for that one. 

Governor CRIST. Yes, the next panel will probably tell you, but 

my guess would be to make money. 

Senator ALLARD. OK. But how do they justify that increase? 

Governor CRIST. I have no idea, and I—— 

Senator ALLARD. OK. We will ask that of the next panel. 

Thank you very much, Mr. Chairman. 

Chairman DODD. Thank you very much. Governor, we thank you 

very much for your presence here today. It means a lot to us to 

have you here, and you have spoken eloquently on behalf of your 

State, and as your colleagues, the two Senators do, with great frequency, as I mentioned earlier. And the reason we are holding this 

hearing is because this is a national problem, and as you point out 

accurately here, natural disasters hit all of us at one point or another. I pointed out earlier that had some of these storms that you 

have described and Senator Nelson and Senator Martinez have described, had they moved a few degrees west as they went up the 

coastline, they could have had some devastating implications on 

the Northeastern States. I certainly recall back as a child growing 

up in Connecticut the huge storms that we had hit. The 1938 hurricane, I have a brother that was born in the middle of the 1938— 

they did not call it a hurricane in those days. They called it a sandstorm, I think, as they came through. We did not know how to predict them. It wiped out huge areas of the Northeast in 1938. In the 

1950’s as well, we had a number of big ones that came through. 

And you pointed out the natural disasters that hit other parts of 

the country as well. 

So this is an important hearing, and obviously your State has 

been on the front lines of this given the devastation that has occurred in Florida, and, of course, Katrina and the devastation that 

occurred in the Gulf States. So we want to take some responsible 

actions. 

The commission idea is one that I endorse, and I would like to 

have it move fairly quickly. As I mentioned to the former Chairman 

here, the possibility of combining that with the reform of the Flood 

Insurance Program, to mark up those bills in the next few weeks 

to be able to move aggressively so that we could get a commission 

to come back quickly with some recommendations as to how we 

might pursue this, on the assumption we can come up with some 

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consensus here with responsible people from the insurance industry as well as others, to give us some ideas on what could be done. 

So I thank you for the suggestions and ideas. I mentioned several 

other points that we could possibly move on, the tax relief as well 

as the issue of a mitigation program here, a revolving fund where 

people would have to pay back but, nonetheless, provide some lowcost loans to people to be able to take steps to protect their homes 

and businesses against the problems of natural disasters. 

So there are a number of things that I think we would like to 

get moving on, and your testimony here today helps crystallize 

those ideas. So we thank you immensely for coming, and I thank 

both of my colleagues for their presence. 

Senator Martinez obviously will be here. Senator Nelson, you are 

more than welcome to join us on the Committee as well. 

Senator NELSON. Thank you, Mr. Chairman. Thank you all, Senator. 

Chairman DODD. We will move to our next witness, Dr. Edward 

Lazear, who was sworn in as the Chairman of the Council of Economic Advisers in February of 2006. Before coming to the Council, 

Dr. Lazear was a member of President Bush’s Advisory Panel on 

Tax Reform. He is on leave of absence from Stanford University, 

where he is the Jack Steele Parker Professor of Human Resources 

Management and Economics, and the Morris Arnold Cox Senior 

Fellow at the Hoover Institution. We thank Dr. Lazear for coming 

to the Committee. 

Doctor, thank you, and I say this to all of our witnesses this 

morning. Your full statements and supporting documents and materials will be included as part of the record. If you can keep a bit 

of an eye on the clock here so that we try and stay within time 

here so we can get to some questions and get to our next panel. 

Thank you very much. 

STATEMENT OF EDWARD LAZEAR, CHAIRMAN, COUNCIL OF 

ECONOMIC ADVISERS 

Mr. LAZEAR. Chairman Dodd, Ranking Member Shelby, and 

Members of the Committee, thank you for the opportunity to allow 

me to testify today. Your Committee is tackling an important and 

difficult set of issues in this hearing. I believe that we share similar goals. We all want homeowners and businesses to have insurance against events that are beyond their control. The question is 

how to provide it. 

When Government gets into the insurance business, it undermines private insurance supply, and then individuals can only rely 

on the Government for insurance. Governments are not very good 

at providing insurance and should be wary about crowding out the 

private sector, leaving individuals with no recourse other than to 

rely on the Government. 

The administration opposes legislation to create new Federal programs to backstop catastrophe insurance. There are a variety of 

forms that the backstop could take. We believe that none of these 

approaches would be helpful, nor are they warranted. They would 

create primarily three kinds of problems for the economy: 

First, the Government insurance would displace insurance provided by the private market. For the most part, that market is 

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healthy, and were it not for other forms of interference, the market 

could operate effectively to insure risks faced by homeowners and 

businesses. 

Second, a Federal program would undermine economic incentives 

to mitigate risk because the program would likely distort rates 

from their actuarial values. Individuals would be encouraged to 

take on risks that are inappropriate, specifically putting themselves in harm’s way because they do not bear the full expected 

cost of damages incurred. 

Third, the Federal backstop would mean that all taxpayers nationwide would subsidize insurance rates for the benefit of a relatively small group of people in high-risk areas. The general taxpayer would pay for actions over which they have no control. Those 

who can avoid the risk would be passing the costs onto others, creating a system of distortion and inequity. 

For the most part, the national insurance industry is healthy today, despite the record $57 billion estimated in insured losses incurred as a result of the 2005 hurricane season. Industry-wide capital available to cover future losses actually increased during 2005. 

Although it is true that Florida, North Carolina, and parts of Mississippi, Louisiana, and Alabama are experiencing difficulties with 

insurance availability, much of this can be traced to certain regulatory actions at the State level. 

First, some States have used regulation to suppress prices, which 

has the effect of making insurance unavailable where it might be 

most needed. The role of State regulation should be to protect consumers from fraud and inadequate risk management by insurance 

companies, but States sometimes use their regulatory power to control prices. This discourages insurance companies from voluntarily 

providing insurance in those high-risk areas where unregulated 

rates would naturally be the highest. Insurers need to charge rates 

that are high enough to allow them to cover expected losses and 

purchase reinsurance or maintain surpluses to cover catastrophic 

losses. 

Second, a national catastrophic risk insurance plan would likely 

distort rates and undermine economic incentives to mitigate risk. 

The experience of the National Flood Insurance Program and the 

steps needed to reform it illustrate some of the challenges that 

would likely arise in a broader Federal natural catastrophe insurance program. The National Flood Insurance Program plays an important role in helping homeowners insure against flood losses, but 

it needs to be further reformed and should not be expanded. 

Reforms passed in the 2004 authorized a pilot program to remove 

some of the worst repetitive loss properties from the flood insurance rolls, and the President’s fiscal year 2008 budget calls for doubling the funding of this program. Furthermore, the administration 

has proposed several principles for improving the National Flood 

Insurance Program, including making premiums more flexible and 

actuarially sound. We look forward to working with the Committee 

on developing these principles. However, the challenges of this program show it does not serve as a good model for broader Federal 

catastrophe insurance programs. 

National catastrophe risk insurance would displace private insurance and undermine the economic incentives to mitigate risk. It 

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24 

would force all taxpayers nationwide to subsidize insurance rates 

for the benefit of a relative small group of people in high-risk 

areas. This would be both costly and unfair to taxpayers. 

Returning to the example of national flood insurance, the financial consequences of passing claims on to the general Federal taxpayer is no minor issue. The National Flood Insurance Program 

has borrowed $16 billion from Treasury to cover the 2005 losses. 

The cost will in large part be borne by taxpayers nationwide, many 

of whom are not exposed to flood risk and do not receive coverage 

under the program. The insurance industry is healthy, and the private sector is well equipped to provide insurance for hurricanes 

and other natural catastrophes, but State regulators and the Federal Government must allow the private market to function. Therefore, the administration believes that a Federal program to provide 

catastrophe risk insurance at the Federal level, although well intentioned, would have significant adverse consequences to the economy and would be unfair. 

I welcome your questions. 

Chairman DODD. Thank you very much, Doctor, and we appreciate your being here today. I should point out you have very 

strong statements about the opposition to a Federal program to 

provide catastrophic risk insurance. Is there anything you believe 

the Federal Government should be doing in this area? 

Mr. LAZEAR. I think that the Federal Government should encourage the private sector to be active in providing insurance, and to 

the extent that the Federal Government is involved in insurance— 

for example, through the National Flood Insurance Program—we 

have to be careful that we make sure that we charge the right 

rates and that we do not drive out other insurers who could be 

competitive. And let me be specific because I know Senator Shelby, 

who talked about this earlier, has strong views on this as well. 

The last thing I think we want to do is create a structure where 

we induce people to locate in harm’s way. The best way to avoid 

doing that is to make sure that we charge people the actuarially 

fair rates for being in those areas. That said, we have a program 

in place right now; the National Flood Insurance Program is in 

place right now. We certainly do not believe that we can pull the 

rug out from under people who have relied on that program, and 

as a result, we have thought about ways to reform this, and I think 

some of the positions that the Senator has taken on that are consistent with the way the administration is thinking about it as 

well. 

Chairman DODD. Well, we were talking about it, and I hear what 

you are saying. Take Louisiana, for instance, New Orleans here. 

We are talking about people here, not all of them living in fancy 

homes on Bourbon Street here who were hurt. A lot of very desperate people were adversely affected by that. What is our answer 

to be? Is it sort of tough, that is the way things go? I mean, there 

is no insurance down there today. You have 300,000 homes in that 

city that are either uninhabitable or totally destroyed. 

Mr. LAZEAR. Right. 

Chairman DODD. There is little or no insurance available so you 

cannot get mortgages, you cannot get loans to rebuild. Things are 

absolutely stalled as they presently stand. Doesn’t the National 

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25 

Government—I mean, if that were my State here in devastation 

like that here, or someone else’s State, I would expect my Government to want to stand up and help at a moment like that. 

Mr. LAZEAR. What I would say is that we want to make sure that 

help is available. The question is whether it should be done by the 

National Government or whether it should be done by the private 

sector. 

Now, that is why I distinguish between things that were done in 

the past and things going forward. If you have a system in place 

and people have relied on that system—you talk about New Orleans. I think that is a great case in point—you simply cannot 

change the rules on those people midstream and say, well, just 

tough. I mean, obviously, we have to have compassion for individuals who have bet on the coverage that was there in the past. And 

it is for that reason, I think, that the President felt strongly about 

the reauthorization of the National Flood Insurance Program in 

2004. But it was also the case that he felt that as we look forward, 

as we go forward, as we think about new programs, we do not want 

to get ourselves into the same situation that we were in then. We 

want to try to take actions that will encourage the private market 

to come in and to take care of those risks that were previously covered by the Federal Government. 

To the extent that we can do that, I think we move in a better 

direction, because I believe—and I think the President believes— 

that the private market will do a better job, actually, at insuring 

these people, at providing the kind of coverage—again, going forward, not talking about going backward—that we need to have. 

And it is extremely important that we do that. 

I would be careful about getting in the way of the private sector 

in terms of providing—— 

Chairman DODD. You have made that point. I hear you saying 

that. I am curious as to whether or not you believe the administration takes the view, then, that the Flood Insurance Program—putting aside its obligations under the existing one, but do I hear you 

saying, in effect, that if you had your druthers, you would eliminate that program as well? 

Mr. LAZEAR. No, that is not the position of the administration. 

Again, we did prefer reauthorization of that program, but, again, 

with—— 

Chairman DODD. Let me make a distinction between the reauthorization of that program as opposed to doing something like a 

national catastrophic risk—— 

Mr. LAZEAR. Well, again, I would—— 

Chairman DODD. Similar ideas here to deal with natural disasters. 

Mr. LAZEAR. Similar, but one is new and one is old, and I would 

go back to that—— 

Chairman DODD. Aside from the newness and the oldness of it, 

what about the principle involved here? 

Mr. LAZEAR. I think that is the key principle. The key principle 

is that when national flood insurance came in—that was about 30, 

40 years ago. 

Chairman DODD. 1968. 

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Mr. LAZEAR. 1968. Insurance markets were different. Capital 

markets were different. Now we have much more sophisticated 

both insurance markets and capital markets. 

For example, we have national catastrophe bonds—catastrophe 

bonds which you can purchase on the market, which is a form of 

insurance that individuals can take. You can diversify risk that 

way. Those are a relatively new development. 

What that means is that we have mechanisms available today, 

again, going forward, to deal with other kinds of risks that we did 

not have available when that program was first instituted. 

Chairman DODD. I understand that. I am just trying to understand, putting that aside, then, if I was coming and proposing to 

you today a National Flood Insurance Program, the administration’s view would be to oppose that idea. 

Mr. LAZEAR. I do not know that the administration would necessarily oppose a new program. We would certainly oppose expansion of the National Flood Insurance Program right now. We believe that given the program as it stands—and, again, I am making 

the same point, so I hate to be—— 

Chairman DODD. I am just trying to understand the distinction 

here. I understand your point that you have made here, but the 

Flood Insurance Program has got some problems. We all admit 

that. It needs to be fixed. 

Mr. LAZEAR. Right. 

Chairman DODD. But I am trying to get at a deeper point here 

with you, and that is, whether or not the administration takes the 

view that even the National Flood Insurance Program is a program 

that probably is one that does not really deserve to be reauthorized, looking forward, again. 

Mr. LAZEAR. That was not the position. Again, the position was 

that we favored reauthorization. We did so in 2004. So the answer 

to that question would be no. 

Chairman DODD. All right. Senator Shelby. 

Senator SHELBY. Thank you, Chairman Dodd. 

Mr. Chairman, you are Chairman of the Council of Economic Advisers with the administration, and you have a deep background in 

economics. If a Federal bailout is required, what impact could it 

have on the Federal budget? And does your analysis provide any 

insight into the impact of a national catastrophic fund, what it 

would have on the Federal budget if it is not put together right? 

Mr. LAZEAR. We do not have specific numbers to answer that because we would have to be thinking, obviously, about a specific 

plan. In order to score that, we would have to be quite specific 

about it. But the general impact is clear. If we were to have a bailout, then we would be passing the costs onto other taxpayers. And 

there is simply no doubt that that would have distortionary effects 

through the rest of the economy because you have to raise taxes 

in order to fund that, and that is the general principle. 

Senator SHELBY. We understand that there are a lot of people in 

circumstances beyond their control. They live in certain areas. 

They are challenged economically. We have them in my State. We 

have them in Louisiana. We have them in Mississippi. We have 

them in New Jersey. Everywhere. And something ought to be—if 

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27 

we come with an insurance program or flood insurance reform, we 

would have to look into protecting those people to some degree. 

But why do we have to continue to insure million-dollar homes, 

whether it is my State of Alabama, Florida, New Jersey, Louisiana, 

where people are in a flood-prone area and sometimes it is their 

third home, too? You understand what I am getting at. 

Mr. LAZEAR. I do. 

Senator SHELBY. Why should the average working person paying 

taxes in America have to do that? 

Mr. LAZEAR. We believe that one of the major problems in terms 

of fairness associated with a national program is that it does pass 

the burden onto the general taxpayer. Sometimes the expenditures 

go to good purposes and go for things which we would all agree are 

important and fair. Sometimes they do not. 

The point is that, no matter where we spend those monies, the 

cost will be borne by the general taxpayer, sometimes by people 

who are more needy than the individuals who receive those funds, 

and that is always a problem in terms of redistributing from one 

party to another. Sometimes it helps in terms of fairness, sometimes not. 

Senator SHELBY. We have all referenced the Flood Insurance Program because we know it is not actuarially sound, was never actuarially sound. It is nearly 40 years old—1968. We tried to reform 

it last year. The whole Congress is aware of that. We had, I 

thought, a pretty good bill that came out of this Committee. It did 

not please everybody, but it came out of this Committee very 

strongly. 

Doctor, I believe that we could be headed toward establishing a 

commission to review these issues. I think that if that is the direction that we take, we need to make sure that such a commission 

is appropriately comprised and put together—the taxpayer advocates, pro-market advocates, those familiar with the risks associated with coastal development, and others that would be able to 

participate in this commission. In other words, it would be broadbased and not slanted toward another so-called Flood Insurance 

Program that is actuarially unsound and does not work. Do you 

agree with that? 

Mr. LAZEAR. I agree with that, Senator. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman DODD. Could I just ask—I should have asked this 

question myself. We have talked about this commission idea. Does 

the administration support the idea of having a commission, sort 

of a 90- or 120-day brief window here to take these various ideas? 

I do not know if you heard Senator Nelson—— 

Mr. LAZEAR. I did, yes. 

Chairman DODD [continuing]. Talk about the fact, and he is accurate in this. We are going to hear a lot of—in fact, in the next 

panel you will hear a lot of different thoughts on what ought to be 

done here, that we ought to try and pull some of this together so 

we get some clarity on this. 

Does the administration support the commission? 

Mr. LAZEAR. I think the administration would look forward to 

hearing from a commission that was broad-based, as Senator Shelby suggested, and that focused on providing new information. This 

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is an area that is pretty well understood. The insurance area has 

been researched and researched for probably 50 years, so it is not 

a new problem. It is a problem that is pretty well understood in 

the economic literature. But there are certainly facts that could be 

uncovered by such a commission. 

For example, some States have done things better than other 

States. Some States have run into difficult problems. It would be 

useful, I think, for a commission to perhaps unearth some of those 

problems and make those public, and we could learn from that. I 

think more information is always better. It is pretty hard to oppose 

getting more information. 

Chairman DODD. Thank you very much. 

Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. I would like to follow up a little bit on a question that I posed to the Governor. You 

also referred to it in your remarks, and that is that some States, 

their Insurance Commission artificially held down insurance rates. 

Could you share with us which States that might have occurred in? 

Were they the coastal States that we are looking at and talking 

about now? 

Mr. LAZEAR. I probably would defer to your next panel. I think 

the panel to which they referred was actually not this panel, but 

it was the one where you are actually having the experts from the 

industry. 

Senator ALLARD. OK. 

Mr. LAZEAR. I would prefer to have them testify on it in detail. 

Senator ALLARD. But you do see that as a problem? 

Mr. LAZEAR. It is certainly a problem because if you constrain 

the rates, then obviously insurance companies have a choice: either 

they produce the insurance, provide the insurance at rates that are 

below their actuarial costs, or they opt out. And most have opted 

out. 

Senator ALLARD. Yes, and so it is supply and demand. If you cannot make a profit at a certain rate, you just discontinue providing 

the service. You do not have any choice. You cannot keep a business going and take a loss year after year. 

Mr. LAZEAR. Simple economics. 

Senator ALLARD. But your view is that the insurance companies 

have actually been doing relatively well in the last few years in 

many cases. Are you looking at it from a national basis, or are you 

looking at it on a State-by-State basis? 

Mr. LAZEAR. Looking at it from a national basis, the insurance 

companies have been able to increase their solvency, increase the 

size of their funds available for paying off catastrophes. 

Senator ALLARD. And that is probably by design, isn’t it? Because 

the risks are getting greater, so you have to have larger pools out 

here. If you have any more Katrinas, you know, you are not in 

business any longer if you are insuring that. You have got to have 

a larger pool. So talk about that a little bit, if you would. 

Mr. LAZEAR. Yes, in fact, the insurance—that is an excellent 

point. Insurance companies have redone their models of the risk, 

of the expected costs associated with disasters. In particular, what 

is important—and I will try to avoid economic jargon, but what is 

particularly important is the correlation among bad events. If lots 

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of bad events happen at the same time, then that puts insurance 

companies in a worse situation than if these events are 

uncorrelated, if they are kind of random. 

What happens is when you get populations moving to particular 

areas, so you have—for example, in Florida, as the population of 

Florida grows, you have more and more people who are at risk in 

an area that would be hit by one event. It tends to increase the 

correlation, and insurance companies have had to take that into account in adjusting their actuarial calculations, and that is what 

they have done. 

Senator ALLARD. The question was posed by the Chairman: What 

is it the Government can do to help property and casualty insurance? In my view, they can get their act together as far as determining these floodplains. I mean, FEMA is not—they are not anywhere close to getting all these floodplains designated. In some 

areas, we have areas that are not in floodplains, but the maps 

show they are in it. We have other areas where they are shown out 

of a floodplain but in reality they are in floodplains that have heavily been built into. 

