American Geological Institute

Government Affairs Program

House Hearing on Homeowners' Insurance Availability in Disaster Prone Areas

House Committee on Banking and Financial Services
Subcommittee on Housing and Community Opportunity
June 24, 1997

Representatives present
Chairman Rick Lazio (R-NY)
Ranking Member Joseph P. Kennedy II (D-MA)
Rep. Bill McCollum (R-FL)
Rep. Jesse Jackson Jr. (D-IL)
Rep. Doug Bereuter (R-NE)
Rep. Jack Metcalf (R-WA)
Rep. Bob Ney (R-OH)
Rep. Sue W. Kelly (R-NY)

To read the full testimony of the witnesses submitted to the committee, visit the House Banking and Financial Services Committee website.

Opening remarks
Chairman Lazio introduced the hearing as the first in a series scheduled to examine the availability of insurance in disaster-prone areas. Lazio expressed concern that the high cost of homeowners' insurance in these regions "may effectively prohibit purchase." He stated that from 1988 to 1994, the federal government has spent over $45 billion for disaster relief. Lazio introduced H.R. 219, the Homeowners' Insurance Availability Act of 1997, in conjunction with Rep. Bill McCollum. Rep. Bereuter added that he has had some concerns about previous versions of the legislation, but feels confident about the most recent proposal. And Rep. Jackson added that he understands the helplessness shared by families not adequately insured when disaster strikes, and is interested in addressing the issue on a federal level both for personal and policy reasons. The hearing came at a rather opportune time for Jackson, whose basement flooded recently. He was not insured for the damage.

Witness for the first panel:
The Honorable Jo Ann Emerson (R-MO)

Rep. Emerson stated that "Congress has a moral obligation to help homeowners prepare" for damage caused by natural disasters. Emerson hails from the eighth Congressional District in Missouri, home to a "potentially devastating earthquake fault line known as the New Madrid Fault." She noted that there is a greater then fifty percent chance of a catastrophic event along that fault line in the next fifty years. While the last earthquake along the fault occurred in 1811 (ranged from 8.0 to 8.6) and was mitigated by the relative lack of population in the area, the same region is now highly populated. Emerson stated that the issue of providing adequate coverage to individuals in hazard-prone areas is beyond the capacity of the private sector and requires a federal solution. The federal government must "plan intelligently to minimize the financial and physical damage that [natural events] cause." Emerson concluded by hailing H.R. 219 as a "great starting point" (she is a cosponsor) and encouraging the bill's passage. Emerson's husband, the late Sen. Bill Emerson, worked during the last Congress to move this issue forward and made great progress.

Witness for the second panel:
Bill Gray, Ph.D., Professor of Atmospheric Science, Colorado State University

Professor Gray's testimony focused on predictions for the coming decades in terms of hurricane frequency and capacity for destruction. Based on precursor oceanic and atmospheric signals such as stratospheric winds, rainfall, and ocean surface pressure and temperature, Gray has concluded that we are "on the brink of an unprecedented level of hurricane-spawned destruction such as we have never seen." Following a high hurricane activity period from the 1940's to the late 1960's, there was a great downturn in major storms from 1970 to 1994. Then, a very large increase occurred for the years 1995 and 1996. "Never before have we seen two consecutive years with so much activity as 95-96."

Gray speculated in his testimony that the Atlantic "conveyor" or belt of thermohaline circulation is a major driver of climate change, remarking that periods of high storm activity correlate well with periods of more rapid circulation. Since the Atlantic circulation "appears to be speeding up now," Gray expects that "we will be faced with two to three decades of more intense storms." The Professor concluded his testimony by noting that, without adequate insurance, the consequences of the coming storms could be enormous for taxpayers. "We should be doing much more to anticipate these events."

Questions and answers
In response to Chairman Lazio's question regarding the timeframes of intense versus mild storm periods, Gray characterized the variation as occurring on decadal scales. Thus, we can expect the next upswing in storm activity to last between twenty and forty years. Gray also noted that we can only work with probabilities in determining hurricane landfalls. He labeled hurricanes as "our greatest national threat...much more significant than global warming which is a longer term prospect and may have been exaggerated." Addressing Lazio's questions about technological advances addressing the confidence ratings of landfall probabilities, Gray responded that his research team is one of a very few actually conducting research on decadal storm variations. Chairman Lazio concluded with, "I guess the best we can do is protect against the inevitable," to which Gray responded, "I think so."

