U.S. House Subcommittee Insurance Crisis Hearing Report

On Monday, February 11, 2008, the Oversight and Investigations Subcommittee (“Subcommittee”) of the United States House of Representatives held a field hearing entitled “The Homeowners’ Insurance Crisis and its Impact on Communities, Homeowners and the Economy” in Palm Beach County, Florida.

The purpose of the hearing was to examine insurance industry coverage of catastrophic 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, and possible solutions to the current homeowners’ insurance crisis.

Witnesses at the hearing, including Florida Insurance Commissioner Kevin McCarty, insurance industry representatives and advocates for a federal role in natural catastrophe insurance, urged the Subcommittee to help address Florida’s property insurance crisis and to help states better prepare for the financial impact of a natural catastrophe.

Commissioner McCarty said that “to some extent, Florida subsidizes” the National Flood Insurance Program (“NFIP”) because the State has paid about 42 percent of its premiums and has only received about 16 percent of the claims payments.

Subcommittee members said the insurance crisis once was viewed as an issue only affecting a few states. In light of recent California wildfires and tornadoes in the South, disasters are becoming a national problem as the population grows.

Commissioner McCarty said the best way for the federal government to help would be to spread the risk more evenly across the country. To view a copy of Commissioner McCarty’s testimony, click here.

Tom Wenham, mayor of the Village of Wellingham, Florida, offered testimony on “skyrocketing” insurance rates in his municipality. Mr. Wendham indicated that Wellington homeowners insurance rates have more than doubled in the past year, costing the average homeowner roughly $5,000 annually in premiums. To view a copy of Mr. Wenham’s testimony, click here.

Charles J. Bonfiglio, President of the Florida Association of REALTORS® (“Association”), spoke in favor of a comprehensive national natural disaster policy. The Association suggests that such a policy take into consideration responsibilities of the property owner, private insurance market, and all levels of government in preparing for and recovering from catastrophic events.

Mr. Bonfiglio provided findings from a 2006 study commissioned by the Association on the impact of hurricanes on housing and economic activity. To view a copy of Mr. Bonfiglio’s testimony, click here.

Past president of the Independent Insurance Agents and Brokers of America Alex Soto gave testimony on possible causes of the insurance crisis. Those causes include recent hurricanes that have been the costliest in the nation’s history, lingering instability in the Gulf Coast insurance market, unprecedented population growth in coastal and disaster-prone areas, changing standards applicable to the evaluation of insurer ratings, reinsurer premium increases, and the amount of funding the federal government has made available to homeowners affected by the 2005 hurricanes. To view a copy of Mr. Soto’s testimony, click here.

Support was offered for HR 3355, also known as the “Homeowners’ Defense Act of 2007” that was passed last year by the U.S. House of Representatives but stalled in the Senate.

HR 3355, co-sponsored by six Florida congressmen, would expand the federal government’s role in addressing rising homeowners’ insurance premiums and dropped coastal policies and would lower the risk of state-provided reinsurers like the Florida Hurricane Catastrophe Fund.

HR 3355 would allow states to apply for low-interest loans from the federal government if a disaster strikes and would allow state-sponsored insurance funds to voluntarily pool their risks and issue bonds to transfer some of that risk.

The Bush Administration does not support HR 3355. According to the 2007 Economic Report of the President (“Report”), intervention by the federal government would prevent private insurers from setting rates high enough to cover risks and that insurers and reinsurers may be priced out of the market if they can’t compete with government-backed coverage.

The Report also says that policyholders would be less likely to properly safeguard their homes against natural disasters if the perception exists that the federal government will help in the event of a disaster.

Panelists at the field hearing responded to the testimony by saying that the free market system has failed because insurers can make higher profits by dropping policies in disaster-prone areas. HR 3355 could help ameliorate this problem by offering backup coverage to Florida and other disaster prone areas where policies are being dropped.

Interest was expressed in exploring on a national level some ideas that Florida leaders have developed, including incentives for making homes safer and more energy-efficient, and the creation of a state-approved hurricane risk prediction model used by insurers to set homeowners’ insurance rates.

Should you have any questions or comments, please do not hesitate to contact this office.

 

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