U.S. House Subcommittee Holds West Palm Beach Field Hearing On Insurance Issues, National Catastrophe Fund Proposal

Jul 7, 2009

The United States House of Representatives’ Financial Services Subcommittee on Oversight and Investigations held a field hearing in West Palm Beach on July 2, 2009 entitled “The Homeowners’ Insurance Crisis:  Solutions for Homeowners, Communities, and Taxpayers.” 

In attendance were Subcommittee Chairman Dennis Moore (D-Kansas) and Subcommittee Member Ron Klein (D-Florida), who introduced federal legislation last month known as the Homeowners’ Defense Act of 2009 (H.R. 2555).  The bill would allow Florida and other states the choice of participating in a national catastrophe insurance pool, with the goal of lowering insurance costs on a national basis.  To read more about the Homeowners’ Defense Act, click here.

Chairman Moore opened the hearing by recounting the disastrous effects of a Category 5 tornado that hit his home state of Kansas in 2007.

“It is a fact of life that catastrophic disasters will happen from time to time, and we need to be fully prepared,” said Chairman Moore.  “After the unacceptable response by FEMA to Hurricane Katrina, for example, we must ensure that our federal government is there to help in a time of need. Hurricane Katrina caused $45.3 billion in insured losses and, of the top ten most costly insured catastrophes in the United States since 1989, eight of the top ten were caused by hurricanes.”

Chairman Moore explained that catastrophes are not just a Florida problem, but a national problem that demands national attention.

The hearing focused on how catastrophic natural disasters impact the affordability and availability of homeowners’ insurance.  Three panels of witnesses provided perspectives on various insurance-related issues such as: 

  • Coverage of natural disasters
  • The withdrawal of insurance companies from offering policies in coastal areas
  • Rising homeowners’ insurance premiums and the resulting economic impact on state and local governments
  • Possible solutions to the homeowners’ insurance crisis

Representative Klein stated that the hearing provided an opportunity to receive insurance issue-related information to take back with him for action at the Capitol.  He noted that, during his time in the Florida Legislature, the Florida Residential Property and Casualty Joint Underwriting Association (“FRPCJUA”) was created as an insurer of last resort, but was expected to disband after a few years.

“Unfortunately the successor of the FRPCJUA–Citizens–is now the largest underwriter in the state,” he added.

Representative Klein also stated that his Homeowners’ Defense legislation would assist approximately 20 states identified as having inadequate catastrophe insurance markets.

Each witness was allotted five minutes in which to speak, with an additional five minutes afforded to respond to questions from the Subcommittee members.  Following is an overview of Panelists’ remarks:

 

PANEL ONE

Ivan Itkin, former Pennsylvania Congressman

Mr. Itkin, who currently resides in a beachfront high-rise Fort Lauderdale condominium, testified about his “great concerns” regarding the availability of windstorm insurance.  He stated that private property insurance companies refuse to insure his building, which leaves him and his fellow residents with no other option but to secure coverage from Citizens Property Insurance Corporation (“Citizens”).  Mr. Itkin’s building’s policy deductible is five percent of building’s valuation of $85 million, which equates to $4.26 million.  Even with an annual premium of $339,000, Mr. Itkin emphasized that the building is not adequately insured.  Thus, he urged Congress to pass national catastrophe legislation that would help provide financial assistance in times of need.

 

Cynthia Shelton, President, Florida Association of Realtors

A resident of Lake Mary, Florida, Ms. Shelton is also President of the Florida Association of Realtors, which is the largest trade association in Florida with a membership of 15,000 realtors.  She began her testimony by stressing that a strong real estate market is the “lynch pin” of a healthy economy.  Insurance availability and affordability is a major concern that extends beyond homeowners:  It also affects multi-family rental housing, as well as commercial property and casualty insurance.  The lack of adequate coverage threatens the ability of current property owners to retain their properties and slows the rate of property investment in communities.  Ms. Shelton explained that the inability to obtain affordable insurance is a serious threat to real estate market, and that a home’s value is directly tied to insurance costs.  Lack of insurance devalues property and impacts renters, to whom the cost of increased premium is passed.

Realtors would like to see a “healthy debate” on the issue during the current Congressional Session and believe it is time for the passage of “sound and productive” legislation on natural disaster insurance.