Rep. Bereuter began by stating that the bill recognizes that "the predominant costs should be absorbed by the disaster-prone states." Professor Gray agreed with this concept, stating that such areas are "nice places to live...but you have to pay for it." Rep. Metcalf questioned Prof. Gray regarding his predictions for regions other than the Atlantic coast. Gray responded that the Atlantic region is special because it is a "marginal area for storms" and experiences more year-to-year variation than other tropical storm regions. While there is some multi-decadal variation in other regions, it tends to be less.

Witnesses present for the third panel included:
Bob Klein, Ph.D., Director, Center for Risk Management and Insurance Research, Georgia State University
Greg Butler, Chief Executive Office, California Earthquake Authority
Daniel Sumner, General Council, Florida Department of Insurance

Mr. Butler began the testimony by describing California state law which requires homeowners' policy sales to also offer earthquake policies. Butler went on describe his involvement in the California Earthquake Authority which was established to respond to the market crisis in California following the Northridge Earthquake in January of 1994. "At the peak of the crisis, the California Department of Insurance reported that carriers representing over ninety-five percent of the homeowners' insurance market had either stopped completely, or severely restricted, the sale of new policies in California." Since December of 1996, the Authority has issued over 300,000 earthquake policies, and California is "once again enjoying an open, competitive marketplace in the homeowners' insurance arena." Still, Butler noted that no one state can solve the problem alone, and the federal government should be involved in pinpointing a comprehensive solution. He concluded with the fact that "while we've done all we can in California, there is a major gap between the worst case scenario and what we can cover."

Mr. Sumner began with the fact that "in a worst cast scenario, a high intensity natural disaster, hitting an area of dense development, can inflict more damage than a state, even a state with Florida's financial resources, can bear on its own." He spoke about the Hurricane Catastrophe Fund set up in Florida which, since 1985, has accumulated over $6.4 billion in cash and bond holdings. While Sumner expressed approval and pride in the accomplishments of the Fund thus far, he tempered his enthusiasm with the reminder that Hurricane Andrew alone cost a total of $16 billion. "Eleven insurance companies became insolvent as a result of Andrew claims." Since there is not enough private insurance to cover all homeowners, the state of Florida has undertaken measures to ensure that all have protection. "Over 900,000 policies have been insured through a state sanctioned residual market mechanism," the Florida Residential Property and Casualty Joint Underwriting Association (JUA). Yet, were a Class 5 hurricane to strike somewhere between downtown Miami and downtown Ft. Lauderdale, expected losses resulting from such a hurricane "would approach $53 million." Sumner emphasized the need for a "federal backstop" since no state "can cover all of this at once," and left the Committee with a question to think about, "How can the federal government provide a financial safety net should the costs of a natural disaster exceed the reasonable capacity of private insurers and individual states to absorb those costs?"

Dr. Klein began his testimony with the fact that "less than half of the homeowners in disaster-prone areas actually purchase earthquake insurance, and the number is declining." Primarily, many cannot afford the premiums required in these high-risk regions, and there is a general lack of incentives to purchase. Klein criticized the "flawed public policies" that "allow people to externalize their personal losses and costs to all Americans." Klein commented that insurance in high-risk areas will never be cheap, but there are steps the government can take to make it less expensive and more secure. He listed four elements that must be included in a successful federal strategy: (1) public subsidies of excessive catastrophe risk and uninsured losses should be minimized, (2) public information programs should be boosted to educate property owners on how they can protect themselves against natural disasters through cost-effective mitigation and insurance, (3) federal and state governments should establish properly structured financial mechanisms to supplement the capacity of the private sector to fund megacatastrophes, until the market for the securitization of catastrophe risk matures sufficiently to fully assume this risk, and (4) restrictions on insurance markets should be eased to allow them to adjust to a sustainable equilibrium, function efficiently, and provide appropriate incentives for cost-effective risk management. Klein's parting words to the Committee were the following: "You have a ticking financial time bomb on your hands."