So, you know, I think one of the reasons that the flood insurance 

is not working is because we have not done a good job of defining 

the floodplain. 

Mr. LAZEAR. Again, that would be consistent with the view of 

basing costs on risk. So the floodplain is an extreme example of a 

very high-risk area, and the problem is we do not price it appropriately. 

Senator ALLARD. Yes. Now, it seems to me if the Federal Government in flood situations, particularly Louisiana and Mississippi 

and those States that were impacted by Katrina, we have not been 

particularly hesitant about handing money over to those areas, and 

that has all gone to low-interest loans and whatnot, which is a way 

of providing, I guess, some insurance on a case-by-case basis to one 

locale that gets adversely impacted. So, in a way, the Government 

is already involved, would you say? 

Mr. LAZEAR. That is correct. The block grant program that was 

associated with some of the recent disasters has put a significant 

amount of money into those regions. Mississippi got $5.4 billion, 

Louisiana $10 billion. Some of that has been used, by the way, for 

insurance, so, for example, in Mississippi, approximately $80 million went to purchasing reinsurance for that State. 

So there are a variety of mechanisms that can be used, and I 

think some of the States have done a good job in using funds provided by the Federal Government to enhance the quality of the insurance—and, again, in cooperation with the private market, 

which, again, in my view, is probably the best way to do it. 

Senator ALLARD. And how do you figure that into your rate setting? Or is that a factor? 

Mr. LAZEAR. Well, it is certainly a factor in terms of the private 

companies figuring it in. If they get cheaper reinsurance, of course, 

that lowers the rate, and I suspect that some of that is going on 

in Florida as well, as the State provides cheaper reinsurance rates. 

So that does do that. 

Now, again, one has to be very careful about doing that because 

to the extent that we subsidize reinsurance, either at the State 

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30 

level or the Federal level, again, what you are doing is you are saying you are essentially changing the true cost that the individuals 

see when they locate in an area. And so, again, you are giving an 

additional incentive by making that insurance cheaper than it otherwise would be to locate in harm’s way. 

I think we have to think carefully about any kind of reinsurance 

program as well. 

Senator ALLARD. So your view is that the market is pretty well 

working, the free market is pretty well working at this particular 

point, with—— 

Mr. LAZEAR. My view—sorry. 

Senator ALLARD. I mean, the insurance industry has traditionally 

relied on State regulation as avoiding Federalizing these programs, 

and I guess the market approach, feeling that States are in a competitive environment with each other—I mean, if you get insurance 

too high, an insurance company will not do business in your State. 

And it could have an impact on ownership and population in that 

State. 

Could you talk about that some? 

Mr. LAZEAR. Yes. The insurance industry is quite a sophisticated 

industry, obviously. It is sophisticated in many respects, but it is 

also a reasonably competitive industry. There are a number of 

large companies out there, some smaller ones, that can compete 

and do compete on the basis of rates and other kinds of services. 

As long as we have a well-functioning, competitive system—and 

what I mean by well-functioning, competitive system is that insurance companies can compete with one another and that they are 

not undermined by competition from the State or the Federal Government—then those companies can provide effective insurance 

and, I would argue, better insurance and better coverage to the average citizen of the State. 

Again, I go back to my earlier statement. I am very uncomfortable when the State or the Federal Government comes in and provides cheaper insurance that, in the short run, looks like a better 

deal to the citizens, but then drives out the private market. And 

then what you find is that everybody has to rely on the Government and only on the Government. And then something happens 

and the Government is not there to pick up the slack. 

So that is my big concern about having programs that are well 

intentioned but have the side effect of driving the private market 

out. 

Senator ALLARD. And more Government control. 

Mr. LAZEAR. More Government control. 

Senator ALLARD. Yes. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

We have been joined by Senator Carper. Tom, do you want to 

submit some written questions here, or do you want to go to the 

next panel? 

Senator CARPER. Let’s go to the next panel. Thank you. 

Chairman DODD. Well, thank you. 

Senator SHELBY. Doctor, could you compare in any way or contrast, compare and contrast the national catastrophe proposal as 

we understand it at this point with TREA and its future? 

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Mr. LAZEAR. Yes. TREA, as you know, when the President authorized or suggested TREA, it was viewed to be a temporary program. 

Senator SHELBY. Absolutely. 

Mr. LAZEAR. And it came in as a temporary program and as a 

program to deal with a very new situation where the risks were not 

well—— 

Senator SHELBY. And it is working, is it not? 

Mr. LAZEAR. I believe that it has worked because we have seen 

the private market actually increase in parallel to TREA. 

Senator SHELBY. Absolutely. 

Mr. LAZEAR. And it looks like now we—— 

Senator SHELBY. And we scaled it back some, did we not? 

Mr. LAZEAR. We have scaled it back, and, in fact, private insurance is functioning and well developed. So we would expect that 

the temporary nature of TREA would be something that would give 

way in the future to the private market, and, you know, obviously 

you are thinking about those issues right now, and I think you will 

be exploring that with the administration. 

That is a slightly different kind of issue than thinking about 

risks that are well known, that we have seen in the past, where 

there is the ability to diversify these risks and we can deal with 

that at the private level and can already deal with that at the private level. So I guess that would be the distinction that I would 

make. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Doctor. We appreciate 

your testimony, and we will leave the record open. Colleagues, I am 

sure, will have some additional questions for you. We would ask 

you to respond to them as quickly as you can. 

Thank you very much. 

Let me introduce our next and last panel here. We have a very 

distinguished group of panelists. I appreciate their patience this 

morning in listening to the earlier testimony. 

Let me begin with Commissioner Walter Bell, who was named 

Alabama’s chief insurance regulator in January of 2003, also President of the National Association of Insurance Commissioners, a position he was elected to in December of 2006. Commissioner, we 

welcome you. Thank you for being with us. 

Governor Marc Racicot is with us this morning. He began his 

tenure as President of the American Insurance Association in August of 2005, joined AIA from the law firm of Bracewell & Giuliani, 

and he was a two-term Governor of Montana and someone whom 

I have come to know and respect immensely. Marc, we thank you 

for being with us here this morning. 

Our third witness is Dr. Robert Hartwig, the President and Chief 

Economist of the Insurance Information Institute. He previously 

served as Director of Economic Research and Senior Economist 

with the National Council on Compensation Insurance in Boca 

Raton, Florida. 

Mr. David Guidry is President and Chief Executive Officer of 

Guico Machine Works, located just outside New Orleans in Louisiana, and, Mr. Guidry, we thank you for being here with us this 

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morning as well. Mr. Harold Polsky is with us, a homeowner who 

recently moved from Port Richey, Florida. I mentioned both of 

these individuals in my opening comments. We thank them for 

being with us. 

Frank Nutter has been President of the Reinsurance Association 

of America since May 1991. He held the same position with the 

RAA from 1981 to 1984. Prior to becoming President in 1991, Mr. 

Nutter served as the association’s general counsel. 

Admiral James Loy is National Co-Chairman of 

ProtectingAmerica.org. Admiral Loy is the former Deputy Secretary 

of the Department of Homeland Security, former Administrator of 

the Transportation Security Administration, retired from the Coast 

Guard as its Commandant in 2002, and we are pleased to have you 

with us. And as someone who has represented that academy for a 

long time, I am delighted to have you be a part of the panel here 

this morning. 

And, last, Mr. Chuck Chamness was appointed President of the 

National Association of Mutual Insurance Companies in September 

2003. Prior to his appointment, he was Executive Vice President 

and served as Vice President of Public Affairs from 1995 to 2003. 

We have a lot of you jammed in here. I apologize for that, but 

we wanted you all to get to know each other well here. So we have 

a little intimacy up here, elbow to elbow packed in. You look like 

you are passengers on one of our new airliners today here, jammed 

in here. 

[Laughter.] 

At any rate, let me begin with you, Commissioner Bell, and 

thank you for coming this morning. Then we will move right down 

the line in the order that I have introduced all of you here—at 

least the order I have introduced you rather than the order you are 

sitting here. And I will call on each one of you in case you fail to 

remember which number you were in the list. 

Commissioner, we thank you. Keep your eye on the clock, by the 

way, so try and live within that timeframe for me here. 

STATEMENT OF WALTER BELL, COMMISSIONER, ALABAMA DEPARTMENT OF INSURANCE, ON BEHALF OF THE NATIONAL 

ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. BELL. Thank you, Mr. Chairman, Ranking Member Shelby, 

and Members of the Committee. Thank you for the opportunity to 

testify here today on behalf of the National Association of Insurance Commissioners. My name is Walter Bell. I am the Insurance 

Commissioner, as you stated, for the State of Alabama, and I also 

serve as President of the NAIC. As a commissioner and citizen 

from the Gulf Coast, I commend you for holding this hearing today 

on this crucial national issue. 

State insurance officials from coastal States are seeing significant problems near the water with the insurance availability and 

affordability. Rising rates near the coast are challenging many current homeowners. Retirees and those living on fixed incomes who 

have lived in their homes for years are now finding their insurance 

costs doubling, or worse. Likewise, rising rates are also challenging 

real estate development as more properties are going unsold because buyers cannot find affordable coverage. Some insurers are 

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33 

even reducing the number of policies they are willing to write at 

the coast, regardless of price, due to the exposure of Katrina-like 

events. 

The uncertainty of anticipating future losses is the main factor 

that adds volatility and subjectivity to the insurance pricing. Insurers and reinsurers are becoming more conservative with where 

they place their business, and rating agencies are requiring these 

companies to retain more capital to maintain their ratings. Carriers are responding to changes in perceived risk by scaling back 

where they are willing to offer coverage, by reducing the number 

of policies they rate, and by raising prices. 

A recent report by Guy Carpenter indicates that in 2006, reinsurance rates across the U.S. rose 76 percent on average, and that 

number is far higher near the water. This increased cost is passed 

on to consumers, and it is contributing to the growing gap between 

what they can afford and what insurers are willing to charge. 

Property insurers are often licensed in 50 States, but the policies 

they sell, how they are underwritten, and how they are priced 

makes them an acutely local product. As part of my written testimony, we provided brief snapshots illustrating the challenges of insurability in a number of coastal States. The common theme in 

these snapshots is that most coastal states have a relatively 

healthy market, except for areas within a few miles of the water. 

In those areas, much of the coverage is provided by State-run insurers or surplus line carriers. What little coverage is provided by 

the market is typically expensive and often carries high-deductible 

and other coverage limitations. 

The risk associated with large natural disasters is managed 

through a variety of means. Much has been talked about about the 

flood insurance. Floods are covered by the Federal programs. 

Earthquakes are largely uninsured or covered by a State entity. 

And wind is covered, but often augmented by a State wind pool. 

Very few areas of this country are not threatened by some form of 

devastating event, yet few people have comprehensive insurance 

coverage that fully reflects that risk. 

There is no single solution to this problem. State governments 

and insurance officials are taking a variety of steps to manage the 

risk exposure in their State, but as Congress considers its own involvement in this challenge, there are a number of ideas that merit 

attention. Perhaps the biggest idea is a concept of an all-perils policy, a single policy for a single risk-based premium. A lesson 

learned from Hurricane Katrina is that consumers clearly expect 

all-perils coverage, and the current system of two or three separate 

policies just to cover one piece of property is ineffective and leads 

to gaps in coverage. All-perils coverage should be a private market 

solution, and any national insurance program should serve as a 

backstop to augment the private market, not supplant it. 

We must also consider adopting mitigation efforts such as responsible land use policies, better building codes, and retrofitting 

programs to strengthen existing homes. Tax-deferred reserves for 

individuals and insurance companies should also be considered to 

increase market capacity and give consumers another option to 

manage the property risk. 

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The NAIC strongly endorses the concept of a national commission to analyze the problem and develop the best mix of solutions. 

State insurance commissioners look forward to working with this 

Committee to find the right answers to the problem. 

Again, thank you for holding this hearing this morning and for 

inviting me to participate, and I will be pleased to answer any 

questions. 

Chairman DODD. Thank you very, very much. That was very 

helpful testimony. We thank you for coming this morning. 

Governor Racicot, thank you very much. 

STATEMENT OF MARC RACICOT, FORMER GOVERNOR OF 

MONTANA, AND PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN INSURANCE ASSOCIATION 

Mr. RACICOT. Good morning, Mr. Chairman and Ranking Member Shelby. Thank you for the opportunity to appear in front of the 

Committee. Good morning as well to Senators Allard and Carper. 

My name is Marc Racicot, and obviously it is an understatement 

to take note of the fact that Hurricane Katrina has focused renewed attention on the role of the private sector insurance industry 

in managing natural catastrophe risk. Fortunately, we believe very 

strongly that the insurance industry is well positioned to do that. 

However, insurers must have the tools available to them to measure, reduce, and fund those exposures. By contrast, in our judgment, quasi-governmental Cat Funds, draconian regulatory restrictions, and new legal liabilities not only fail to address the true 

problems but also threaten the viability of our Nation’s private insurance mechanism. 

In responding to Hurricane Katrina, just to put this in perspective, I believe that 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. Less than 2 percent have been disputed, and less than 1 percent across the Gulf have ended in litigation. Those, however, even though they comprise a minority of the 

number of instances of dispute, nonetheless have received most of 

the attention. 

As a Nation, we know that we have to make certain that we are 

prepared for and can respond quickly to future catastrophes, and 

insurers are fully committed to working with local, State, and Federal policymakers to make this happen. 

I have had the chance to testify before Congress on this subject 

several times before, and I have shared our perspective with Southern Governors at their recent meeting in Washington in February. 

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

I have strongly urged them to act carefully. Thankfully, last year’s 

hurricane season was remarkably mild, but hurricane experts, as 

we all know, are calling for another active season in 2007, and each 

year more and more people populate our Nation’s most vulnerable 

coastal communities, sometimes estimated those emigrating into 

Florida to be in the neighborhood of 1,000 to 1,400 people a day. 

And how are we advising them of the risks that are associated with 

the decisions they make? 

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At the same time, I am here today to urge appropriate scrutiny 

and 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. However, 

I can assure the Committee that punitive measures directed at insurers, including recently introduced bills to repeal the McCarranFerguson Act, are wholly unrelated. They will do literally 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. 

We have proposed a reform agenda that we believe in principled. 

It discards the path of least resistance and instead focuses upon 

sound financial, capital market, and environmental principles. It 

consists of four major principles: 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 can 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 recovery and response, while at the same time recognizing the post-Katrina challenges that are still facing coastal communities. 

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

about two of them. 

The Homeowners Insurance Protection Act 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 the premise. Even after Hurricane Katrina, private 

sector capacity for natural disasters has increased. Ironically, the 

single greatest threat to private sector risk transfer mechanisms 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 their seeming promise of short-term relief, Cat Funds 

are no panacea for natural catastrophe risk, and they can lead to 

generational inequities among policyholders, unfair geographic and 

cross-sectional subsidization, and increased building in catastrophe-prone regions. 

Another bill, the Homeowners Insurance Non-Coverage Disclosure Act, would require insurers to restate the terms of their private property insurance policies in plain language that may well be 

at odds with the actual contract language. It would increase complexity and the likelihood of litigation rather than address the 

issue at hand. 

Unquestionably, these are tough and complex issues. The property/casualty insurance system, like any human enterprise, is not 

perfect, but it has been in place since the beginning of our Nation, 

and it takes good care of millions of Americans. It pays about $250 

billion a year in damages that they sustain to their property, and 

I would suggest that is the threshold and most significant decision 

that will be made by policymakers. Do we want to preserve the primstockstill on DSKH9S0YB1PROD with HEARING

36 

vate property protection system that, with its imperfections, has 

operated extremely well? Or do we want to move more and more 

toward the socialization of this protection system as we address 

these issues on an episodic basis? The last thing we want to do, it 

seems to me, that any Government can afford to do in the name 

of reform is to irreparably compromise the capacity of the private 

insurance industry to continue doing what it has done well over 

these last 150 years. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you, Governor, very much. 

Dr. HARTWIG. And I understand you have some video. 

STATEMENT OF ROBERT HARTWIG, PRESIDENT AND CHIEF 

ECONOMIST, INSURANCE INFORMATION INSTITUTE 

Mr. HARTWIG. Yes, a bit of video here. Good morning, Chairman 

Dodd, Ranking Member Shelby, and members of the Committee. I 

would like to thank you for the opportunity to discuss the financial 

vulnerability of the United States to the real and growing threat 

posed by catastrophic hurricanes and the corresponding impacts on 

the availability and cost of insurance. My testimony today will address three major issues: the recent history of catastrophic hurricane losses in the United States; drivers of the increase in insured 

losses in coastal regions, including population growth, rising property values, and unsound land use decisions; and implications of increased hurricane risk on the price and availability of insurance. 

Measured in dollar terms, the United States is arguably the most 

vulnerable country in the world to natural disaster risk. Catastrophic hurricanes, earthquakes, tornadoes, wildfires, and severe 

winter storms cost insurers $20 billion on an average annual basis. 

The record hurricane seasons of 2004 and 2005, however, spawned 

seven of the ten most expensive storms in U.S. history, as you see 

in the chart before you, resulting in payments to 5.5 million policyholders totaling $80 billion. 

Tropical events now account for nearly half of all catastrophe 

losses over the past 20 years. Looking ahead, meteorologists are 

predicting that the 2007 hurricane season, which begins just 50 

days from today, will be 85 percent more severe than average. Not 

only will more storms occur, but the likelihood of a powerful Category 3, 4, or 5 storm making landfall is estimated at 74 percent 

this year, well above the long-run average of 52 percent. More ominous is the fact that we may only be on the leading edge of a prolonged period of elevated hurricane activity, lasting perhaps another 15 to 20 years. Insurers today are actively planning for a 

$100 billion storm. 

For the 53 percent of Americans today who live within 50 miles 

of the coastline, hurricanes represent a potentially life-altering economic threat. Yet despite increased awareness of the risk in the 

wake of Hurricane Katrina’s destruction, people continue to be 

drawn to the coasts in records numbers. The U.S. Census Bureau 

predicts that the number of people living in hurricane-exposed 

States will increase by nearly 44 million, or 36 percent, between 

the years 2000 and 2030. Eight-hurricane exposed States will experience population gains equal to or exceeding the projected gain of 

29.2 percent for the country overall. Florida, already the most exmstockstill on DSKH9S0YB1PROD with HEARING

37 

posed hurricane State in the country, will lead the way, with an 

expected population increase of 12.7 million people, or about 80 

percent, by the year 2030. 

Yet these trends are merely a continuation of growth trends that 

have been under way for some time, mostly in the years since the 

last period of intense hurricane activity ended about 1960. The following sequence of charts depicts population increases in a sampling of coastal counties from New England to the Gulf Coast. In 

each case, sharp population increases are noted in areas that are 

historically vulnerable to hurricane, although perhaps not recently. 

Rising coastal populations drive increases in coastal development. In 2004, the insured value of all coastal property exposed to 

the threat of hurricanes totaled some $7.2 trillion, equivalent to 62 

percent of GDP. It is expected that the value of insured coastal 

property will double within the next decade, as coastal populations 

and property values continue to soar. Again, Florida is the most exposed State in the country by far, with about $2 trillion in coastal 

exposure, about 27 percent of the total. The figure also shows how 

small States, like Mississippi, can sustain enormous losses and 

why the Northeast, with $3.7 trillion in insured coastal exposure, 

is so financially vulnerable. Indeed, a major landfalling hurricane 

in the Northeast could produce insured losses exceeding $100 billion. 

Now, with respect to the issue of land use decisions, which has 

not been discussed too much, despite the fact of its well-known vulnerability to hurricanes and rapidly escalating property values, 

coastal development continues at a furious pace. The example of 

South Miami Beach is illustrative. In that narrow strip of land 

alone, 15 new condominium complexes will be completed by yearend 2009, offering a total of 2,111 individual units at prices ranging up to $16 million, with an average price of $3.7 million. Total 

insured exposure is likely to top $6 billion, much of it insured by 

the State at rates that are not actuarially sound, further burdening 

the State’s already precarious property insurance markets. Rapid 

buildups are observed in many other coastal areas, from Galveston 

Island to Cape Cod. 