 

Joe Grillo Sr., Senior Vice President, Weekes and Callaway

Mr. Grillo stated that his comments were not based on actuarial promulgations.  Rather, in order to formulate his remarks, he relied on history, which he said “repeats itself in one way or another,” along with hands-on experience from his 36 years in the insurance business.  The good news in the insurance world, he explained, is that rates have been decreasing significantly over the past two years, mostly because of mandated mitigation credits.  This is an area in which the state and federal governments could provide assistance via tax credits and grants.  He also acknowledged that, while the number of Florida insurers has increased, Citizens still remains the State’s primary underwriter.

In Mr. Grillo’s opinion, the bad news is that Florida population growth has slowed, primarily because of high property taxes and insurance rates.  People are turning away from Florida because these rates are at historically high levels.  Mr. Grillo expressed concern with the dearth of nationally recognized insurers in the State’s market, aside from a handful that specialize in high-value homes.  He explained that the market is left with inexperienced start-ups that have been in business for less than five years.  Many of these companies, he added, could not sustain the financial impact of a substantial, or even perhaps a less-than-substantial hurricane. 

Mr. Grillo’s conclusion was that there is “availability and somewhat improved rates, but we are sitting on a time bomb reliant on the weather.”  He offered that writing capacity could be expanded by the return of “brand name” insurers to the State.  A self-described “open market person,” Mr. Grillo said he could also understand how the proposed legislation would have the federal government act as a conduit in order to improve reinsurance costs.  With the proper integration, he said, it is logical to expect that passage of H.R. 2555 would result in a better purchasing environment for the homeowner.

 

Robert Detlefsen, Vice President of Public Policy, National Association of Mutual Insurance Companies (“NAMIC”)

Mr. Detlefsen testified that the private sector and federal government should work together to address problems of insurance availability and affordability.  Caution should be taken, however, that any expansion of the government’s role does not artificially suppress insurance rates, crowd out the private insurance market, or encourage unwise residential and commercial development in high-risk coastal regions.

He stated that Florida’s approach to insurance rates isn’t “within a coastal mile” of actuarial soundness.  Coastal area underwriting restrictions imposed on property insurers act as price ceilings on coverage.  While rate suppression lowers short-term costs, it creates long-term market problems.  He testified that the “right way” to solve the problem is to focus on two key principles: 

  • Insurance premiums should be based on risk
  • Special treatment given to lower income residents in high-risk areas should come from public funding and not from insurance companies.

The NAMIC supports mitigation grants, believes the private market should establish risk, and the National Flood Insurance Program should be reformed.  The organization opposes portions of Representative Klein’s Homeowners’ Defense Act that seek to build on state catastrophe funds. They are also concerned that the federal natural catastrophe fund created by the bill would “crowd out” the private reinsurance market.

 

Colleen Repetto, Executive Director, Fair Insurance Rates in Monroe (“FIRM”)

FIRM, a grassroots organization with more than 5,000 members based in Monroe County, Florida, brought attention to the statewide windstorm insurance crisis during 2006 by successfully challenging Citizens’ Monroe County windstorm rate filings as excessive.  This action was followed by a 32 percent rate rollback by the Florida Office of Insurance Regulation.

Ms. Repetto stated that consumers need to be educated on the cost/savings benefits of strong building mitigation incentives.  In her opinion, windfall tax dollars generated by post-catastrophe rebuilding and repairs should be used to build state catastrophe fund reserves, fund mitigation programs and/or reduce premiums in the areas they were collected.

Chairman Moore asked Ms. Repetto whom she thought should bear the cost of rebuilding after a catastrophe.  She answered that the payment process involves four tiers of responsibility:

  1. Before insurance coverage even begins, policyholders have already paid their premiums, as well as a deductible;
  2. Insurance companies then need to pay claims;
  3. Then, the state should come into play;
  4. Finally, the federal government would bear the burden of remaining costs.

 

PANEL TWO

The Honorable Steven Geller, former Florida State Senator, District 31, and former President, National Conference of Insurance Legislators

Senator Geller believes a national catastrophe program is critical.  As evidence to supplement his remarks, he provided a DVD to the Subcommittee, which featured 20 lead-in stories from the Weather Channel’s show “It Could Happen Tomorrow” about various types of random natural disasters.  If any of these natural disasters occurred, Congress would have to intervene, or face a collapse of the financial market.  Senator Geller believes that the high cost of windstorm insurance is the single biggest issue facing the State of Florida today.  He testified that, with an appropriate federal plan in place, South Florida could reduce windstorm rates by 60 percent.