Questions and answers
With the implementation of a federal reinsurance policy as a backstop for state programs, Chairman Lazio asked for the panel members' opinions regarding the required state premiums. All panel members agreed that the premiums paid by states must be statistically sound. Sumner specified that sound rates must be arrived at over time since any drastic increase in rates in a short time period for individuals with fixed incomes would be unreasonable. Klein added that the process will take some transition time; however, the program will not be successful unless the rates are sound as defined by actuarial analysis.

Rep. Ney questioned whether such a program should be voluntary or whether all who do business in a state should be required to participate. Butler responded that the process is voluntary in California, for the state is very diverse in terms of seismic activity. Ney responded that there would seem to be no incentive to participate in coverage programs barring a mandate, and concluded that "if the Feds are in it, you have to make it mandatory." Ney also commented that the program might include provisions to "reward" companies who join voluntarily.

To Rep. McCollum's inquiries regarding the storm intensity needed to wipe out Florida's disaster fund, Sumner responded that he is more concerned about what is behind the next big storm. While the fund could cover a great deal, a storm on the heels of "the big one" might not permit the needed time to reestablish the fund at pre-disaster levels. McCollum also questioned whether states should be required to have their own disaster funding programs prior to seeking federal assistance. Sumner emphasized that states must come to the federal government "with a foundation" and first do all that can be done on the state level.

Witnesses present for the fourth panel included:
Jerry Thomas, Chairman, Quaker City Savings Bank, Whittier, CA
James Klagholz, Insurance Agent and Secretary-Treasurer, C.N. Sterling Associates, Inc., Seaside Park, NJ
Steve Bupp, President, Condominium Venture, Inc., Greenbelt, MD

Mr. Thomas offered the perspective of a real estate lender. He stressed that the "system isn't working," commenting that three and a half years after Northridge, the California Earthquake Authority "has less than they did then." Thomas emphasized the need for a national answer, and offered three suggestions: (1) insurance should be mandatory and widely available at reasonable rates, (2) incentives to mitigate risks should be provided, and (3) insurance must cover multi-family as well as single-family dwellings. Thomas recommended that the Committee look at flood insurance programs and requirements as an example. He concluded by saying that "this is the most important work the Banking Committee will do for some time."

Representing the Community Associations Institute, Mr. Bupp remarked that his organization is the voice for 32 million people. He commented that the insurance premiums for multi-family dwellings and living arrangements have "increased a huge amount." In addition, many areas with established homeowners' associations and common property areas still do not have collaborative policies. Bupp emphasized the prevalence of common interest communities, and asked that they be adequately considered in policy development. He stressed that the Committee find a way to "provide a fair product for a fair price."

Mr. Klagholz described the current state of the insurance marketplace as rife with "very big problems, and they're growing worse." According to Klagholz, many companies have withdrawn from the market in high-risk communities, and residents have given up their attempts to find affordable insurance coverage. He offered the New Jersey Fair Plan as an example which offers the most minimal coverage, stating that his agency has been forced to go to companies outside the U.S. for supplemental coverage. The level of coverage that was "achieved for decades with only one policy now requires three companies." Klagholz commented that the current situation of companies unwilling to write coastal business amounts to a crisis. "Insurers regularly refuse to renew at least some of their properties in coastal markets." Klagholz concluded with the opinion that those who do not live in disaster-prone areas should not have to pay for those who do. The federal government must aid in the development of a solution to prevent the undue tax burden imposed on all citizens when disaster strikes.

Questions and answers
Chairman Lazio first addressed Mr. Klagholz, asking whether the current situation appears to be an anomaly or evidence of a trend. Klagholz responded that the current situation most definitely points to a trend. "With each hurricane, companies pull out of coastal areas." Addressing Lazio's questions about prospects for communities ten years down the road assuming we continue as things are, Klagholz added that the real estate market will approach bottom and property values will decrease dramatically. Lazio then questioned Mr. Thomas about effects on the mortgage lending industry. Thomas commented that the Northridge earthquake caused a $6 million loss of reserves out of $60 million. He added, "banks should be more concerned than anyone else." In response to Mr. Bupp's testimony, Chairman Lazio added that his bill does not directly address commercial liability.

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Contributed by Jenna Minicucci, AGI Government Affairs Intern

Last updated June 27, 1997

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