The fact that so much coastal development continues to occur despite the lessons offered by the hurricane seasons of 2004 and 2005 

suggests that builders, realtors, and buyers are entering into real 

estate transactions in these areas with their eyes wide open, fully 

cognizant of the risk. The bottom line is that coastal development 

is economically rational from the perspective of coastal stakeholders only because most of the benefits are retained locally while 

a high proportion of the hurricane-related losses are redistributed 

to others. 

The price of insurance is determined primarily by the degree of 

risk assumed by the insurer. In the wake of the record hurricane 

seasons of 2004 and 2005, insurance prices have climbed sharply 

for many owners of coastal property as a direct result of this increasing risk. Deviations from risk-based pricing do lead to distortions or dilutions in the message that risk-based premiums do 

bring and do then encourage additional development in vulnerable 

areas. This is exactly what is happening in Florida today. The good 

news is that strengthening of building codes, encouraging mitigamstockstill on DSKH9S0YB1PROD with HEARING

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tion, better land use policies can all help to reduce risk and lower 

insurance costs. 

To conclude, I would like to say that the insurance industry is 

committed to working in partnership with public policymakers, consumers, and businesses in developing fact-based solutions to the 

formidable challenge posed by hurricanes and continuing our tradition of helping families, businesses, and communities wherever and 

whenever disaster strikes. 

Thank you, Mr. Chairman. 

Chairman DODD. Very good. Thank you very much. By the way, 

I do not know if we got copies of that. 

Mr. HARTWIG. In my written testimony, there are these slides, 

and many others. 

Chairman DODD. Oh, good. 

Mr. HARTWIG. And a lot more detail. 

Chairman DODD. They are very, very helpful. Thank you very 

much for that. It was very interesting and very helpful. 

David Guidry, we thank you for coming this morning. We appreciate your being here. 

STATEMENT OF DAVID GUIDRY, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, GUICO MACHINE WORKS, INC. 

Mr. GUIDRY. Thank you, sir. Mr. Chairman, Members of the 

Committee, I am David Guidry, President and Chief Executive Officer of Guico Machine Works. I appreciate the opportunity to appear before your Committee today on behalf of Greater New Orleans, Inc., a 10-parish regional economic development organization 

in southeast Louisiana, representing over 100 businesses in all 

major sectors of the local economy. 

Mr. Chairman, as a small business man in the New Orleans 

area, I am truly grateful that you have called this hearing today 

to shine a national spotlight on one of the cruel realities of the 

post-Katrina Gulf South. Businesses both large and small simply 

cannot find affordable insurance. More than a year and a half after 

Hurricanes Katrina and Rita, with all the Federal dollars and tax 

incentives provided to our region of the country, many of you would 

expect to see the skyline of New Orleans crowded with cranes and 

bustling with construction activity. I am sad to report that, instead, 

very little of that activity is actually under way. 

While many experts may have a number of explanations for the 

slow pace of the recovery in New Orleans, I can assure you that 

primary and significant factor is the unavailability of affordable insurance for business. I am told that in the Greater New Orleans 

area, not a single commercial property insurance policy has been 

renewed on an as-is basis and that most are simply not being renewed at all. 

How can we possibly rebuild our great city under these circumstances? How can we expect capital to flow into our area when 

affordable insurance cannot be found? We must find a solution to 

this problem, and in the very near future. Indeed, if the insurance 

climate of the Gulf South does not materially improve in the next 

12 to 18 months, many small business men and women will be 

forced to consider relocating to other regions of the country in order 

to obtain affordable insurance and maintain viable businesses. 

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Mr. Chairman, let me tell you a little bit about my business and 

what we have experienced during and after Katrina. My company, 

Guico Machine Works, is an oil and gas equipment manufacturer, 

a company that I founded over 25 years ago in the New Orleans 

area. Before the hurricane, my company had 55 employees, turning 

our wellheads and related products in our plant located on the Harvey Canal in Jefferson Parish. My business had accounts receivable 

of nearly $1 million from sales of $400,000 per month. However, 

after Katrina struck in August of 2006, our manufacturing output 

immediately dropped to zero. For nearly 6 weeks after the hurricane, we received no mail, no checks, no sources of income, yet customers continued submitting orders. We had a shop full of materials and machinery, but no workers, causing the shop to sit idle. 

During Hurricane Katrina, the building next to my warehouse 

literally exploded, and parts of that building rained down upon my 

warehouse, causing extensive damage. Like most businesses in 

New Orleans, I had insurance coverage against storm and fire 

damage. I also had wind and hail protection on our warehouse, but 

not on its contents. My insurance company denied coverage for the 

damages to my building and its equipment. I have unfortunately 

been forced to litigate this claim and in the meantime have not received one dime from my insurer. 

Without any insurance recovery, I have been unable to repair the 

damage, and, Mr. Chairman, on top of that, I have been notified 

that because the damage has not been repaired, my wind and hail 

policy will not be renewed. Moreover, the premium on the balance 

of my insurance policies has increased a whopping 55 percent for 

far less coverage than under my pre-Katrina policies, and my deductible has skyrocketed from $2,500 to $20,000. Furthermore, had 

I opted for the same coverage as my pre-Katrina policy, my deductible would have increased to $175,000 per occurrence. These are 

not costs and risks that my business can readily absorb. 

To put it all in perspective for you, let me give the Committee 

just a few real-world examples of the experience that similarly situated businesses are facing in our area. 

A local restaurant located in the French Quarter paid $27,000 for 

its property insurance in 2005, which included a 2-percent wind 

and hail deductible, with a minimum of $25,000. The 2006 renewal 

for the property with the same limits had been increased, believe 

it or not, to $242,000 and now includes a 5-percent wind and hail 

deductible. 

A local shopping center experienced an increase in property insurance premium from $70,000 to $250,000 and an increase in its 

wind deductible from $350,000 to $1.7 million. Furthermore, when 

I visit with my colleagues in the business community in the New 

Orleans area, among other things, I am told almost all personal 

and commercial property policies are not being renewed or are renewed with severe restrictions regarding wind damage. Owners of 

vacant buildings are unable to obtain wind coverage of any sort. 

The wind provision in the typical policy will almost always have a 

2- to 5-percent deductible. Business interruption coverage may not 

be provided if the wind coverage is placed with a different insurer. 

Mr. Chairman, on behalf of the small business community in and 

around New Orleans, I urge you to address this crisis before it is 

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too late. GNO Inc. is pleased to have joined the Natural Catastrophe Policyholders Coalition to address this very issue we are discussing here today. As taxpayers who have worked hard and 

played by the rules, we are counting on your and your colleagues 

in Congress to rescue us from this nightmare. We stand ready to 

work with you in any way we can. I am pleased to answer any 

questions that you may have or submit any additional information 

that you may require. 

Thank you. 

Chairman DODD. Mr. Guidry, thank you very much, and as I 

pointed out earlier, we appreciate your coming before us and telling 

us your story of what happened. Having been down there a few 

weeks ago, I know it is not an isolated case. As you point out, there 

are other businesses as well that are paying—if they can find any 

insurance at all, it is at prices they cannot afford. I suspect you are 

not going to—how long are you going to be able to hold on with 

your business? What is your sense? 

Mr. GUIDRY. What was the last question? 

Chairman DODD. How long can you hold out? 

Mr. GUIDRY. Senator, the truth, I would like to say it is almost 

like I am playing this giant game of solitaire. Every day I pull a 

card, and I have to figure out where to put that card. You know, 

you guys have taught me a new word: ‘‘actuarially sound.’’ With 

this new deductible, I have discovered my company is not actuarially sound today. So stability is what we need. As an entrepreneur 

and small business owner, managing risk is what I do for a living. 

But managing in an arena, in an environment where it is not stable—my insurance card comes due on September the 9th. That is 

my renewal policy. What that is going to look like, I have no idea 

yet, but we will figure out a place to put that card. 

Chairman DODD. We will get back to you in a few minutes here. 

Mr. Polsky, thank you for being here. 

STATEMENT OF HAROLD POLSKY, HOMEOWNER 

Mr. POLSKY. Thank you, Chairman Dodd, Ranking Member Shelby, and Members of the Committee. I want to thank you, first of 

all, on behalf of both myself and my wife, Barbara, for the opportunity to speak before you today. We appreciate this opportunity to 

add our voices to this very difficult but very important issue. 

There are two issues here. We have only heard one side of it, and 

that is a very important side: the cost and availability of insurance. 

But there is another side, and Mr. Guidry talked to it briefly. Insurance companies are not paying the claims. They like to tell you, 

‘‘We have paid 98 percent of all claims.’’ They have not. They put 

money in a fund to pay off a future claim. They call that ‘‘claim 

paid’’ whether it has been paid or not. 

Now, until November 2002, my wife and I rented a house in the 

city of Philadelphia, Pennsylvania. Around the middle of 2002, we 

discovered that we had the wherewithal to purchase a house. We 

did not want to live in Philadelphia, and on the advice of a relative, 

we looked into Florida. We found a perfect house for us: 1,500 

square feet, concrete block, small lot. It was not a perfect house, 

but it was our house and that made it perfect for us. We moved 

in in December 2002. We had to carry three different kinds of inmstockstill on DSKH9S0YB1PROD with HEARING

41 

surance. We had to carry homeowner’s insurance, wind insurance, 

and flood insurance. But the total of those three premiums was 

well within our budget. 

The year we moved in and bought our first policies, all three poli- cies had the same value for the property: $90,000. They were all 

identical. The homeowner’s premium was $464, the wind premium 

was $443, and the flood premium was $851, and that is a total of 

$1,758. This was in November 2003. Remember that date, please— 

or November 2002. 

In November 2003, when our first renewal came in, it was still 

a manageable cost. Our homeowner’s premium was now $482 a 

month. The value of the house had changed. It was now $95,200. 

Our wind premium was $475 a month, and suddenly the wind policy value was $99,000, which was the same value that the National 

Flood Insurance Program put on the house with a premium of 

$935, for a total of $1,892. We could not understand why all of a 

sudden these three policies, two of them from the same insurance 

company, had different values for the house if it had to be replaced. 

Then 2004 came. Hurricane Frances hit the East Coast of Florida 

and, like a slingshot, whipped across the peninsula. When it got to 

Port Richey, Tampa Bay area, on September 6th, it was a very 

strong tropical storm. 

We suffered damage in our house. We do not know how it got in, 

but water somehow got into the house. We knew it was not flooding 

because there was no rising water. But all of a sudden all the carpeting in our house was soaking wet. 

We were concerned about damage to our possessions. We moved 

everything into the middle of the rooms, and we are afraid the 

water was going to lead to mold issues. So we tried to contact our 

insurance company. We could not get a hold of them until September 10th, and that is understandable. A major storm had just 

come through. 

We explained our damage. They gave us a claim number and told 

us that an adjuster would contact us within the next few days. 

They also gave us a telephone number to contact this adjusting 

company if we had not heard. Well, they did not contact us, and 

we tried to call every day, and they never answered their phone. 

And then 20 days later, Hurricane Jeanne did her little whiplash 

out of the Atlantic Ocean, came right across, and again we had 

water on our carpeting. The day after that happened, we got two 

letters from our insurance company denying our claim. One of 

them said we did not have wind coverage, and the other one said 

our deductible did not cover the damage. Well, nobody had been to 

our house. How did they know what our damage cost was? They 

had no way of knowing it. 

We also started to smell an odor in the house that we were convinced had to be mold because it was not there before. We contacted the insurance company on the 28th of September to file a 

claim for the damage from Jeanne. We were given a claim number 

and told that someone would contact us, told us, ‘‘Pull up all your 

carpeting, save a piece. Take pictures of your damage. Give it to 

your adjuster.’’ 

Then our telephone stopped working. We called the local phone 

company. They came out. The technician found that the main jack 

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in the wall was soaking wet. He said, ‘‘There are only two ways 

that could have happened. Either water came down the walls and 

soaked the jack, or you had 18 inches of flooding in your house.’’ 

And we had no flooding. 

We pulled up the carpet. There was mold underneath it. We were 

worried we had not heard from anybody. We finally got a call from 

an adjuster. He inspected everything and said, ‘‘The wind blew the 

shingles up on your roof. The water got under the shingles, came 

down the walls. That is why you have wet carpeting.’’ He agreed 

that there was mold and said we should have a payment within 2 

weeks from our insurance company. We did not hear anything. 

Then in November of that year, for 2004, our policy was renewed again, this time with a $100,700 value of the property for homeowner’s insurance with a $504 premium. Wind had a $97,000 value 

with a $538 premium, and $99,000 value for flood with $992, which 

was still manageable, $2,034. 

Then on December 21st of that year, we called our insurance 

company, and they said, ‘‘There is no insurance claim for you.’’ 

Senators, to put it bluntly, my wife and I went absolutely ballistic. This went on for all of 2005 and all of 2006, over and over 

and over. We had cleaned up all of our wet carpeting and the mold, 

which we were later told, ‘‘You should not have gotten that close 

to that much mold.’’ But we did because somebody had to do it. 

We got sent to mediation to try to settle this, and the only thing 

that happened there was the representative for our insurance company said, ‘‘You had a flood, and you have to file a flood claim.’’ 

And we said, ‘‘We cannot file the flood claim. There was no flooding. If we file a flood claim, that is insurance fraud.’’ He said, ‘‘I 

do not care. You have to file a flood claim. You had a flood.’’ 

The policies kept going up and up and up. I mean, you have my 

written testimony with all of it. I am just going to skip to a few 

facts because I have gone over, and I am sorry. 

We were living in a house with bare concrete floors, boxes everywhere. We felt like we were living in a warehouse. The stress of 

having to live in these conditions was affecting us both physically 

and emotionally. The financial burden from the increased premiums plus the increased electrical costs—have you tried to heat 

or cool a house with wet insulation in the walls? It cannot be done. 

Our electric bills doubled. 

Between losing our claim, misfiling it, jumping us from one adjusting company to another, and then putting us in a class action 

lawsuit of a wind versus flood claim without our knowledge and 

without our consent, we felt like we were living on a roller coaster. 

It put such a strain on our marriage that my wife and I almost 

split up over this. There is no way to understand what happened 

without seeing a timeline, and I have one of those here that I will 

give to you. We had to hire a lawyer to get the claim settled. Eventually, we could not afford to live in Florida. We settled our claim 

for half of what we should have received, sold the house at a loss— 

and by a loss, I mean we got $35,000 under market value. And 

then we left in September 2006 and moved to Virginia. 

Now, in 2006, the original value of our house and premium for 

homeowner’s insurance, the premium was $1,092 on a value of 

$108,000. In October of 2006, we got a revised statement, 1 month 

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before that policy expired, and that revised statement said your 

home value is now $215,475 and your premium is $2,063. That is 

a 100-percent increase. Our mortgage jumped up by almost $200 

all through insurance. We had already moved to Virginia when we 

got that. Heaven only knows what would have happened to our 

mortgage costs if we had not already moved. 

Right now, in the Pasco County record, the house that we were living in has been assessed by the county as a value of $124,856. 

The insurance company for 2006–2007 valued it at $231,000. Our 

renewal that we would have had to pay if we stayed in Florida— 

we had a $2,700 premium. Right now the premium in that zip code 

is $3,491. That is just homeowner’s insurance. 

Senators, our case may be extreme. It is not uncommon. Thousands of people in Florida and throughout the Gulf States can tell 

you similar stories. The outrage here is not just the cost. It is what 

everybody who has a claim goes through, and they are intertwined. 

How many more people have to go through what Barbara and I 

went through or, even worse, lose their home to foreclosure, because they are. Thousands of people every day are losing their 

homes to foreclosure. The insurance industry along the Florida and 

Gulf Coast is out of control. It is a pattern that is repeating itself. 

If you do not believe that, ask people who live on Long Island, New 

York, why they cannot get insurance. Ask people on the Jersey 

shore why they cannot get insurance. It is happening, and it is 

going to hit every single State in this union if we do not do something about it. How long can we wait? 

I am sorry I took more time. Thank you for the opportunity, and 

I would be happy to answer any questions you may have. 

Chairman DODD. Thank you very much, Mr. Polsky. We are 

deeply sorry about what you have gone through and your family 

has gone through. But we appreciate your testimony here this 

morning. 

Let me turn to Mr. Nutter, if I can, Frank Nutter. Thank you 

for being here. 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA 

Mr. NUTTER. Chairman Dodd, Ranking Member Shelby, and 

Members of the Committee, my name is Frank Nutter. I am President of the Reinsurance Association, which is the national association representing property and casualty organizations that specialize in assuming reinsurance. Reinsurance is commonly referred 

to as the insurance of insurance companies, and one of its most 

common purposes is for the transfer of risk associated with catastrophic events, such as hurricanes, earthquakes, and in the case 

of September 11th, acts of terrorism. Any debate about the role, if 

any, that the Federal Government should have with respect to financing recovery from natural disasters should include an analysis 

of what the reinsurance capacity is, as well as what the insurance 

companies’ capacity is to write. 

Global reinsurers view U.S. catastrophe risk as an essential component of their diversified assumed risk portfolios. Evidence of this 

is that in 2004 the four major hurricanes that hit Florida resulted 

in a little over $30 billion of insured damage. The global reinsurmstockstill on DSKH9S0YB1PROD with HEARING

44 

ance industry ultimately paid approximately one-third of those 

losses. 

The hurricane season of 2005 produced losses estimated to be as high as $60 billion to $65 billion. The reinsurance industry will ultimately pay approximately one-half of all of those losses. 

The industry finances natural catastrophe risk by spreading the 

losses among market segments. For 2005 hurricane losses, insurers 

retained 39 percent of the loss, Bermuda reinsurers 29 percent of 

the loss, U.S. reinsurers 10 percent of the loss, European reinsurers 13 percent of the loss, and Lloyds of London 9 percent. 

Notwithstanding this loss experience, the reinsurance market 

has adapted to increase natural catastrophe risk. The capital markets have greatly enhanced reinsurance capacity following Hurricane Andrew, as they did following Hurricane—following Hurricane 

Katrina, as they did in 1983 after Hurricane Andrew, and in 2001 

after the terrorism losses of 9/11. 

Since the fall of 2005, approximately $32 billion of new capital has been raised and committed to the reinsurance market. $10.4 

billion was invested in new startup companies, $10.3 billion in replenishing the capital positions of existing reinsurers, an additional 

$5.6 billion was invested in special purposes vehicles. In addition, 

$5.3 billion was raised in the capital markets for catastrophe bonds 

for U.S. catastrophe risk. And in the last 6 months both the Chicago Mercantile Exchange and the New York Mercantile Exchange 

have launched catastrophe trading platforms. 

Private reinsurance capacity increased in 2006 by approximately 

30 percent, and reports of the January 2007 renewals indicate reinsurance capacity has grown an additional 14 percent in a moderating price environment. Broker reports reflect that flat to declining reinsurance rates for 2007 renewals. In our view, the free market works. 

The RAA believes that the natural disaster risk are insurance in 

the private insurance and reinsurance market and that State Cat 

funds significantly displace the private market. The RAA believes 

there are many flaws with the concept of State catastrophe reinsurance fund, and only Florida has such a fund in place. 

The first is that politically charged rate-setting does not affect 

the underlying risk of loss or cost of recovery. If premiums are set 

below actual risk either losses are not funded, someone else is subsidizing the losses, or insureds are led to expect a Government bailout. 

Second, there is no evidence that State reinsurance catastrophe 

funds result in greater availability or affordability of homeowner’s 

insurance. 

Third, State catastrophe funds also violate one of the fundamental tenets of insurance, and that is spreading the risk among 

various risk bearers. State funds concentrate the risk. 

State reinsurance funds, particularly as it exists in Florida, are 

merely a cost-shifting mechanism financed by debt. They rely on 

cross-subsidies to pay for hurricane risk rather than relying on current affected property policyholders paying those costs. In Florida, 

car owners, small businesses, school districts, daycare centers, 

churches, hospitals, renters, professionals, and business owners, 

anyone with a property and casualty insurance policy, is required 

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by law to pay the billions in dollars in bonds authorized by the 

Florida Hurricane Cat Fund due to its shortfalls. 