Senator Geller also stated that, in many areas of the country, reducing insurance bills is more beneficial than reducing mortgage rates.  He supported Congressman Klein’s bill and said that by passing legislation in advance of a disaster, Congress can be proactive instead of reactive.  He closed with stating “We’re not asking for a handout, just a hand.”

 

Dr. Ray Spudeck, Chief Economist, Florida Office of Insurance Regulation  (“OIR”)

Dr. Spudeck opened by stating “we can’t stop the grounds from shaking, hurricanes from hitting and rivers from rising.  What we can do is make sure there is an adequate plan in place to deal with these (disasters).  We have a plan in place to insure damage for hurricanes, (but) not for earthquakes or flooding.” He then testified on behalf of the OIR regarding the following issues:

  • The current system for catastrophic natural disaster;
  • Experience from the Florida market;
  • Various approaches to managing disaster risk and insurance;
  • Federal support of disasters and disaster insurance;
  • Improving disaster preparedness and disaster response;
  • Building better homes; and
  • Consideration of a federal backstop for catastrophic risk.

Dr. Spudek also stated that the OIR will work with the Subcommittee to find solutions for making both personal and commercial insurance more available and affordable, while placing fewer burdens on American taxpayers than are currently shouldered.

 

PANEL THREE

Admiral James M. Loy (Ret.), former Commandant of the U.S. Coast Guard and former Deputy Secretary of the U.S. Department of Homeland Security

Currently, Admiral Loy is the co-chairman of Protecting America.org, an organization committed to finding better ways to prepare and protect American families from the devastation caused by natural catastrophes.  He testified that conventional faith in the current system of “destroy, rebuild and hope” as it relates to the aftermath of extraordinary natural catastrophes is fatally flawed.  Even more importantly, in these difficult economic times, the nation can’t afford the threat of yet another large shock to its weakened housing and lending sectors.

Admiral Loy stated a “catastrophic event would cause such enormous damages that our economy would be rocked, private resources would be quickly depleted and a federal bailout of potentially hundreds of billions of dollars would be required.  The American taxpayers have lost their appetite for bailouts. They would be far better served by a program that uses private insurance dollars to pre-fund coverage for the eventuality of a catastrophic natural catastrophe.”

“To that end,” continued Admiral Loy, “we believe that a comprehensive, integrated plan linking a national catastrophe fund with support to first responders and strong provisions for education and mitigation would best address the threat of the next mega-catastrophe.  A national catastrophe fund will create a privately financed and federally-administered layer of reinsurance to complement and stabilize private market reinsurance alternatives and ensure greater availability and affordability for consumers of residential property insurance.”

He concluded by stressing that a national catastrophe plan should continue to be a top national priority and that it is time for the federal government to take action. 

In response to inquiry from Chairman Moore, Admiral Loy agreed that mitigation grants were beneficial and a good solution to the problem.

 

Vicki Williams, Outreach Coordinator, My Safe Florida Home

In her overview of the My Safe Florida Home Program, Ms. Williams stated that every $1 spent on mitigation returns $4 in insurance savings.  The Program has been tremendously successful and has utilized all of its grant money.  On average, the homes that participated in the Program had a 36 percent increase in the strength of their home and a 27 percent decrease in their home insurance premiums.  Further, the $160 million allocated to the Program resulted in the creation of 1,000 jobs and the generation of significant sales tax for the State of Florida.  Unfortunately, due to tough economic times, no funds were allocated to the Program during the 2009 Florida Legislative Session.  Ms. Williams stated that a obtaining a federal matching grant for the Program would be extremely beneficial.

 

Chairman Moore and Representative Klein thanked all of the witnesses for their testimony and expressed their intent to continue working on federal legislation together.

The Chairman closed by stating “The harsh reality is that this is a national problem that does require national attention for a solution.”

 

Hyperlinks to witness testimony are provided below:

Panel One

Panel Two

  • The Honorable Steven Geller, former Florida State Senator, District 31, and former President, National Conference of Insurance Legislators
  • Dr. Ray Spudeck, Chief Economist, Florida Office of Insurance Regulation

Panel Three

Available Member Statements: Chairman Moore (KS)

 

Should you have any questions or comments, please contact Colodny Fass.

 

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