When hurricane occurs it requires the Florida Catastrophe Reinsurance Fund to pay losses in excess of its cash balance, as in the 

case in 2004 and 2005, the Cat fund issues bonds. The bond debt 

is not paid by insurance companies who receive the cheap reinsurance. It is paid by assessing or taxing Florida policyholders. 

The irony of Florida is that the people who vilified insurers are, 

together with other policyholders, now their reinsurers. 

We believe that preferred solutions include removing regulatory 

constraints from the private insurance market’s ability to willingly 

insure risk, encourage private insurers to enter the market, and 

enforce building codes. 

If policymakers follow competitive free market principles, a Federal natural disaster or reinsurance fund is unnecessary. Some 

have suggested that a Federal program is appropriate because we 

all pay for disaster recovery now, implying that Federal taxpayers 

are on the hook for disaster losses. While natural disasters may 

occur in all States, most are modest insurance costs compared with 

a few regions. 

For instance, since 1950, with the exception of Louisiana in 2005, 

all other States combined had less insured hurricane losses than 

Florida. The potential natural disaster related losses in other 

States are notably less than potential costs, particularly in light of 

very low probability for the most severe events, and are paid for 

by insureds based upon their own risk premiums. Even with a Federal Cat fund, the reality is that only a few states would draw on 

its resources. 

Mr. Chairman, we look forward to working with the Committee 

with respect to ideas to address this problem and to addressing any 

issues that we might help and of focusing on Federal catastrophe 

funds. 

Thank you very much. 

Chairman DODD. Thank you very much. Thanks very much and 

we appreciate it very much. 

Admiral Loy, thank you for being here. 

STATEMENT OF ADMIRAL JAMES M. LOY (USCG–RET.), COCHAIR, PROTECTINGAMERICA.ORG 

Admiral LOY. Good morning, Mr. Chairman. Good morning, Mr. 

Shelby, members of the Committee. 

I appreciate the opportunity to testify today in my capacity as 

Co-Chairman of ProtectingAmerica.org, an organization committed 

to finding better ways to prepare and protect American families 

from the devastation caused by natural catastrophes. 

My fellow Co-Chairman is James Lee Witt, the former Director 

of the Federal Emergency Management Agency. Our coalition of 

over 200 members include first responders like the American Red 

Cross emergency management officials, insurers including State 

Farm and Allstate, municipalities, small businesses, Fortune 100 

companies, and thousands of private citizens. We like to think we 

are becoming a bit of a voice of the people to help the Committee 

figure out which way forward is the right way to go. 

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ProtectingAmerica.org was formed in the summer of 2005 to raise 

the national awareness about the important responsibility we all 

have to prepare and protect our homes, families, businesses, and 

communities. And we are building a campaign to create 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. 

Mr. Chairman, in the 5 minutes available, let me make three 

critical points, I believe, from my full testimony, which I offer for 

the record. 

The first is that the comprehensive nature of the solution I just 

mentioned really has four pieces. We have talked a lot this morning about a reformed insurance construct, which is certainly one of 

those pieces. 

But the second is a serious public education effort with respect 

to preparedness that goes to the citizen level, it goes to the business owner level, and helps all of them understand how critical 

their personal role is to prepare. 

The third is a serious commitment nationally to mitigation. We 

have heard good comments this morning, which is the beginning of 

I think the common ground even for the agenda for the commission 

that you have suggested. But efforts like land use policies and 

building codes and the enforcement of both of those are extraordinarily important to hopefully minimize the challenge on the front 

end that we have to deal with after the storm goes by. 

And last, wherever it is appropriate for adequate support and resources to the first responders that we all count on, those four dimensions have to be woven together to design this comprehensive 

national solution. And all must be incorporated or we will fall short 

of the goal that we have. 

The second point I would make is to recognize this current cycle 

that we are in of destroy, rebuild, destroy, rebuild, with hope in 

there somewhere, as hardly a very decent way of going forward. I 

believe that cycle to be fatally flawed and we have to find a way 

to interrupt it before the next major storm comes by. 

I think the points at issue here are that complacency tends to 

reign. And the further away we get from Katrina, the less focused 

we will be on finding a solution to this problem. Denial of it happening to me is pretty pervasive. But invariably, as we have heard 

from testimony at the table already this morning, sooner or later 

it happens to us. 

The current system is a Government system of bailout. Random, 

unplanned use of appropriated tax dollars as a bailout after the 

fact is a use of the Federal dollars at this point which is not what 

we should be doing. We should be planning in the front end for better utilization of those dollars. 

Fifty-seven percent of our citizens live in catastrophe prone 

areas. More go there every day, as we have heard from other witnesses this morning. Climatologists predict several decades worth 

of big storms. Seismologists suggest that we are way overdue for 

a major earthquake. 

The third point I would offer, sir, is the costs associated with 

these megacatastrophes are almost beyond imagination and cermstockstill on DSKH9S0YB1PROD with HEARING

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tainly are not inside the envelope of what even actuarially sound 

policies can deal with. 

For Katrina, for example, with a piece that was on the front page of the USA Today just on Monday, they are talking about $277 billion worth of claims, and I am mixing both flood and wind here. 

But at the other end of the day, this storm has the potential to get 

to the point of $500 billion by the time we are all done bailing this 

out. 

If the 1906 earthquake in San Francisco happened exactly the way it did in 1906 again today, it would be a $400 billion event. 

If that 1938 storm, sir, that you cited in your commentary happened again today, it would be between $150 billion and $200 billion event. 

And last, Mr. Chairman, more directly to the point of this hearing, ProtectingAmerica.org does advocate the establishment of a 

privately funded catastrophe funds in catastrophe prone States. 

Such funds will provide more protection at lower cost to consumers. 

Much like the 401(k)s retirement savings programs, these Cat 

funds would grow tax-free, able to generate higher levels of reserves to provide greater levels of coverage in a shorter timeframe. 

These Cat funds would serve as a backstop to the private insurance market that we absolutely must continue to depend on as we 

have for the last 150 years. They would also generate investment 

earnings that, in addition to helping to pay claims in the aftermath 

of a catastrophe, would be used for those mitigation, prevention, 

education, preparation and first responder programs up front. 

We also advocate the creation of a national catastrophe fund that 

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

of a megacatastrophe. Those State funds would be financed 

through mandatory contributions by insurance companies in those 

States in an amount that reflects the exposure risk of the policies 

that they write in those States, to go back to Mr. Shelby’s point 

about actuarially sound numbers. 

Qualified State funds would be able to purchase reinsurance 

from the national program. Rates for this coverage would be actuarially based and would only be available to State programs that 

have established the prevention and mitigation funding as I have 

described above. In the event a catastrophe strikes, private insurers would be required to meet all of their obligations to their policyholders. Should catastrophe losses exceed those obligations, then 

at a threshold level first the State fund could kick in, and then the 

national fund, if it was appropriate. 

Because this program relies on the traditional private market for 

paying claims, the inherent inefficiencies and bureaucracy in a 

Government-run program are virtually eliminated. Because this 

program requires States to fund meaningful prevention and mitigation programs, planning, protection, preparation will take place before the onslaught of a catastrophe and will be in a state of continuous and rigorous improvement over time. 

ProtectingAmerica.org is cognizant of readiness and preparedness 

efforts underway by the Department of Homeland Security, by the 

Red Cross, by the Council of Excellence in Government, and we are 

working very hard to work with them, partner with them in that 

work. 

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All of these elements are contained in legislation currently pending in both the House and the Senate. 

Mr. Chairman, I want to thank you again for taking the time to 

consider and discuss this important subject. 

Before I close, reforming the insurance construct is a very important dimension of this work that we have in front of us. But Mr. 

Chairman, my final thought for your Committee is this: please recognize the opportunity we have to act before the next nightmare 

and provide the leadership to produce for America that comprehensive national catastrophe management solution with all the salient 

pieces. 

Thank you, sir. 

Chairman DODD. Admiral, it is great testimony and I suspect 

Senator Shelby might be asking a guy like you to serve on this 

commission when we get it going, and people with. You have got 

a good comprehensive view and you make some excellent points. 

Admiral LOY. Thank you, sir. 

Chairman DODD. We thank you very, very much. 

Our last witness, and thank you for your patience in being the 

last witness to appear here. 

Mr. CHAMNESS. Pleasure. 

Chairman DODD. But thank you, Mr. Chamness. 

STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CEO, 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Mr. CHAMNESS. Good morning, Chairman Dodd, ranking member 

Shelby, and members of the Committee. 

My name is Chuck Chamness, and I am President and CEO of 

the National Association of Mutual Insurance Companies. I am 

grateful for the opportunity to testify before you this morning on 

a subject that poses an enormous challenge to the insurance industry and our Nation as a whole. 

It is widely acknowledged that property insurance has become 

more expensive and less available in coastal regions of the U.S. 

While Government and the private sector can and should work together to address this problem, we believe that any actions taken 

must recognize the basic economic principles of supply, demand, 

and price. 

A serious discussion of the issue at hand should begin by acknowledging three facts. One, the increased exposure of densely 

concentrated, high value property in certain geographic regions 

that are prone to elevated levels of a catastrophe risk means that 

property insurance in these regions will be relatively more expensive than regions that lack these attributes. 

Two, as population growth and commercial development increases in these regions, high insurance costs are likely to continue 

to increase, as well. And three, the increased population growth 

and commercial development in the coastal regions is occurring at 

a time when the frequency and severity of catastrophe storms in 

these regions is increasing. 

Simply put, the availability and affordability of property insurance in coastal regions is mainly a function of risk. But other variables, including actions taken by Government, can also reflect the 

supply and cost of risk. 

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I would like to comment on a few of the disaster-related proposals that have emerged this year. In Florida, the State recently 

removed restrictions on the ability of Citizens Property Insurance 

Corporation, the insurer of last resort, to compete with private insurers while canceling rate increases previously approved for Citizens to reduce the disparity between its level of risk and the relatively low premiums it charges. 

Lawmakers also doubled the risk-bearing capacity of the Florida 

Hurricane Catastrophe Fund from $16 billion to $32 billion. As a 

result, the Fund has been given a legislative mandate to assume 

a level of catastrophe risk exposure more than 30 times its capital. 

Thus, if only one major storm hits the State this year, all Florida 

insurance consumers will face huge assessments and significant tax 

increases. 

At the Federal level, NAMIC strongly opposes S. 618, which 

would almost certainly increase costs and decrease the availability 

of coastal property insurance. By repealing the limited insurance 

exemption from Federal antitrust laws created by the McCarranFerguson Act, S. 618 would prevent small insurers from sharing industry-wide historical loss data and using catastrophe models to 

predict loss costs. Without this data, small insurers will be driven 

from the marketplace. Their demise will decrease the supply and 

raise the cost of property insurance, particularly in catastropheprone regions. 

With regard to a Federal catastrophe fund, NAMIC recognizes 

that a true megacatastrophe could exceed the capacity of the private insurance market. That is why it is appropriate for policymakers to consider solutions that could augment the capacity for 

the private market. However, any Federal catastrophe fund should 

have a high attachment point and only be triggered in the event 

of a megacatastrophe that the private market does not have the capacity to handle. 

While we have reservations with some of the proposals that have 

either been introduced or enacted, we are encouraged by several 

bills that were recently introduced. NAMIC believes one of the best 

proposals to emerge so far is S. 930, which Senator Martinez recently introduced. It would lower costs by creating tax incentives 

to encourage property owners to mitigate wind-related risk. 

NAMIC also supports two bills introduced by Senators Nelson 

and Martinez. S. 927 allows homeowners to create tax-free catastrophe savings accounts similar to health savings accounts, which 

could be used to pay hurricane deductibles and the costs of retrofitting properties. S. 926 would amend the Federal tax code to 

allow insurers to set aside a portion of premium income on tax-exempt policyholder disaster protection funds. 

NAMIC also would support Federal legislation that would create 

financial incentives to encourage States to adopt and enforce strong 

state-wide building codes. Strong building codes, as well as responsible land use planning, have been shown to greatly reduce the 

level of property damage and human suffering caused by natural 

disasters. 

Finally, NAMIC believes the National Flood Insurance Program 

should be substantially reformed. We supported the Senate bill 

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passed by this Committee last year and we are hopeful that similar 

legislation is considered this year. 

In conclusion, NAMIC recognizes that people who live and conduct business in coastal areas will face serious challenges in the 

years ahead. We believe the most effective mechanism for addressing these challenges is through the private insurance market. We 

also believe Congress can play a constructive role by enacting some 

of the positive reforms mentioned above. 

Thank you. 

Chairman DODD. Very good and I thank all of you for being brief 

in your statements. It has been very helpful to have us hear from 

all of you. 

I am going to apologize to our witnesses in stepping out of the 

room and ask Senator Carper to take the gavel. 

I have a series of questions I would like to ask all of you that 

I will submit in writing to you and then ask you if you could, in 

a prompt fashion, respond to the Committee. I would be interested 

in your reactions to a commission. I would be interested in your reactions to the tax proposal, the temporary one we have talked 

about to give some relief on premiums, as well as the flood insurance reform program. Many of you may have already commented 

on this in the previous Congress, when Senator Shelby struggled 

to get that adopted. We got it out of Committee but it did not go 

any further than that. 

As well as the mitigation. I am particularly pleased that all of 

you have had positive comments about the mitigation ideas. That 

is $100 million we are talking about there. 

I want to include a revolving idea there. I think the notion of 

homeowner responsibility, business responsibility of paying something back on this increases the likelihood you will get more responsiveness from the program than if it is just a fund you can 

draw down on without some commensurate responsibility. 

So I would be interested in those and comments on those ideas 

for the Committee, and any other suggestions you might have in 

response to these questions. 

And I apologize to the witnesses here for stepping out before I 

have a chance to ask the questions directly. But let me turn to my 

colleague, Senator Shelby, and turn the gavel over to Senator Carper. And I thank Senator Carper immensely for taking responsibility. 

Senator SHELBY. Thank you, Chairman Dodd. 

Mr. Polsky, I know you are frustrated with what you went 

through that you related. Who was your insurer that you had so 

much trouble with? 

Mr. POLSKY. OK. My insurer was the only insurer in the State 

of Florida that would insure in my ZIP code, and that is Citizens 

Property Insurance Corporation, an arm of the government of the 

State of Florida. 

But Citizens was the only option we had because nobody else 

would sell. Because they were told you do not have to sell. Because 

the regulators in the State of Florida caved on their demands to 

let them do it their way. That is why it was Citizens. 

But Mr. Shelby, let me tell you, I spoke to many hundreds of people just in my area, and there were thousands across the State, 

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who had the exact same problem with State Farm, with Allstate, 

and with Nationwide. So it was not a Citizens Insurance issue—— 

Senator SHELBY. Pretty uniform, was it not? 

Mr. POLSKY. It was very uniform. There were more issues with 

Citizens because the regulations did not apply equally to them because they were a Government-funded agency. But the problems 

were the same, regardless of who the insurance company was. 

Senator SHELBY. OK. 

Admiral Loy, you propose a private—a public/private partnership 

to address the rising cost of catastrophe insurance. I worry myself 

when I hear the word public/private partnership because such partnerships usually involve a lot of public money, a lot of private profit, and not much partnership. That has been my concern for many 

years here. 

Admiral Loy, in theory, a national catastrophe fund should—I 

say should—should be actuarially sound—— 

Admiral LOY. Yes, sir. 

Senator SHELBY [continuing]. And thereby self-financing. Is that 

correct? Do you agree with that? 

Admiral LOY. That is correct. 

Senator SHELBY. However, our experience with the Federal Flood 

Insurance Program’s inability to adequately price flood insurance 

leads me and others to doubt whether any Federal insurance program would be able, would be able to charge actuarially sound 

rates over the long term. That is what we would hope to do. 

Would you discuss the scenarios under which you realistically 

foresee taxpayers having to pay to cover the obligations of a national catastrophe program? 

Admiral LOY. A national catastrophe fund at the national level. 

Senator SHELBY. Right. 

Admiral LOY. Sir, first of all, let me establish my credentials as 

not an actuary. 

Senator SHELBY. We know that. 

Admiral LOY. There are folks on this panel that are dramatically 

better equipped to—— 

Senator SHELBY. But we know you know a lot about water, 

though. 

Admiral LOY. Yes, sir, I do know a bit about water. 

First, I would offer that we should learn lessons from the National Flood Insurance Program that has gone by. We have actually, in the ProtectingAmerica.org agenda, attempted to leave that 

over here, learn lessons from it, make those lessons become realistic for us as we think our way through what might be the proper 

construct of a national catastrophe fund keyed to those participating States that would meet the obligations—— 

Senator SHELBY. Should the No. 1 thing be actuarially sound? 

Admiral LOY. Yes, sir, I do believe that to be the case. 

Senator SHELBY. It has got to be, does it not? 

How likely is it that actuarially sound prices will ever be 

achieved under the Flood Insurance Program, the proposed natural 

catastrophe program, or any other insurance program absent, Admiral, the use of neutral mechanisms to assign rates to risk? 

In other words, you are managing risk. That is about insurance, 

is it not? 

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Admiral LOY. Exactly. 

Senator SHELBY. And if you do not, if you do not assign a rate 

to a risk, somebody is getting a free lunch, are they not? 

Admiral LOY. Well again, sir, I am not a student of the insurance 

business as it relates to the—— 

Senator SHELBY. But just use your own common sense. 

Admiral LOY. Precisely. My common sense suggests that with 

thresholds established, as has been commented on by a couple of 

other witnesses, where a State fund—first of all, the first and primary provider of the insurance capability must remain the private 

insurer. And to the degree they find themselves overwhelmed in 

the aftermath of a storm, to have in advance the designed intent 

of allowing a State fund to kick in, so to speak, and address the 

shortfalls, as Mr. Polsky and others have described, that seems to 

be an appropriate thing to do. 

And in my mind, the last court of resort can be that national 

fund where those very few, once in 100 years, maybe even once in 

200 years, catastrophes come by that the national fund can, in all 

intents and purposes, be that reinsurer for the State fund to allow 

people and businesses not to have to suffer through what we have 

heard in testimony this morning. 

Senator SHELBY. Mr. Nutter, what is your estimate of the maximum losses that the insurance industry could, could suffer in a 

year from a natural disaster before it would face widespread insolvencies? We know you have a tier of insurance and you sell off a 

piece of the risk here and there. That is managing risk. 

But what are the probabilities of an event occurring that would 

inflict such losses? 

Mr. NUTTER. It is a challenging question. Let me give you my 

best answer. 

Our estimate of the reinsurance contacts in place in 2006, in 

other words not necessarily the total capacity available but the capacity in place, is probably $70 billion to $75 billion of reinsurance 

capacity. 

You could add to that the capacity that the Florida Hurricane 

Cat Fund added, which is probably another $15 billion, looking at 

2006, of $90 billion. And that sits on top of whatever the insurance 

companies retain by way of risk. So if you use some percentage of 

capital and surplus, you would add multiple billions of dollars of 

that. 

So our estimate is that, indeed, there is satisfactory capacity for 

the catastrophe risk based on the probabilities of losses. 

Senator Dodd mentioned the—and Admiral Loy mentioned the 

1938 storm and the numbers were $100 billion or something. The 

insured exposure, even adjusted to today’s cost, is about $38 billion. 

If that same storm happened today and today’s exposures, that is 

considerably lower than what the industry paid by way of Katrina, 

Rita and Wilma. 

The Miami hurricane of 1926 is often cited as perhaps the worst 

case scenario. And while it is no longer insured mostly in the private market because of the State of Florida’s actions, that storm 

would be estimated at $80 billion. 

To us those are numbers that suggest the industry is fully capable, in terms of capacity and handing a major natural catastrophe 

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in this country. Admiral Loy mentioned, validly, numbers considerably in excess of that. But I am sure that includes infrastructure, 

disaster assistance, probably includes the Flood Insurance Program, none of which would be replaced by any Federal cat fund as 

currently proposed. 

Senator SHELBY. Dr. Hartwig, would a natural catastrophe fund 

have any impact on the long-term availability and affordability of 

insurance? 

Mr. HARTWIG. In terms of the long term availability and affordability, potentially for the highest level events that we can talk 

about, the sorts of events that Mr. Nutter has outlined, events that 

go beyond that, events that exceed that, events that would have required some Government involvement on the back end anyway. 

To the extent that various funds are being discussed today or the 

legislation in Florida which was sold as a savings to individuals, 

most of those savings are illusory and they are illusory because 

while you can promise to cut rates today, the reality of it is the 

deficits that will be incurred both by the State-run insurer and the 

State-run reinsurer, have to be recovered on the back end. 

Senator SHELBY. So there is no realistic price mechanism here? 

Mr. HARTWIG. Right. Definitely with respect to Florida, there is 

no realistic pricing mechanism at all. And in fact, I would go so far 

as to say that the vast majority of State-run markets of last resort 

tend to operate in a deficit position or at very thin margins and are 

on the razor’s edge of going bankrupt at any given point in time. 

Senator SHELBY. Doctor, regarding Florida’s catastrophe fund, regarding their—it replaces pre-event premiums with post-event assessments. That is an unusual kind of way to finance insurance, is 

it not? 

Mr. HARTWIG. Well, there are some financing mechanisms that 

are post-event and some bonds can be triggered post-event. But 

what is unusual in Florida is to basically displace the private sector, promise a big, big savings for everybody in the State, and then 

to replace them with what many people do not understand is a 

huge tax increase on the back end. Just many people are unaware 

of it. 

We are talking about literally, in some of the scenarios Mr. Nutter mentioned, a repeat of the Great Miami Hurricane of 1926. We 

do not need to go to fiction. We can just look at old events occurring today. We are talking about assessments in the vicinity of $40 

billion that threatened the State’s credit rating, that will cause all 

sorts of assessments on policies on people who do not even live 

near the coast. 

Senator SHELBY. Mr. Nutter, I am sure you have reviewed Senator Nelson’s legislation to establish a national catastrophe fund. 

What is your opinion on the likely impact of the affordability of insurance, if that were to become law in its present form? 

Mr. NUTTER. It is hard to see how it would help. If, as has been 

suggested by proponents of a Federal cat fund, that it is to be actuarially sound at the Federal level, requiring the State fund to be 

actuarially sound, then ultimately you still have to have the consumer pay an actuarially sound rate in order to fund the mechanism. If you do not do that, there has to be a subsidy or some sort 

of taxpayer assistance, as Florida is doing now. 

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It is hard to see how that trickle-down effect of that fund is actually going to affect the affordability or availability of insurance. 

Senator SHELBY. Dr. Hartwig, you just said that there are billions of dollars available for reinsurance in the marketplace, as I 

understand it. Would we chase that money away if we got the Federal Government in as the backstop business here? 

And if it would be driven away, would it go away perhaps permanently? 

Mr. HARTWIG. Well again, I think that everything needs to be 

done to encourage capital to flow into insurance in reinsurance 

markets. And if there is a need that is beyond what can be satisfied by any elements in the private market, including the capital 

markets, there you might see that there is some role of Government. 

But to use Florida as a bit of a microcosm of this, it is true that 

reinsurers were chased out of Florida. And if you have the belief 

that each time you make a little money or each time you get to a 

year that there are no cat losses that the Government is going to 

step in and displace you, you are not going to come back in. So they 

are looking for somewhere else to go. 

Senator SHELBY. Mr. Chamness, Chamness? 

Mr. CHAMNESS. Chamness. 

Senator SHELBY. One of the biggest problems we had following 

Katrina that we have heard a lot, over and over—— 

Senator CARPER. Senator Shelby, I am going to just wrap it with 

this one, if you would, please. 

Senator SHELBY. I am getting toward the end, if you will let me. 

Senator CARPER. OK, good. So am I. 

Senator SHELBY. I always let you, remember? 

One of the biggest problems we have had following Katrina was 

the failure of some companies to pay claims in an equitable manner. We have heard some of that today. 

There are many reports of companies failing to adequately assess 

claims and being willing to litigate claims rather than to pay them. 

Do you think that the insurance industry could have done a better 

job settling claims in the aftermath of Katrina? And what are your 

members doing to make sure that they will do a better job in the 

future? You know, they have had a lot of bad publicity, not just in 

Louisiana, Mississippi, but everywhere. 

Mr. CHAMNESS. Well, thanks for the question, sir. 

The fact is, Katrina was unprecedented in the number of claims 

paid, the cost, the number of lives lost. And I think the insurance 

industry has learned lessons from the unprecedented claims handling that was required after that storm. 

We certainly have looked at a lot of issues that Congress can do 

today that will help improve the next storm and the insurance industry’s reaction to it. 

I would respond, and I am sorry about the experience of Mr. 

Polsky in Florida. He was a panelist here and so to address—well, 

I cannot address his specific—— 

Senator SHELBY. He is probably speaking for a lot of people, 

though. 

Mr. CHAMNESS. Well, I would just say that the experience with 

Citizens and his claims handling particularly, I think was well docmstockstill on DSKH9S0YB1PROD with HEARING

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umented in that various period where Citizens had, I think, twice 

as many complaints in Florida as any other private insurer. So unfortunately, his experience perhaps was not an exception. 

Senator SHELBY. I have one last question. 

Governor, over the past few years, there has been tremendous 

growth in the use of alternative insurance mechanisms, including 

catastrophe bonds and sidecar transactions. Could you offer any insight as to why there has been so much innovation and what impact a national catastrophe fund would have on these incentives in 

the private market now for future innovation? 

You might want, just for the audience, explain what you mean 

by catastrophe bonds and sidecar transactions. These are new developments. 

Mr. RACICOT. They are, Senator Shelby. And frankly, they are a 

revelation of a notion that I believe you subscribe to. And that is 

the incredible imagination and creativity of capital markets when 

they are allowed the opportunity to function and operate because 

they are built upon the ingenuity and the competitiveness of the 

American people driving toward the best bargain they can drive to 

a consumer, thereby rendering a profit. 

And clearly, there have been—— 

Senator SHELBY. But in doing that, they are assessing real risk, 

are they not? 

Mr. RACICOT. They are. And frankly, at its core what this argument to me about is this, that there are some forms of insurance 

whereby a partnership with a governmental entity is unavoidable, 

for instance with terrorism. And that is for a very logical reason, 

because you cannot be advised—you have no history, first of all, to 

set a premium, to do it actuarially. You have no presently existing 

information to make an assessment on a daily basis. So how, in the 

name of God, can you go about setting a premium when you cannot 

assess the risk? That is unavoidable. 

Our belief is that this system has operated exceptionally well for 

150 years. Not perfectly, but exceptionally well. And when you talk 

about the number of failures with processing cases, really you are 

talking about in the neighborhood of 17,000 out of 1.75 million 

cases across the Gulf. I would say that is a pretty good record in 

any venue. 

Those are the ones, of course, that receive the attention because 

they are so tragic and they are so difficult and they are so challenging personally to people, and our empathy goes out to them. 

But at the same time, we have got to keep an eye on principle. 

If you establish a cat fund, I think you are tearing at the fabric 

of this infrastructure. And you can compromise it irreparably and 

you cannot restore it. And that is why our caution is to be very, 

very careful here. Because if we get to the point of socializing property casualty insurance in this country any more vastly than what 

is absolutely necessary, for instance with terrorism, we I think augment substantially the risk of decimating the system, which then 

means the Federal Government to this day has to be prepared to 

pay out about $250 billion more in damages to the American people. 

Senator SHELBY. Thank you, Governor. 

Thank you, Mr. Chairman. 

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Senator CARPER. Senator Shelby, I remember all those years 

when you were our chairman and you were patient with me and 

let me go on and on. And I thought how will I ever repay him? 

[Laughter.] 

I think I owe you one less, my friend. 

To our panel, sometimes I say when we have folks before us, we 

just have a couple of witnesses on that particular day would be 

quality, not quantity. Today we have quantity. But I would also observe we have quality. This is a good panel and good perspectives, 

a lot of different perspectives. They are of real value. 

Governor Racicot and I served as Governors together for 8 years. 

I believe he once had an idea of—I want to call it a consensus commission or compromise commission. In a day and age when we do 

not get a lot done here in our Nation’s Capitol and maybe we disagree more than we should. It was a different approach and, I 

thought, an intriguing approach. 

As we listened to this back and forth here today, I think we may 

want to dust that off, that idea off, and see if we cannot apply it 

here in this regard as well. 

I think it was a Republican, a great Republican, Abraham Lincoln, who used to talk about the role of Government. Do you remember what he used to say? To paraphrase him, the role of Government is to do for the people what they cannot do for themselves. 

We have responsibility, really shared responsibility that involves 

States, involves Governors, insurance commissioners, legislators, 

that involve the private sector insurance companies, reinsurers, 

that involve the Federal Government as well, not only through outfits like the Coast Guard that respond to these emergencies and 

FEMA and others, but also, to those of us who keep looking at this 

flood insurance program, the Federal Flood Insurance Program, to 

decide is it appropriate or not. 

Mr. Chairman, Chairman Shelby and I used to serve together on 

the House Banking Committee. And one of the things I worked on, 

actually I think we were on that committee together, was the National Flood Insurance Program. It seemed to me we almost 

incentivized people to move into harm’s way. 

I think it was Dr. Hartwig who said over half the people in our 

country live within 50 miles of one of our coastlines. We do not 

have 1,400 people a day coming to Delaware, but we probably have 

1,400 people maybe every other month, that are moving, especially 

to Sussex County, which is where we have some terrific, terrific 

beaches. 

What I want to do today is ask two different questions. I will tell 

you what both of them are. One of them deals with sea level rise, 

something that we are concerned about in my little State. The 

highest point of land in Delaware is a bridge and it is not very 

high. 

We have a lot of folks who come to places like Rehoboth Beach 

and Dewey Beach and Fenwick Island and Lewes and Cape Henlopen and all kinds of places up and down our little shore. 

But I kid people and say, Senator Shelby, we are going to have 

people buying beachfront property not in those places in Delaware, 

but if we are not careful in like Dover, Wilmington, or places far 

inland. Hopefully, that will never happen. 

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But last week the U.N.’s Intergovernmental Panel on Climate 

Change released a report. You probably heard about it. They concluded that climate change—yet another report concluding that climate change is going to have a significant impact on the environment. They talked about winners and losers in different parts of 

the world and how climate change was going to affect them. 

One of the specific impacts they cited though in the report, and 

it states, and I quote ‘‘Sea level rise and human development are 

together contributing to losses of coastal wetlands, and mangroves 

and increasing damage from coastal flooding in many areas.’’ That 

is their quote. 

We know that climate change is presenting an increasing amount 

of risk to our lives and to our property around the globe, especially 

in coastal regions. 

I would just ask, particularly for the insurance companies that 

are here or their spokesmen, if you would, how are the insurance 

companies calculating the risk of climate change impact when 

issuing policies? That is my first question. 

And sort of as a follow-in, are insurance companies taking any 

specific risks or steps to incentivize actions that would reduce 

greenhouse gas emissions that cause global warming and contribute to sea level rise and just exacerbate the situation we are 

talking about here today? 

Mr. NUTTER. Senator Carper, I will take a shot at that. 

Senator CARPER. Mr. Nutter, you are on. Thanks. 

Mr. NUTTER. The scientists who look at the evidence of climate 

change have concluded that the likely effect on hurricanes, which 

is how the industry would tend to translate climate change into its 

business, is that it will increase the intensity of storms, that there 

is no conclusive evidence that the number of storms will be increased by the intensity of storms. It does not take much to increase the intensity of the storms that have hit the Gulf Coast or 

Florida to understand that it will exacerbate the damage greatly. 

The insurance mechanism that attempts to translate this scientific information is largely through catastrophe modeling companies. These companies try to assimilate scientific information together with the actuarial information. And the modeling companies 

then submit information to insurance companies and, in some 

cases, to insurance regulators. 

Regulators have had difficulty, as you might expect, in accepting 

what maybe some consider subjective assessment of the likely impact of climate change. But it is an effort on the part of the industry to try and assimilate its actuarial expertise with the scientific 

expertise. But some conclusive information would suggest that not 

only are we going to see more activity, as Dr. Hartwig suggested, 

but the intensity of these storms are likely to be far more severe. 

Senator CARPER. It would seem to me, before I yield to others to 

respond to the question, it seems to me that the intensity of the 

storms is sort of the near term threat. The longer term threat is 

sea level rise. That is just an observation. 

Others, please? 

Mr. RACICOT. Well, Senator Carper, I think it is important to 

note and for everyone to clearly understand that it is not insurance 

companies that do this actuarial analysis independently on their 

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own, in private, with visors on. These analyses are conducted by 

independent entities that receive data from virtually every insurance company in the United States of America. 

It actually, parenthetically, is a good reason why the bill that 

sets about to diminish or derail the application of McCarran would 

be a disaster for people because you would steal away the opportunity to get as much information as possible into these distilleries 

of knowledge and analysis allowing for an actuarially sound premium ultimately to be suggested. 

At the end of the day, I think for our members, when it comes 

to climate change, it is not an issue that they denounce nor dismiss. It also, at the same point in time, is an issue, I think, that 

the jury still retains some doubt about. And as a consequence they 

are planning, looking to the modeling agencies, contemplating and 

trying to analyze virtually all of the new data that comes in on a 

daily basis. But frankly, it has not risen to the level that would 

allow for them to be able to draw a conclusive presumption about 

proceeding in the future. 

Senator CARPER. All right. Others? 

Mr. NUTTER. Senator Carper, can I just supplement it, since 

you—— 

Senator CARPER. Mr. Nutter, sure. 

Mr. NUTTER [continuing]. Made the point about sea level rise. 

As you would expect, gradually rising sea level is not going to be 

an insured event. On the other hand, increased storm activity or 

increased intensity is clearly going to drive a wave wash onto shore 

and affect property. 

So it clearly is a problem, both with respect to what I mentioned 

earlier, the increased intensity of the storms, but also the likelihood that properties are now going to be subjected to a greater extent of the wave wash that comes with the storms when they come 

onshore. 

Senator CARPER. All right, thank you. 

Mr. Chamness. 

Mr. CHAMNESS. Mr. Carper, I agree with the comments of the 

other insurance company participants. 

I would add that it is something that our industry is beginning 

to pay quite a bit of attention to. Indeed, our own trade association 

has rolled out a website called InsuranceandClimate.org that is 

starting to track some of the information, some of the studies that 

have been published, most of them from Europe, mostly be reinsurers that are examining the issue. I might hold it out as a resource for you as you look into it and the insurance industry. 

Senator CARPER. Anyone else? Please. 

Mr. HARTWIG. Yes, Senator Carper. 

I would like to get back to one point in my testimony also about 

land use. 

Senator CARPER. By the way, I really enjoyed the visuals that 

you had there. You do not see that every day. That was good, good 

tool. 

Mr. HARTWIG. Thank you for putting up the videos for me. 

But the issue about land use, while there is a tendency to often 

think about these issues as forming part of elements of an insurance crisis, per se, as my example with South Miami Beach, every 

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bit of which would disappear were sea levels to rise just a bit, we 

can see that clearly. While insurers may be looking at modelers 

and a variety of other researchers to help discern the risk, somebody in South Miami Beach is not looking at this. And so those 

structures are no doubt intended to stand a long time. 

So we are seeing different things going on here. We see insurers 

taking this very seriously. But because land use decisions are local, 

but they do not appear to be thinking big picture. 

Senator CARPER. Thanks. 

Dr. Loy—not Dr. Loy, Admiral Loy. You may be a doctor, too, I 

do not know. 

Admiral LOY. I guess I would just like to offer that your question 

allows us to sort of step back a bit from the conversation that we 

have had for the most part this morning. For this Committee, as 

you represent the people of this country, this has to be about saving lives and protecting people at the other end of the day. 

And to the degree we are able to do that, we can recognize that 

insurance and the construct associated with it is not ‘‘the’’ solution. 

It is a part. It is a dimension, a serious, an important dimension 

of the solution. 

But we need systemic changes, I believe, in the way our country 

is prepared and protected against these kind of things. 

And so the multiple dimensions associated with truly a comprehensive national solution to this challenge is, unfortunately, 

what the Committee has to try to get its arms around while concentrating in each of those dimensions, including the insurance 

construct. 

Senator CARPER. Second area I want to explore, I want to go 

back to Senator Shelby’s questions with respect to the National 

Flood Insurance Program. Mr. Chamness, I think you were the one 

who said what we tried to do here in this Committee and in the 

Senate last year was worthy or was meritorious. 

As I recall our efforts sort of foundered. I do not believe the 

House ever acted and I do not believe we ever ended up with final 

legislation. 

But for about 20 years, when Senator Shelby and I were together 

in House Banking, we started working on national flood insurance, 

looking at the National Flood Insurance Program, and trying to 

make sure we were not somehow inadvertently incentivizing people 

to move into harm’s way. Spend a lot of money, invest a lot of 

money, and ended up putting themselves and their families, and 

frankly insurance companies and taxpayers, at risk. 

I do not care who starts off. Mr. Chamness, you mentioned the 

issue so you may want to start. If you want to give me just one 

thing we should do with respect to national flood insurance. Use 

last year’s legislation. Just one important principle that we should 

adhere to in that legislation. I would welcome any advice you all 

have for us, because I think we are going to take it up again. I believe the Chairman mentioned that before I got here today. 

Mr. CHAMNESS. Thank you, Mr. Carper. 

You are right. I think the Congressional Budget Office called the 

current program unsustainable. Basically, as it was pointed out 

earlier, it takes in approximately $2 billion in premium each year 

and pays out, in a regular year, about that amount. Of course, 

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when we reach the events of 2005, it pays out many times that 

amount. 

So if there is one thing, I think it would be to make it more, and 

it is a Government program, more actuarially sound, allow it to 

build up a reserve, a reserve that can be called upon in those times 

of great need. And we just experienced one and the Committee is 

well aware of the challenges that that posed. 

Senator CARPER. Thank you. 

Any other counsel? Yes, Governor. 

Mr. RACICOT. Senator Carper, would you permit me to add one 

footnote to your previous discussion? 

Senator CARPER. Add that footnote. 

Mr. RACICOT. That is that if we set about to—when you talk 

about climate change and sea levels—to create a natural catastrophe fund, perversely it seems to me we are contributing significantly to your rising concern. 

What do I mean by that? You are still providing the same incentives for people to migrate wherever they choose and make whatever decisions they wish because at the end of the day they know 

that they will be taken care of. The value proposition that our forebears built into this system is somehow, I think, eviscerated. 

I just thought it might be worthy of your consideration. 

Senator CARPER. Thank you. Sure. 

How about that second question? 

Mr. RACICOT. In reference to the second question, frankly, if you 

really think about it, the National Flood Program was an effort to 

optionally federally charter a risk and allow it to be managed by 

the Federal Government. And frankly, had it been required to 

charge actuarially sound premiums and had it had accurate maps 

to be able to determine where the flood zones were, and had it the 

ability to react like a private company, it could very well have done 

exceptionally well. 

And at the end of the day, when you think about it, if you are 

going to require something to be actuarially sound, there is already 

the private capacity to do that. So why are you creating that redundancy to create a Government program that already allows for that 

function to be performed by the private sector? 

And so I think there are things that ought to be done with the 

National Flood Program. I would not agree with Dr. Lazear that 

somehow the difference is one is old and one is new. That has to 

do with justice. It does not have to do with economics. 

And from an economic point of view, it seems to me, what we 

ought to be considering is how to make it work. And I think you 

can make it work and bridge to the future to an actuarially sound 

national pool by charging adequate premiums, having accurate 

maps, and having expanded coverage. 

Senator CARPER. Good. Commissioner Bell. 

Commissioner Bell, sitting back here, you are about a head taller 

than everybody else on this panel. When you stand up, how tall are 

you anyway? 

Mr. BELL. I have been that way most of my life, Senator. 

Senator CARPER. Do you just have really short legs? 

Mr. BELL. I am 6′6′′. 

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Senator CARPER. I could tell. We should sign you up for the University of Delaware. We could use another Fighting Blue Hen like 

you. 

Senator SHELBY. We are going to keep him in Alabama. 

[Laughter.] 

Senator CARPER. I was afraid of that. 

Mr. BELL. Thanks, Senator. That is my State of choice and birth. 

When we look at the flood insurance program, it goes beyond 

what is sound in terms of actuarially. The big question from 

Katrina was was it wind or was it flood? And that is what has 

caused all of the issues in the State of Mississippi, in Louisiana, 

and in the entire program. 

So until we come up with some way that is going to say and determine what happened first, unless we get rid of the anti-concurrent clauses. What happened first? To be able to determine that 

with an adjuster going out after the fact is going to be very difficult 

and it is still going to give room for much litigation going forward 

in another Katrina-type of event. 

So I caution you going forward to make sure that that is a huge 

issue that you look forward to going forward because from day one 

that was going to be the big issue with the Katrina situation. 

Senator SHELBY. Mr. Chairman, I think Mr. Guidry—— 

Senator CARPER. Mr. Guidry, I am going to ask you to really 

have the last word here and we will wrap this up. But I am going 

to ask the other witnesses to respond for the record, because I am 

very much interested in your thoughts. 

If you were in our shoes, if you were in our shoes, not running 

a small business in Louisiana, and not being commissioner of insurance, not running a major trade association. If you were in our 

shoes, what would you do about the National Flood Insurance. I 

would welcome that. Thank you. 

Mr. Guidry, the last word. 

Mr. GUIDRY. I just wanted to comment on the notion of 

incentivizing people to move in harm’s way with flood insurance. 

I service the offshore oil and gas industry. I am not down there 

for the view. We are there because that is where the pipelines are. 

We are down there because that is where the oil ports are, the heliports are. And then obviously, to service that industry I have to be 

in proximity to that industry. 

In turn, the people I employ comes down to that area and survive. So we are not exactly on the same par with Florida where we 

are there to build million dollar houses, third and second houses. 

And finally, the comments that the Admiral said. I am a firm believer that the profit motive is the most efficient way to be able to 

deliver a service. So the private sector thing, I am in total agreement with that. 

When I look at our particular case, the education piece, we do accept our responsibility in our insurance coverage and looking at it. 

Obviously, the term ‘‘in good hands’’ does not mean what I thought 

it meant. That is a part of it. 

And then second, the mitigation piece. I mean, there is a lot of 

it that we just feel that we are just being held hostage because 

these guys got the lawyers and we do not. And the deal is just to 

hold us out, hold us out as long as possible for us to just come in 

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and finally settle. Because we think the insurance companies are 

actually going to do that. 

But what I do caution you with is you can come in here and you 

can spout all these wonderful statistics. But we, as small business 

people, what we are thinking today are going to be the statistics 

that you are going to be debating, you know, in the next year and 

the next year. When you take it and you make my company have 

a $200,000 deductible, what you have done is you have taken the 

risk from the insurance company and you have put it on me. 

In turn, I will put it on my banker. And if something were to 

happen to just me, I will just have to deal with it. But if it happens 

as large as it has happened in my community, then my banker is 

going to have to deal with it. And on the back end, you are going 

to come right back from the insurance side of your committee to 

the banking side of your committee and you are still going to have 

to deal with the issue. 

And if Katrina has taught us one thing, being proactive on a situation is always less costly than being reactive on a situation. 

Senator CARPER. That is a good note to end on. 

Mr. Guidry, the committees here are always jealous of their jurisdiction. When you say whether it is banking or whether it is insurance, we are your committee, that is something that is probably 

music to the ears of most members of this Committee. 

I am sort of speaking on behalf of Chairman Dodd, and I will not 

pretend to speak for Senator Shelby. But we are grateful that you 

stuck around with us today and testified and provided some real 

good thought. 

I think the hearing record will be open for a week or two after 

this and you will get a couple of questions, further questions in 

writing. If you all could respond to them, we would be deeply grateful. 

Again, it is good to see all of you. Especially good to see my 

friend and colleague, Governor Racicot. 

And Admiral Loy, we are always grateful to you for your service 

to our country. 

With that, this hearing is adjourned. 

[Whereupon, at 12:45 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follows:] 

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PREPARED STATEMENT OF SENATOR WAYNE ALLARD 

I would like to thank Chairman Dodd and Ranking Member Shelby for holding 

this important hearing to examine the availability and affordability of property and 

casualty insurance in the Gulf Coast and other regions. 

I want to say from the outset that I remain highly skeptical of the necessity of 

federal catastrophe insurance. Although the property/casualty insurance industry 

paid $57.7 billion in catastrophe losses in 2005, the last three years have been their 

most profitable ever, rising to unprecedented levels. 

If there is a problem, it is that the companies no longer want to take on any risk. 

After one claim, many homeowners are dropped by their insurance companies. After 

dropping anyone they perceive as risky, the insurance companies now want the taxpayers to shoulder the remaining risk? That doesn’t make much sense to me. 

While it may be necessary to make some adjustment in the insurance markets, 

I am unconvinced that the necessary ‘‘adjustment’’ is federal insurance. After all, 

the flood insurance program provides a fairly shameful record of federal involvement 

in insurance. While proponents would disagree, pointing out that this program will 

be actuarially sound. I would remind them that federal flood insurance started with 

the same promise. 

Terrorism risk insurance provides another instructive example. Although we were 

repeatedly promised that the markets only needed time to adjust. GAO and others 

found that the federal presence has served to stifle private sector innovation and 

involvement. 

So, despite the many promises we might hear surrounding current proposals, I 

am reminded of the saying that those who don’t know history are doomed to repeat 

it. 

While I don’t think it is a good idea for the federal government to get in the insurance business, I do recognize that some changes may be necessary to help foster a 

healthy private market. I will be interested in any suggestions our witnesses today 

may have along those lines, so I will be listening carefully to their testimony. 

Thank you, Mr. Chairman. 

PREPARED STATEMENT OF SENATOR JACK REED 

Thank you Chairman Dodd and Senator Shelby for holding this hearing on the 

availability and affordability of property and casualty insurance. 

In many catastrophe-prone coastal areas, some insurance companies have stopped 

writing new homeowner policies and have dropped existing customers or decreased 

coverage. Homeowner premiums for customers in several coastal states have increased sharply despite several years of rising industry profits and a less costly 

2006 hurricane season in the East. In my state of Rhode Island, property owners 

have been greatly impacted and are frustrated by fewer options and significant increases in insurance premiums; reportedly, some homeowners are paying over twice 

their premium. Even though they have been loyal customers for years and have 

never filed a claim, some Rhode Islanders have received non-renewal notices from 

their insurance company. According to the Newport County Board of Realtors, 4,500 

homeowners’ policies have been cancelled in the Newport area. Other Rhode Islanders have been forced to accept higher deductibles in order to receive coverage. 

Rhode Islanders are experiencing these difficulties in obtaining insurance and are 

paying higher premiums even though insurance companies are reporting rising profits. According to a Wall Street Journal article, the insurance industry has had three 

straight years of rising profits, which factors in the cost of 2005’s Hurricane 

Katrina. Profits from the property and casualty industry rose to $68.1 billion in 

2006 compared to $49 billion in 2005. However, home insurance rates along the Gulf 

and Atlantic coasts rose between 20 and 100 percent during 2006; outside coastal 

areas, rates rose 2 to 4 percent over the same period. 

At the national, state, and local levels we must evaluate how we plan, mitigate, 

and respond to natural hazards. Hurricanes and floods have occurred throughout 

history and will continue to occur. We have to engage in an honest discussion about 

how to rebuild in a way that protects people, property, and the environment. 

I believe the federal government needs to provide Americans with the most accurate data that reflects flooding hazards from hurricanes and other natural events. 

Currently, FEMA’s flood maps do not reflect the real flood hazard risks. Over 70 

percent of FEMA’s maps are over ten years old. In the case of Rhode Island, the 

maps are over 20 years old. New development, community growth, erosion, and a 

variety of other factors altered watersheds and floodplains. This new development 

and its affects on floodplains are not accurately reflected in FEMA flood maps. As 

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a result, I plan on reintroducing my flood mapping bill, the National Flood Mapping 

Act. 

I am interested to find out from today’s witnesses the reasons why insurers are 

exiting the property and casualty insurance market and why homeowners are being 

cancelled or having to pay substantially higher insurance premiums to protect their 

homes. Furthermore, I am interested in what states are doing to address the impact 

exiting insurance companies and rising insurance premiums will have on homeowners and competition. Lastly, I would like the witnesses to address what role the 

federal government might be able to play in providing homeowners with needed relief. 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM EDWARD P. LAZEAR 

Q.1. All of the witnesses appear to support the proposition that 

mitigation efforts are an important part of preparing Americans to 

withstand and hopefully minimize damage from a large-scale natural disaster. I agree, which is why I have called for at least doubling the federal investment in mitigation efforts. What do you see 

as the current barriers to mitigation efforts and what can be done 

to remove those barriers? 

A.1. First and foremost, the government should not take actions 

that discourage loss mitigation such as providing subsidized insurance against catastrophe risk at below actuarial rates or preventing private insurers from charging premiums commensurate 

with risk. In a well functioning insurance market, those businesses 

and homeowners who chose to locate in dangerous areas or fail to 

adopt measures to reduce losses may be charged higher insurance 

premiums, which gives them a financial incentive to change their 

behavior. 

The Administration strongly supports disaster risk mitigation. The FY 2008 Budget proposes $100 million for FEMA’s Pre-Disaster Mitigation Program which provides funds to states and communities for hazard mitigation planning and the implementation of 

mitigation projects prior to a disaster event, and $34 million for 

FEMA’s Flood Mitigation Assistance Program which provides funding for measures that reduce the long-term risk of flood damage to 

buildings. The FY08 Budget also proposes to double the funding for 

the Severe Repetitive Loss Pilot Program, from $40 million to $80 

million. Funding is provided for the acquisition of the structure and 

underlying real property for the purpose of creating open space 

uses in perpetuity; relocation of flood prone residential structures 

to areas outside the hazard area; elevation of existing residential 

structures; demolition and rebuilding of structures; construction of 

minor localized flood control projects that provide protection to severe repetitive loss properties; and certain flood-proofing techniques for historic structures. Although federal programs such as 

these can help to encourage community mitigation efforts, responsibility for establishing and enforcing prudent building codes, zoning, 

and land use planning rests mainly with the states and local communities. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM EDWARD P. LAZEAR 

Q.1. Are you familiar with the experiences other countries have 

had with establishing national catastrophe funds? If so, are there 

any lessons that we should learn from their experiences? 

A.1. In February 2005 the Government Accountability Office submitted U.S. and European Approaches to Insure Natural Catastrophe and Terrorism Risks, to the House Financial Services Committee. This report, which reflects information gathered from a diverse array of stakeholders, looked at practices in six European 

countries and found a mix of government and private-sector approaches to dealing with natural catastrophe risk. The governments of France and Spain mandate natural catastrophe coverage 

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and backstop private insurers with state-backed entities or government guarantees. Conversely, the national governments of Germany, Italy, and the United Kingdom do not provide natural catastrophe insurance. All six countries, however, allow insurers to establish tax-deductible ‘‘reserves’’ for future catastrophe events. 

Q.2. If a mega-catastrophe did occur that threatened the solvency 

of the entire insurance industry, what actions could the federal 

government presently take to stabilize insurance markets and ensure that policy holders’ claims were paid, and would the existence 

of a national catastrophe fund improve the federal government’s 

ability to respond to a crisis in U.S. insurance markets caused by 

a mega-catastrophe? 

A.2. Currently, the Stafford Act provides for post-event federal disaster assistance and state guarantee funds protect policyholders 

when individual insurers are unable to pay claims. A mega-catastrophe large enough to threaten the solvency of the entire insurance industry would require an aggressive federal response, regardless of whether or not a federal natural catastrophe backstop 

program were in place. An insurance industry crippling event 

would necessarily be much larger than 9/11 or Katrina, but, if 

those events are any guide, only a fraction of the overall economic 

costs of the mega-catastrophe would actually be covered by insurance. After the event, Congress would need to make difficult 

choices about how to allocate scarce federal aid dollars and federal 

budgetary resources. One problem with a natural catastrophe backstop program is that it would effectively pre-commit a share of 

those scarce aid dollars to pay loss claims. A post-event insurance 

bailout could be beneficial, but after a true mega-catastrophe, other 

needs might be more pressing. 

Q.3. Do you have any concerns that Florida’s recently enacted insurance reforms have undermined its insurance market and make 

it likely that a federal bailout will be needed in the near future? 

A.3. As discussed in my prepared remarks, I believe that Florida’s 

recent insurance legislation is, in important ways, a step in the 

wrong direction. States need to allow markets to function. When insurance premiums reflect underlying risk, they provide valuable 

signals to those seeking insurance about the costs of their decisions, so people have incentives to take actions to mitigate risk. 

Moreover, basic economic theory and evidence shows that if premiums are suppressed through regulation, less insurance will be 

available. Unfortunately, rather than allowing market forces to operate, key provisions of Florida’s recent insurance legislation tighten constraints on insurer’s ability to adjust the premiums they 

charge. Furthermore, the state has substantially increased coverage of its property insurer of last resort while lowering its rate 

of coverage threshold, and has nearly doubled the size of its reinsurance facility, the Florida Hurricane Catastrophe Fund. When a 

state provides insurance and reinsurance at below market rates, it 

crowds out private insurance and reinsurance. By expanding coverage provided by the Florida’s reinsurance backstop, the Florida 

Hurricane Catastrophe Fund, without appropriating sufficient capital to cover potential near-term losses, the new law increases the 

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odds that the Fund or the state will need to borrow heavily to cover 

claims if a severe catastrophe strikes. 

Every state need to take responsibility for keeping its own financial house in order, so I would not want to speculate on the possibility of a federal bailout for Florida. I would note, however, that 

it is reasonable to have concerns about the financial risks posed by 

expanding state insurance obligations. Florida’s legislative changes 

to its property insurer of last resort had made the carrier actuarially unsound, according to the state’s chief financial officer. It is 

telling that shortly after Florida’s insurance legislation was passed, 

major rating agencies lowered credit ratings for bonds issues by the 

Florida Hurricane Catastrophe Fund. The insurance strength rating agency A.M. Best Company also cautioned that insurers with 

large exposures in hurricane-prone areas of Florida could have 

their ratings downgraded because of concerns over the financial 

strength of the Florida Hurricane Catastrophe Fund. 

Q.4. If a national catastrophe fund was established and it increased the supply of reinsurance, would it result in lower insurance prices for consumers? 

A.4. A national catastrophe fund would likely result in taxpayersubsidized government reinsurance crowding out some private reinsurance. We have already seen an example of this in Florida. Guy 

Carpenter and Company has reported that expansion of the statesponsored Florida Hurricane Catastrophe Fund could cause Florida 

insurers to purchase $1.5 to $2.0 billion less private reinsurance 

than they otherwise would. 

To the extent insurance prices would decline under a national 

scheme, it would likely be due to taxpayers taking on some of the 

risk instead of insurance companies and policy holders. 

Replacing private reinsurance with government reinsurance is 

both unfair and inefficient. It is unfair because it forces taxpayers 

nationwide to bear the costs of subsidizing insurance in high risk 

areas. Why should the residents if Iowa or Nebraska, who don’t 

enjoy the amenities of living on a coast, have to pay higher taxes 

so that the insurance rates of those living in high-risk coastal areas 

can be lower? It is inefficient because it means that the costs of 

covering catastrophic losses will be contained within the United 

States instead of diversified internationally. Insurance exists to 

spread risk. When a primary insurer buys reinsurance cover, it is 

effectively spreading the risk of covering catastrophic losses to investors around the world. One of the reasons the U.S. property/casualty insurance industry emerged from the devastating 2005 hurricane season in sound financial condition is that a significant fraction of insured hurricane losses were borne by reinsurance companies backed by capital from investors in Europe and Asia as well 

as North America. In contrast, when insurance or reinsurance is 

provided by the U.S. government, all of the costs will ultimately be 

borne by U.S. taxpayers, so risk is not spread as widely as it could 

be. 

Q.5. In your testimony, you stated that a national catastrophe program would ‘‘undermine economic incentives to mitigate risk because the program would likely distort rates from their actuarial 

value.’’ Could you elaborate on this statement and discuss further 

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whether a national catastrophe program could increase the financial losses incurred by natural disasters by reducing incentives for 

risk mitigation? 

A.5. In insurance markets, as in other markets, prices affect the 

way people weigh costs and benefits. Insurance prices that are artificially low can discourage people from adequately protecting 

against future losses. If we introduce a taxpayer-backed backstop 

program designed to keep insurance premiums in high-risk coastal 

areas artificially low, we effectively make it cheaper for people to 

locate in those high-risk areas. Since people consider insurance 

costs when deciding where to live and do business, such a policy 

risks encouraging excessive development in places where catastrophes are most likely to strike. Similarly, a subsidized catastrophe insurance program would mean that owners of properties already in place would not bear the full cost of their risk exposure, 

so they would have less incentive to take actions such as installing 

storm shutters that might reduce future losses. 

Q.6. What impact could alternative insurance mechanisms, such as 

catastrophe bonds, insurance derivatives, and the securitization of 

insurance risks, have on the availability and affordability of insurance in the future? Also, what impact would a national catastrophe 

fund have on the development of these new products? 

A.6. Through catastrophe bonds, sidecar deals, and other innovative financing mechanisms, insurers and private investors are finding new ways to spread the risks posed by large-scale catastrophes. 

These financing mechanisms currently contribute only a relatively 

small share of the total capital available to cover catastrophe 

losses, but the volume of capital they have raised has grown rapidly in recent years. It is likely that as these markets mature, the 

base of investors willing to bear some catastrophe risk will continue to expand, ultimately lowering the costs of insuring catastrophe risk. However, a government-sponsored national catastrophe 

backstop program would likely undermine market innovation in catastrophe risk finance because government-subsidized reinsurance 

provided at less than actuarial prices would crowd out private sector alternatives. It is reasonable to assume that the greater the 

government’s involvement in the catastrophe risk reinsurance market, the less time and money will be spent looking for innovative 

alternatives. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM WALTER BELL 

Q.1. Mr. Nutter says in his testimony, ‘‘The insurance industry 

surplus grew from $356 billion at December 31, 2003 to $439 billion at December 31, 2005. As of December 31, 2006, the industry’s 

claims paying ability and capital base have never been better.’’ 

This statement suggests that despite Katrina, the largest natural 

disaster in American history, insurance companies have had no 

problems paying claims, and in fact, have a better ability to pay 

claims now than before that disaster. In addition, Mr. Nutter says 

that ‘‘reinsurance capacity is adequate even for peak catastrophe 

markets.’’ 

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At the same time, Americans around the country are finding it 

increasingly difficult to secure sufficient and affordable insurance. 

We hear reports that people from Texas through the Gulf and up 

the Eastern seaboard are seeing their insurance dropped and their 

rates and deductibles increased. 

How can this disconnect be explained? There appears to be sufficient insurance capacity, yet working families and business owners 

are unable to afford sufficient coverage. What do we do for these 

people, so that they can afford needed insurance coverage? 

A.1. The capacity of the insurance industry is an important indicator of the collective industry’s ability to withstand a catastrophic 

event, but capacity alone does not dictate affordability and availability. All the capacity in the world becomes meaningless to the 

public if an insurer is not willing to make that capacity available 

at an affordable price to cover their home or business. Insurers are 

reluctant to expose their capital to catastrophic risk—risk that if 

not carefully managed could result in insolvency—particularly 

when there are other lines of business that are potentially more 

profitable and less catastrophe prone. While this makes good economic business sense from their perspective, it does not solve the 

regulators’ and legislators’ public policy concern of making coverage 

available to those deemed in a high-risk area. The perception of 

catastrophic risk exposure, particularly to an event that would result in the risk of certain insolvency, is what has led to the coastal 

market problems. 

Insurance companies, risk modelers, meteorologists and regulators agree that there are naturally occurring catastrophic events 

that could produce insured losses of $100–200 billion, or perhaps 

more. A massive earthquake in the new Madrid fault area or in 

downtown San Francisco, or a category 5 hurricane hitting Miami, 

veering out to sea, and then traveling up the eastern seaboard, are 

such events. While the statistical likelihood is relatively low, insurers are factoring such potential into their risk management and decision making. Therefore, despite a large amount of aggregate financial capacity, only a fraction of that capacity is available to any 

one company. Further, they are unwilling to put much of that capacity at risk to catastrophic exposure when there are other more 

profitable and less risky lines of business that they could write. 

When they do expose their capital to the risk of catastrophic loss, 

the cost to policyholders can be rather expensive. 

There are no easy solutions or overnight fixes, but there are a 

series of steps that collectively would address this issue: 

• In the long term we can limit catastrophic risk by strengthening building codes and making informed land use plans. A 

first step in achieving this would be a commission, like the one 

you have proposed, to partner states, localities, the federal government, and the private sector. Lowered risks stemming from 

these improved codes and land use plans should be reflected in 

the pricing by insurers. 

• The tax code could be modified to support mitigation and loss 

prevention. For example, deductions or credits for risk reduction measures would encourage mitigation. Allowing for taxfree IRA-like vehicles to save for deductibles would incentivize 

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families to save up funds to have higher deductibles and lower 

rates. 

• Another concept is to amend the IRS tax code to provide incentives for individual insurance companies to set aside reserves 

for catastrophic losses on a tax-deferred basis. Current tax 

laws discourage property and casualty insurers from accumulating assets to pay for future catastrophe losses. Payments for 

catastrophe losses are made from unrestricted policyholder 

surplus after losses have incurred. Current tax law and accompanying accounting standards require insurers to limit the recording of loss reserves to events which already have occurred, 

and require the recognition of catastrophe premiums during 

the periods in which they are written. Currently, if a company 

obtains higher than average profits and creates an excess reserve, these reserves would be taxed at an ordinary tax rate, 

as well as negatively affect future rate requests. The inability 

to build catastrophe reserves forces insurers to prepare financially as if they were going to have a major storm in multiple 

locations every year. This necessitates annual reinsurance purchases with no credit or residual benefit toward next year if no 

losses occur. Allowing U.S. companies to join those in most 

other industrialized nations by setting aside tax-deferred reserves specifically for catastrophes, when structured appropriately as not shelter income, could provide additional capacity for the market. Tax-free catastrophe reserves also could 

help mitigate some of the ‘‘boom or bust’’ cycle in the property 

insurance market to everyone’s benefit. 

• A better system of integrating the federal flood insurance program with the state regulated property insurance and wind 

pools could reduce the litigation risk that is causing insurance 

companies to view coastal insurance as riskier than other lines 

of business. for example, Congress could partner with the 

states to move to a mandatory offer of an all-perils policy. 

• A dedicated reinsurance fund, whether single state, multi-state 

or national in scope, could help manage the timing risk associated with catastrophic losses. 

• A ‘‘line of credit’’ or some other access to a short term funding 

mechanism could limit the timing risk associated with large 

scale catastrophes that would otherwise overwhelm the immediate capital capacity of a company. In other words, the risk 

of total ruin would be reduced because the insurance company 

would be able to handle larger than expected losses by tapping 

additional funds and being able to pay back these funds over 

time. 

Q.2. All of the witnesses appear to support the proposition that 

mitigation efforts are an important part of preparing Americans to 

withstand and hopefully minimize damage from a large-scale natural disaster. I agree, which is why I have called for at least doubling the federal investment in mitigation efforts. What do you see 

as the current barriers to mitigation efforts and what can be done 

to remove those barriers? 

A.2. You are right to focus on the important role of increased mitigation. The primary barrier to mitigation is the upfront cost and 

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the fact that the benefits may not come during a homeowner’s time 

in the house. Although there are some inexpensive things that a 

homeowner can do to harden a dwelling, to completely retrofit a 

home to a stronger building code can be expensive. For example, 

elevating a home to reflect changes in the flood plain can be extremely expensive, but it is estimated that $1 of mitigation can result in $4–5 of savings from reduced loss. Similar mitigation efforts 

like more securely attaching walls to roof and walls to foundations 

pay off for both hurricane risk and earthquakes. Mitigation takes 

foresight but it is good public policy that not only saves money, but 

saves lives. 

If there is little perception of risk then there is little incentive 

for mitigation. As Congress considers its role in managing natural 

catastrophes, any federal involvement should find ways to provide 

information and incentives to homeowners, state governments, insurers, builders and other stakeholders to include mitigation efforts 

in their decision making process. Flood plain maps that accurately 

reflect the risk of flood would help the public have a true understanding of the risk empower them to make informed decision 

about where to build and how to build. The tax code could be used 

to provide tax credits to homeowners that take specific steps to improve the likelihood that their home could withstand a catastrophic 

event to which they are exposed. Congress could authorize funds to 

provide grants or low-interest loans to encourage people to take 

steps to harden their homes. State legislatures could encourage 

mitigation by requiring insurers to offer discounts or credits that 

recognize efforts of the homeowner to strengthen the house against 

the risk of catastrophic loss. Also, efforts to educate the public 

about the positive benefits of mitigation could be undertaken. Efforts to either encourage or mandate the adoption and enforcement 

of strong building and land use codes could be considered. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ROBERT HARTWIG 

Q.1. During the hearing, testimony was given on how the high cost 

of insurance in the Gulf Coast is hindering the region’s recovery 

from Katrina. What measures would you recommend to help reduce 

the cost of insurance in the region? 

A.1. There are a variety of recommendations that will reduce the 

cost or limit the magnitude of future increases. All are related to 

risk reduction. 

• Further strengthen building codes throughout vulnerable 

states. 

• Allow insurance prices to move to their full actuarially-sound 

(risk-based) level. Risk-based pricing is critical because it is a 

signal to buyers and developers about the relative riskiness inherent in coastal areas. Federal and state programs that provide insurance subsidies on coastal property obscure and dilute 

the informational value that risk-based insurance premiums 

bring to the market. Risk-based pricing will compel more stringent building designs and make building in highly vulnerable 

areas less economically viable, thereby reducing potential 

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losses and future levels of exposure while at the same time reducing the exposure of taxpayers. 

• Provide incentives for mitigation using federal and state tax 

policy, low interest loans and grants. Insurance discounts can 

be used if rates are allowed to first move to their full actuarially sound level. 

• Require disclosure of property’s hurricane resistance in real estate transactions. If market participants are made aware of the 

strengths and vulnerability of a property before a real estate 

transaction, then this will become an element upon which price 

is determined. All else equal, a home with better resistance 

will be more valuable so long as this fact is known by all parties. A hurricane resistance index could be developed (e.g, 

using a scale of 1–10) that would incorporate a variety of factors. This could be similar to what is done now for automobile 

and crashworthiness. People actually shop for cars based on 

safety considerations and will pay more for safety. Why 

wouldn’t they do the same for homes? I believe real estate 

transactions in Japan use such an index to gauge seismic risk. 

Q.2. Are you familiar with the experiences other countries have 

had with establishing national catastrophe funds? If so, are there 

any lessons that we should learn from their experiences? 

A.2. Numerous countries have funds to deal with terrorism risk. I 

believe few, if any, have comprehensive national catastrophe funds 

for natural disasters. I will research this and report to you on my 

findings. 

Q.3. Would a natural catastrophe fund have any impact on the 

long-term availability and affordability of insurance? 

A.3. The answer to this question depends entirely on how the plan 

is managed. If, as proposed, the plan is actuarially sound and is 

prohibited from receiving any form of taxpayers subsidy, the answer is that what savings do emerge will be nominal (limited primarily to the profits that would have gone to private reinsurers, as 

well as other costs incurred by private reinsurers such as taxes). 

This amount is only a small fraction of the total cost of insurance 

at the retail level. Reinsurance markets have historically been able 

to bring capacity to market, as needed, after mega-catastrophes 

(excluding terrorism). Price often rises because risk is elevated and 

demand goes up, but this incentivizes new capital to enter (at least 

$34 billion post-Katrina). 

If the natural catastrophe fund is not operated on an actuarially 

sound basis, as is the case in the Florida Hurricane Catastrophe 

Fund, large discounts are possible, but only because funds are collected via post-event assessments, taxes and borrowing and because non-exposed types of insurance (e.g., auto and liability insurance, are often assessed as well). 

Q.4. The states are primarily responsible for regulating insurance. 

What steps can state insurance commissioners take to improve the 

availability and affordability of catastrophe insurance? 

A.4. The most important tool at the disposal of commissioners is 

to allow price to be fully reflective of risk. This provides the correct 

economic incentives to people and businesses living/building/buying 

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in disaster-prone areas and would be the most effective, long-run 

solution to healthy insurance markets with minimal government 

intervention. Coverage would generally be available, with prices 

tied directly to risk. Markets even in risky areas could be competitive, providing premiums that are affordable given the risk that 

must be assumed. 

State insurance commissioners can work to educate the public on 

the risks they face living in disaster-prone areas. They can develop 

their own initiatives and work with insurers, disaster-relief organizations and the federal government. Commissioners cannot under 

present law require people to buy coverages such as flood or earthquake, consequently take-up rates for these optional coverages is 

low. Commissioners may be able to raise awareness, however, by 

forcing a signed waiver in the event the policyholder declines such 

coverage. Perhaps in working with partners at the federal level, 

such a waiver could have some real teeth in it (e.g., if you decline 

flood coverage and live in a flood zone, you lose eligibility for federal aid). 

Commissioners can also push other state agencies charged with 

building codes, zoning and land use into making decisions that reduce or limit vulnerability. 

Commissioners might also seek funding for their departments 

that could be used to award grants for mitigation/retrofitting, etc., 

or to help pay the incremental cost in building a ‘‘fortified’’ home. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM ADMIRAL JAMES M. LOY (USCG–RET.) 

Q.1. Mr. Nutter says in his testimony, ‘‘The insurance industry 

surplus grew from $356 billion at December 31 2003 to $439 billion 

at December 31, 2005. As of December 31, 2006, the industry’s 

claims paying ability and capital base have never been better.’’ 

This statement suggests that despite Katrina, the largest natural 

disaster in American history, insurance companies have had no 

problems paying claims, and in fact, have a better ability to pay 

claims now than before that disaster. In addition, Mr. Nutter says 

that ‘‘reinsurance capacity is adequate even for peak catastrophe 

markets.’’ 

At the same time, Americans around the country are finding it 

increasingly difficult to secure sufficient and affordable insurance. 

We hear reports that people from Texas through the Gulf and up 

the Eastern seaboard are seeing their insurance dropped and their 

rates and deductibles increased. 

How can this disconnect be explained? There appears to be sufficient insurance capacity, yet working families and business owners 

are unable to afford sufficient coverage. What do we do for these 

people, so that they can afford needed insurance coverage? 

A.1. The assertion that sufficient capacity exists to defend the status quo misses the point. The fact is the traditional insurance 

model is not serving consumers well. Reform is needed, and the 

time to act is before the next crisis. 

Moreover, the assertion about capacity is dubious at best. While 

the industry’s surplus and capital base may be in a strong position 

generally, that surplus and capital is dedicated to risks across 

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1 Business Insurance, September 25, 2006 (quoting David Priebe, CEO-Europe for Guy Carpenter & Co. Inc.) 

many different lines of insurance and supports risks in every state. 

There is not $439 billion of surplus and capital available to cover 

wind damage to homes along the Gulf Coast. Even reinsurers limit 

their coverage by line and geography. Last Fall, reinsurance industry leaders acknowledged that there is a sizable gap between the 

supply and demand for reinsurance coverage in the southeast U.S.1

This gap demonstrates why the reinsurance market is not a complete solution for U.S. catastrophes needs. Absent a new model, the 

most catastrophe-prone areas, where higher levels of capital are 

needed most, will always have trouble attracting capital. 

The fact is the homeowner’s insurance market is contracting for 

primary insurers because they do not enjoy the same ability to cap 

losses that reinsurers enjoy. Moreover, the rates of returns have 

been historically low. When one lays on top of these facts the reality that the risk has risen, it is easy to see why the primary market has contracted. The risk has risen because more people live in 

harm’s way, property values have risen significantly, especially in 

most of the highly exposed areas, and the forecast calls for more 

frequent and ferocious storms and the reality is that major earthquakes are likewise inevitable. 

The disconnect between the reports of industry surplus and capital and availability issues along the Gulf Coast is also the result 

of a misunderstanding of state regulation and the competitive environment of the insurance marketplace. State regulation requires 

insurance rates in each state to reflect the actual and expected 

losses in that state. Furthermore, for a multi-line insurer to remain 

competitive, each line of insurance, such as auto and homeowners 

coverage, needs to stand on its own in terms of profitability. Profits 

in auto insurance or workers compensation coverage, for example, 

cannot be used to subsidize losses in homeowners insurance that 

arise from hurricanes or other natural disasters. Likewise, insurance markets in each state must be profitable in their own right 

and cannot be subsidized by profits in other states. Hurricane-related losses to homes in a state like Louisiana, for example, cannot 

be subsidized by profits generated by homeowners insurers in Montana. Conversely, Louisiana homeowners cannot and should not be 

called upon to subsidize severe earthquake losses in California. 

These realities clearly present challenges for consumers in the 

homeowners insurance market along the coast. The traditional insurance model does not work well for those consumers. Consumers 

exposed to low frequency and severely high severity events need a 

new model. The market has contracted and costs for the available 

insurance have increased significantly. The residual market (socalled market of last resort for consumers) is growing in a dangerous way. The status quo is unacceptable for consumers, and 

there is urgency and opportunity for Congress to act in a way that 

will address the challenge. An innovative public-private partnership as part of a comprehensive, integrated solution provides a better way for consumers. 

A comprehensive solution that includes an integrated state and 

national financial backstop model can provide more protection at 

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lower cost. Milliman, Inc, the international actuarial consulting 

firm, analyzed the potential impact of a national catastrophe fund 

such as that proposed by ProtectingAmerica.org and concluded that 

reductions in homewoners’ insurance premiums could exceed $11 

billion a year. The estimate is based on the savings consumers can 

expect with state and national catastrophe funds that serve as a 

backstop to private insurance. Consumer savings are attributed to 

the fact that rates charged by the state and national funds will not 

require the significant margin for return on capital that investors 

expect to earn for a high-risk investment like catastrophe reinsurance. The tax-exempt status of the funds produces additional savings that will be passed on to consumers. Milliman also suggests 

the expense of administering the catastrophe funds will probably 

be less than the expense factor that reinsurance companies build 

into their rates. Implementation of the other elements of a comprehensive catastrophe plan—preparedness, prevention and mitigation—will also produce meaningful savings for consumers and must 

be part of a comprehensive, integrated solution. 

The private reinsurance market is too volatile to provide a reliable, predictable and enduring solution to the problems facing consumers along the Gulf Coast. It was no surprise that in the aftermath of the 2004 and 2005 hurricane seasons, reinsurance prices 

increased dramatically, while the amount of available coverage 

shrank, especially in states where it was needed most. 

• In its annual study of the international reinsurance market, 

Guy Carpenter & Company, Inc. reported that reinsurance 

rates in the United States increased 76 percent in 2006. 

• In 2006, the New York Times reported that higher reinsurance 

costs contributed to steep premium increases along the coast 

from Texas to Maine; homeowners face premiums up to ten 

times as much as they paid in 2005. Rates on Cape Cod have 

tripled, and they’re up 50 percent on Long Island even as 

deductibles have increased. 

• Homeowners’ insurance rates in Gulf Coast states increased 

dramatically in 2006 after reinsurance rates doubled. 

Several factors have contributed to increase the demand for reinsurance and a decrease in supply, causing the upward pressure on 

rates: 

• The catastrophe reinsurance market experienced record losses 

and at least four reinsurance company failures in the aftermath of the 2004–05 storm seasons. 

• Predictions of increased storm activity in the Atlantic, including more frequent and intense storms in the Northeast; 

• Pressure from regulators and rating agencies on homeowners’ 

insurance companies to increase the capital available to pay 

catastrophe claims; 

• Increased projected loss estimates due to rapid development 

and rising home values in coastal areas. 

Even the most optimistic estimates of private reinsurance capacity fall well short of the magnitude of losses that will occur some 

day, according to many experts. A major hurricane or earthquake 

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2 Hurricane Season of 2005: Impacts on U.S. P&C Markets in 2006 and Beyond, Insurance 

Information Institute, March 2006, page 12. 

in a densely populated urban area could cause well over $100 billion in damage and totally exhaust the capacity of the private reinsurance market. Will the market collapse as it did in Florida after 

Hurricane Andrew and in California after the Northridge earthquake? At the present time, there is no guarantee that private capital will be available after a major catastrophe to restore the market and protect consumers so they can repair, rebuild and recover, 

and if it is available, at what cost. A national catastrophe fund will 

provide market stability, and its tax-exempt, not-for-profit status 

will mean more protection at lower prices for consumers. 

The bottom line is that unless America rethinks its approach to 

better preparing and protecting its citizens with respect to natural 

catastrophes, the era of readily available and affordable homeowners coverage in the private market for such losses is behind us. 

Today, the homeowners insurance coverage that people need every 

day is tied to coverage for natural catastrophes. When insurance 

companies can no longer write catastrophe coverage because of the 

enormous unpredictable risk it presents, they are often forced to 

also drop the non-catastrophe coverage too—even though we believe companies would be willing to compete vigorously for non-catastrophe homeowners policies in every state. 

Q.2. All of the witnesses appear to support the proposition that 

mitigation efforts are an important part of preparing Americans to 

withstand and hopefully minimize damage from a large-scale natural disaster. I agree, which is why I have called for at least doubling the federal investment in mitigation effort. What do you see 

as the current barriers to mitigation efforts and what can be done 

to remove those barriers? 

A.2. Doing more to save lives and to prevent and mitigate losses 

must be a part of a comprehensive, integrated solution. The solution should force policymakers to make this component of the solution a top national priority, including do more research and development of ways to help consumers build stronger, safer homes and 

strengthen their existing homes with effective, affordable retrofits. 

One of the largest barriers to mitigation efforts is the demand for 

housing in catastrophe-prone areas. There has been, and continues 

to be, a significant population migration to hurricane exposed 

areas. Property values along the coast are also rapidly increasing. 

In addition, all forecasts predict an increase in the frequency and 

strength of hurricanes for the foreseeable future. These factors 

mean that the future holds more devastating storms. In fact, a repeat of the great Miami hurricane of 1926 could cause $500 billion 

in damage by 2020, given current demographic trends.2 A direct hit 

by a Category 5 hurricane on Miami could cause $130 billion in 

commercial and residential damages according to AIR Worldwide. 

Yet, people continue to build along the coast and those living inland continue to subsidize them. Unless and until the cost of living 

along the coast reflects the true risk of living there, the coastal migration will continue. 

Another more significant obstacle is the perception that prevention and mitigation can only be accomplished at a substantial cost. 

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3 Bracing for Disaster: Insurers Require Homeowners to Make Expensive Upgrades to Protect 

Property: Using Google Earth for Inspections, Wall Street Journal, June 7, 2007. 

In reality, it is only marginally more expensive to build a home 

with storm-resistant features. The same is true for retrofits. What 

we have to do is make it a higher priority to bring into this work 

the best and the brightest to help consumers. In doing so, we can 

leverage consumer education and drive consumer demand in this 

area. An analogy we would offer is to automobile safety. Some 

manufacturers for years fought efforts to require automobiles to include passive restraint systems and air bags. Before long, consumers demanded more safety features, and the manufacturers responded in a competitive way to meet the demand. Now, you see 

active efforts to market safety to respond to the consumer demand. 

The same will happen for home safety as well if we make this a 

priority and knock down or overcome the obstacles. 

The public-private partnership model again has perfect application in this area. A recent Wall Street Journal article detailed insurance industry efforts to encourage mitigation, such as shutters 

and fire-resistant roofs, and the complaints and resistance they encountered from politicians and consumer groups.3 More specifically, 

we recommend the following actions as part of the comprehensive 

solution: 

• (1) Congress should consider amendments to the Stafford Act 

to provide additional funding for states that adopt and enforce 

a strong state-wide building code. 

• (2) Community Block Grant funds could be given to communities to provide the funding to offer incentives for disaster-resistant construction or retrofitting, especially for low-income 

families. 

• (3) Congress could amend the National Earthquake Hazard Reduction Program (NEHRP) to give greater emphasis to construction and retrofitting to mitigate earthquake risks. 

• (4) Federal tax credits could be offered to home owners and 

business owners for cost of retrofitting, such as the cost of installing shutters or the incremental cost of installing a hail-resistant roof. 

• (5) The state sales tax could be waived for disaster-resistant 

products. 

• (6) States and/or local governments should consider discounting the value of disaster mitigation in property tax assessments. 

• (7) The Federal government should encourage Freddie Mac and 

Fannie Mae to offer mortgage discounts for disaster-resistant 

homes. 

A key point to remember is that the comprehensive, integrated 

solution that includes the financial backstop will also provide seed 

money to help finance and facilitate (and continuously improve) the 

prevention, mitigation and consumer education that will help drive 

this component of the solution. 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM ADMIRAL JAMES M. LOY (USCG–RET.) 

Q.1. If a national catastrophe fund was established, what in your 

view should be the minimum amount of losses that would trigger 

coverage by the fund? In other words, if the national catastrophe 

fund aims to provide a backstop for only truly catastrophic events, 

what would be the minimum amount of losses that a catastrophe 

would have to inflict for those losses to be covered by the fund? 

A.1. The fund should extend protection to maximize consumer benefits and provide meaningful relief given limitations in the private 

market and to take into consideration the level of current capacity 

that state funds have or would have. In setting the trigger at some 

level, Congress should realize that there is a trade off, the higher 

the trigger the lower the consumer benefit. The proposals to set a 

trigger at a 1 to 50 year event seem reasonable, such as Senator 

Nelson’s bill that was pending last session. 

Milliman, Inc., the international actuarial consulting firm, analyzed the potential impact of a national catastrophe fund such as 

that included in H.R. 91 (currently pending in the 110th Congress) 

and concluded that reductions in homeowners’ insurance premiums 

could exceed $11 billion a year. For the study, Milliman assumed 

a flat trigger of $10 billion. The savings estimate is based on the 

savings consumers can expect with state and national catastrophe 

funds that serve as a backstop to private insurance. Consumer savings are attributed to the fact that rates charged by the state and 

national funds will not require the significant margin for return on 

capital that investors expect to earn for a high-risk investment like 

catastrophe reinsurance. The tax-exempt status of the funds produces additional savings that will be passed on to consumers. 

Milliman also suggests the expense of administering the catastrophe fund will probably be less than the expense factor that reinsurance companies build into their rates. 

It is important to note that the financial backstop model would 

augment private capital. Private capital, including private reinsurance capital, would continue to be important. This approach would 

provide additional capacity to protect consumers and much needed 

stability to the market. It would also provide the predictability and 

certainty that the market will survive major events and will continue to extend protection year after year. 

Q.2. In your written testimony, you stated that a national catastrophe fund would ‘‘provide more protection at lower cost to consumers.’’ Please explain how a national catastrophe fund would 

provide more protection at lower cost and whether such cost reduction would be financed through subsidies from other policyholders, 

direct federal appropriations, or tax-breaks financed by the taxpayer, or other funding mechanisms? 

A.2. Critics of a national catastrophe fund allege that consumers 

in low-risk states will subsidize those who live in states threatened 

by earthquakes and hurricanes. The speciousness of this argument 

is apparent by virtue of the fact that the national catastrophe fund 

provides reinsurance only to state catastrophe funds. Consumers in 

states without catastrophe funds won’t pay anything into the national catastrophe fund. This is consistent with the basic tenets of 

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insurance and cognizant of the political reality that legislators from 

low-risk states will make sure their constituents are protected from 

paying more to subsidize those who live in high-risk states. 

The legislation supported by ProtectingAmerica.org requires 

rates to be actuarially sound. This applies not only to the rates 

charged by the national catastrophe fund, but to the state catastrophe funds that are protected by the national fund. Both on a national basis, and within different regions of high-risk states, rates 

would be required by law to be based on actual risk. Hence, the argument that those who live on Florida’s beaches or California’s 

earthquake faults will get cheaper insurance at the expense of consumers in less perilous areas doesn’t withstand scrutiny. 

See also the answer to item 1 above. While there are many ways 

to structure a fund, the cost reductions would not have to be financed through subsidies from other policyholders, direct federal 

appropriations, or tax-breaks financed by the taxpayer, or other 

funding mechanisms. We have attached a report that shows American homeowners will save $11.6 billion annually if privately funded catastrophe protection programs are established in disasterprone states and backed up by a similar national program, according to Milliman, Inc., one of the nation’s leading actuarial and consulting firms. This report explains in detail how the savings would 

be generated. 

More protection would be provided because coverage would be 

more widely available and consumers could afford more coverage. 

Insurers in a competitive market may also lower deductibles or 

take other steps to increase coverage knowing that the state and 

federal backstop is in place. Very importantly, as stated above, the 

public-private partnership model will provide additional capacity to 

protect consumers and much needed stability to the market. It 

would also provide the predictability and certainty that the market 

will survive major events and will continue to extend protection 

year after year. 

Q.3. In your written testimony you stated that ‘‘we must also reduce the taxpayer subsidy of recovery efforts’’ and noted that ‘‘of 

the first $85 billion in taxpayer dollars spent on Katrina recovery 

efforts, more than $10 billion went to cover losses for uninsured 

and underinsured properties.’’ Your statements suggest that a national catastrophe fund would provide funds to cover uninsured 

and underinsured persons. The national catastrophe fund you proposed in your testimony, however, would provide reinsurance only 

to state catastrophe funds to assist them in paying claims of policyholders in the event of a natural disaster. Accordingly, how would 

a national catastrophe fund, using actuarially sound rates as you 

proposed in your testimony, provide funds to uninsured and underinsured persons following a natural disaster? In addition, would 

you please identify the specific federal appropriations for the disaster recovery in connection with Hurricane Katrina that would 

have been unnecessary had a national catastrophe fund, as you 

proposed in your testimony, been established and functioning at 

the time Hurricane Katrina hit the Gulf Coast? 

A.3. A national catastrophe fund would not provide funds to cover 

uninsured or underinsured persons. However, as the Milliman 

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4Louisiana State University Hurricane Center Residential Wind Damage in Mississippi: Potential Hurricane Loss Reduction Through Improved Building Codes and Construction Practices 

(December, 2005). 

study concluded, a national catastrophe fund could help reduce the 

cost of insurance for consumers. The study estimates an average 

savings of $174.81 per household. These savings increase in more 

catastrophe-prone areas—up to $538.92 per household in Florida. 

We believe that these savings would reduce the number of persons 

who would otherwise be uninsured or underinsured. 

In addition, our plan addresses stronger building codes and improving mitigation efforts. Living on known faults without earthquake insurance, building in a flood plain without flood insurance, 

allowing brush to grow unchecked in areas prone to wildfire and 

building homes in coastal areas that cannot withstand hurricane 

force winds are irresponsible actions, which should not be subsidized by tapayers when the inevitable occurs. 

Stronger building codes, which are vigorously enforced, and sensible land use policies are needed to reduce the impact of catastrophes on consumers and taxpayers. Successful mitigation efforts 

can have dramatic impact on reducing damages caused by these 

storms. One study estimated the damage from Hurricane Andrew 

would have been $8.1 billion less if the building code now in 

Miami-Dade had been in effect in 1992. Further, Louisiana State 

University noted: 

Economic losses, which include damage to buildings and contents, would be 

reduced an estimated 68%, from $4.8 billion to $1.5 billion. The loss reduction estimate does not include such additional benefits as reduction in loss 

of life, human suffering, reduced disruption of communities and local economies, reduced emergency response costs, reduced post-storm sheltering and 

housing costs and other very significant but difficult to quantify losses.4

Prior to Hurricane Katrina, had cost savings measures, better 

land use policies and mitigation incentives been in place, we believe that there would have been fewer uninsured and underinsured persons and less property damage. While we are not familiar with every post-Katrina federal appropriation, it is our understanding that H.R. 2863 provided $11.5 billion to pay for uninsured 

and underinsured losses incurred as a result of Hurricanes Katrina 

and Rita through HUD’s Community Development Block Grant 

Program, If the comprehensive plan we propose was in place prior 

to Katrina, we believe that the need for such a large appropriation 

would have been reduced. 

The comprehensive, integrated solution we support would also 

include better consumer and public education to make sure consumers are aware of the steps they can and must take to protect 

themselves. The financial backstop model can help finance and facilitate those initiatives. Moreover, policy makers should examine 

the system of mandates that apply in some areas but not in others. 

For example requirements that apply to flood coverage do not seem 

to be uniformly enforced. Moreover, it seems incongruous to apply 

such requirements to flood but not for earthquake exposure. 

ProtectingAmerica.org is not proposing more mandates, but the 

issue in this regard should be reviewed and better understood by 

policy makers. We would be happy to assist in that process. 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 

FROM CHARLES CHAMNESS 

Q.1. Mr. Nutter says in his testimony, ‘‘The insurance industry surplus grew from $356 billion at December 31, 2003, to $439 billion at December 31, 2005. As of December 31, 2006, the industry’s 

claims paying ability and capital base have never been better.’’ 

This statement suggests that despite Katrina, the largest natural 

disaster in American history, insurance companies have had no 

problems paying claims, and in fact, have a better ability to pay 

claims now than before that disaster. In addition, Mr. Nutter says 

that ‘‘reinsurance capacity is adequate even for peak catastrophe 

markets.’’ 

At the same time, Americans around the country are finding it 

increasingly difficult to secure sufficient and affordable insurance. 

We hear reports that people from Texas through the Gulf and up 

the Eastern seaboard are seeing their insurance dropped and their 

rates and deductibles increased. 

How can this disconnect be explained? There appears to be sufficient insurance capacity, yet working families and business owners 

are unable to afford sufficient coverage. What do we do for these 

people, so that they can afford needed insurance coverage? 

A.1. It is important to understand the relationship between insurance and reinsurance capacity, and the price insurers and reinsurers charge for their products. The price of global catastrophe reinsurance rose after the 2005 Gulf Coast hurricanes in response to 

forecasts by climate scientists and catastrophe risk modelers that 

coastal regions of the U.S. would experience more frequent and severe storm activity for the next several years. The ability of reinsurers to increase premiums served to attract new capital to the 

global reinsurance market, which explains Mr. Nutter’s observation 

that ‘‘reinsurance capacity is adequate even for peak catastrophe 

markets.’’ 

Primary insurers, for their part, have responded to the rising 

cost of reinsurance by seeking rate increases for property insurance 

coverage in catastrophe-prone regions. Some primary insurers have 

withdrawn from, or stopped writing new policies in, certain catastrophe-prone regions, either because state regulators refused insurers’ requests to raise premiums to a level commensurate with the 

prevailing risk of loss, or to reduce their exposure levels to ensure 

their ability to pay future claims. This accounts for the fact that 

some consumers in catastrophe-prone regions ‘‘are seeing their insurance dropped and their rates and deductibles increased.’’ 

In short, catastrophe insurance capacity has remained adequate 

to the extent that the price of insurance and reinsurance coverage 

has risen sufficiently to attract new capital. Understood in this context, there is no ‘‘disconnect between sufficient reinsurance capacity 

and rising primary insurance rates or reduced availability of coverage in markets where rates have been suppressed through regulation. 

The last part of your question—‘‘What do we do for these people, 

so that they can afford needed insurance coverage’’—poses what I 

believe is the central challenge for government policy makers. In 

response, I can do no better than reiterate the follow statement 

from my written testimony: ‘‘The federal government has a long 

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history of designing and administering programs that provide 

grants and other forms of direct financial assistance to individuals 

on a means-tested basis for the purchase of essential goods such as 

food and shelter. There is no reason why Congress could not provide a similar form of aid to selected property owners for the purchase of insurance. Such an approach would have many advantages 

over the current system of generalized rate suppression and crosssubsidization, not the least of which is that the assistance could be 

targeted to particular individuals based on financial need. Moreover, its availability could be limited to those currently residing in 

disaster-prone areas, and would thus avoid creating incentives for 

people not currently living in those areas to move into harm’s way.’’ 

Q.2. All of the witnesses appear to support the proposition that 

mitigation efforts are an important part of preparing Americans to 

withstand and hopefully minimize damage from a large-scale natural disaster. I agree, which is why I have called for at least doubling the federal investment in mitigation efforts. What do you see 

as the current barriers to mitigation efforts and what can be done 

to remove those barriers? 

A.2. NAMIC believes mitigation efforts can play an integral part in 

protecting homes and businesses from a large-scale natural disaster. As I testified before the committee in april, NAMIC endorses 

strong statewide building codes and responsible land-use planning. 

We applaud your efforts to double the federal government’s investment in mitigation efforts. Our recent experience in Louisiana 

and Mississippi suggests that a major impediment to enacting 

stronger building codes is the perception by local government officials that the codes effectively create unfunded mandates. Governors Blanco and Barbour were eventually able to secure funding 

from the Federal Emergency Management Administration to enable their county governments to hire and train building inspectors. We believe that building code legislation could be more readily 

enacted in other states if affected jurisdictions new in advance that 

FEMA funding was available to assist them in implementing new 

building standards. 

Another barrier to effective mitigation is the fact that property 

owners currently lack sufficient incentives to invest in mitigation 

measures. Congress could encourage risk mitigation by offering 

property owners appropriate incentives. To that end, S. 930, the 

Hurricane and Tornado Mitigation Investment Act of 2007, would 

create federal tax incentives to encourage property owners to mitigate wind-related risk. Similar legislation at the state level has already been enacted in Florida and Mississippi, and is currently 

under consideration in South Carolina. 

Q.3. Governor Racicot testified on behalf of the American Insurance Association that 95 percent of the 1.1 million homeowners 

claims in Mississippi and Louisiana have been resolved. Do you 

agree with that statement? If not, please explain the areas of disagreement. If you do agree, please clarify whether the 1.1 million 

figure includes claims where the insurance company determines 

that the damage is not covered under the policy. If it does not, 

please tell me how many claims were filed overall in Mississippi 

and Louisiana, both those which were determined to be covered by 

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the homeowners policy and those which were determined not to be 

covered. 

A.3. I agree with Governor Racicot regarding the number and dollar amount of the claims paid by the insurance industry as the first 

anniversary of Hurricane Katrina approached in 2006. These figures were based on information compiled at the time by the Insurance Information Institute. As for the additional statistics you request, I recommend that you contact the departments of insurance 

in Louisiana and Mississippi, as my trade association is not in a 

position to collect industry-wide data of this kind. The Louisiana 

and Mississippi departments issued bulletins in the immediate 

aftermath of Hurricane Katrina, ordering insurers in those states 

to regularly file several types of information related to claims handling. The data you seek should be available from these insurance 

departments. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM CHARLES CHAMNESS 

Q.1. What role could mitigation efforts play in helping to reduce 

the price of insurance? 

A.1. Research has shown that mitigation efforts can play an important role in helping to reduce the price of insurance.This is why 

NAMIC believes that strong statewide building codes are needed to 

reduce property damage caused by severe wind storms. However, 

this view is not universally shared by others, including some home 

builders who argue that stronger building standards result in higher home prices. While this may be true, the fact is that the use of 

fortified construction techniques and wind-resistant building materials, made mandatory by strong building codes that are vigorously 

enforced, is critical to mitigating catastrophe risk and reducing the 

cost of insurance. 

In the aftermath of Hurricane Katrina, both Louisiana and Mississippi adopted stronger building standards. Louisiana’s new 

building code applies to the entire state, while the Mississippi code 

applies to the state’s six most southerly counties. It is worth noting 

that during the legislative debates that led to the enactment of 

these laws, many county commissioners in both states expressed 

reservations about the proposed building codes because, in their 

view, being forced to create building departments to administer 

and enforce the codes without proper funding sources constituted 

an unfunded mandate. 

The county commissioners have a point. Fortunately, Governors 

Blanco and Barbour were eventually able to obtain funding from 

the Federal Emergency Management Administration to help the affected counties hire and train building inspectors to enforce the 

new building code standards. However, if local officials could be assured in advance that federal funds are available to assist in implementing new building standards, the resistance to new building 

codes might be lessened or even eliminated. 

It is also important to consider ways to encourage catastrophe 

risk mitigation with respect to the existing housing stock, since 

building codes apply only to new structures. Following the 2005 

hurricanes, three states considered legislation designed to create 

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incentives for owners of existing properties to invest in risk mitigation measures. In 2006, Florida lawmakers created ‘‘My Safe Florida Home’’ disaster mitigation program, which was expanded earlier this year. The Florida program offers homeowners free home 

inspections and advice on how to make properties more wind resistant. In addition, the program offers grants to help defray the cost 

of purchasing risk-mitigation equipment and devices (such as storm 

shutters). A similar program was enacted this year in Mississippi, 

and another is currently being considered by the South Carolina 

legislature. 

NAMIC believes disaster mitigation programs like the ones described above can and will help to protect properties, especially in 

catastrophe-prone states, and thus help keep insurance rates more 

affordable for homeowners. S. 930, the Hurrican and Tornado Mitigation Investment Act of 2007, appears to closely approximate the 

goals of the state disaster mitigation program and should be seriously considered by Congress. 

In addition to mitigation, responsible land-use practices can also 

play a vital role in reducing insurance costs. Given the widespread 

concern among policymakers over the escalating cost of insuring 

properties in catastrophe-prone areas, it is difficult to understand 

why developers are allowed to build multi-million dollar luxury 

condominiums on coastal lands that are prime targets for hurricanes. Because insurers are often prevented by regulators from 

charging risk-based premiums for these properties, the cost of insuring them must be partially borne by property owners in less 

risky areas, driving up their insurance costs. Florida Chief Financial Officer Alex Sink apparently shares my dismay over this state 

of affairs. Speaking recently to a group of insurers, she lamented 

that ‘‘the state [of Florida] is doing nothing in the area of zoning 

codes to discourage building in coastal areas.’’ 

Q.2. It has been widely reported that in the aftermath of Hurricane 

Katrina, some insurance companies may have failed to adequately 

assess claims and may have chosen to litigate claims rather than 

pay them, with the expectation that policyholders would agree to 

smaller settlements. Could the insurance industry have done a better job settling claims in the aftermath of Katrina and what are the 

member companies of NAMIC doing to improve their claims payment procedures to prepare for the next natural disaster? 

A.2. The managers and employees of NAMIC member companies 

know that they are engaged in a highly competitve business. They 

understand that they can never be totally satisfied with their performance and must always strive for improvement. Any insurance 

company that deliberately pursued a strategy of litigating legitimate claims in an attempt to force policyholders to agree to smaller 

settlements would stand to lose market share to companies known 

for treating their customers fairly. 

The media reports to which you allude are largely anecdotal and 

are refuted by data released by the Louisiana and Mississippi insurance departments, which indicate that most claims were adjusted to the satisfaction of policyholders in a timely manner, with 

only two percent of claims going to mediation or litigation. This is 

not surprising, given insurers’ desire to attract and retain policymstockstill on DSKH9S0YB1PROD with HEARING

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holders in a highly competitive market. Another reason that insurance companies generally try to avoid litigating claims is that it is 

a costly option that does not always lead to an outcome favorable 

to the insurer, regardless of the merits of a particular case. If anything, insurers tend to err on the side of paying questionable or 

suspect claims to avoid litigation costs and potential harm to their 

reputations. 

That said, it is important to note that no matter how well a 

claim is handled and how fair the settlement offer, some policyholders will not be satisfied. In those instances, insurance companies work diligently to try to resolve outstanding issues with their 

policyholders. Where a resolution is not possible, insurers often 

turn to mediation. In the aftermath of Hurricane Katrina, the insurance commissioners in Louisiana and Mississippi quickly implemented mediation processes that were successfully utilized by several hundred individuals. 

In closing, I would note that the sheer magnitude of Hurricane 

Katrina—the largest natural disaster in the country’s history— 

placed an enormous strain on the ability of several of our member 

companies to respond to this unprecedented event. Our member 

companies have taken the lessons of Hurricane Katrina to heart, 

and each in its own way has learned from that experience and is 

likely to respond differently when the next mega-catastrophe occurs. 

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