In the letter, Ms. Pusey commended the committees for their attention to the important issue of insuring natural catastrophes; however she raised concerns with the proposed legislation on the grounds that it would displace the private insurance market, encourage building in catastrophe-prone areas, and place an unfair burden upon taxpayers not located in catastrophe-prone states.
Ms. Pusey also outlined a reform agenda for improving the private sector’s ability to serve homeowners and businesses in the path of potential storms, including an emphasis on mitigation efforts and stronger building codes, tax incentives to promote responsible building and preparation, and comprehensive reforms to the National Flood Insurance Program (NFIP).
The text of Ms. Pusey’s letter is below:
"Dear Chairman Kanjorski, Chairwoman Waters, Ranking Member Capito, and Ranking Member Garrett:
As your Subcommittees begin to consider the Homeowners’ Defense Act (H.R. 2555) and its impact on the homeowners insurance markets, I want to share our views on this legislation. This is an important issue and we commend you for taking a proactive approach to addressing the complex problem of insuring natural catastrophes. The American Insurance Association (AIA), the nation’s leading trade association for property and casualty insurance companies, remains committed to working with you to find solutions designed to provide both long-term stability in the private insurance markets and greater certainty to insurance consumers.
"Following the historic 2004 and 2005 hurricane seasons, AIA again under took an extensive review of America's response to catastrophes and ways to improve the insurance industry’s ability to serve homeowners and businesses in catastrophe-prone areas. In particular, we looked at positive system changes that will allow private markets to manage natural catastrophe risk without establishing new government programs or a bail-out from taxpayers living in less-risky areas.
With maximizing private market capacity as a guiding principle, AIA developed a reform agenda that includes federal and state initiatives that could provide short- and long-term benefits. This agenda, a summary of which we have enclosed, consists of four major components:
* Protective measures, including improving mitigation efforts and strengthening building codes, to keep people out of harm’s way and increase the ability of homes and businesses to withstand future catastrophes;
* Regulatory and legal reforms to improve the stability of insurers’ operating environment;
* Tax incentives to encourage residents to take more responsibility for catastrophe preparation and response; and,
* National Flood Insurance Program (NFIP) reforms to assure that the NFIP continues to play a vital role in protecting the nation from the generally uninsurable risk of flood.
These reforms should be implemented as quickly as possible. While some of the reforms are clearly targeted at windstorms, they could be modified to address other natural catastrophes. We believe that these proposals would preserve the critical role of the private insurance markets in providing financial protection from natural catastrophes. For your information, I am enclosing a copy of the executive summary of AIA’s reform agenda.
As we have noted, mitigation must be a key component to any comprehensive reform effort, and we appreciate the inclusion of a mitigation grant program in the Homeowners’ Defense Act. However, the core components of the legislation do not meet the objective of maximizing the private sector’s ability to manage risk. Although well-intended, H.R. 2555 will not generate new private sector insurance, reinsurance or capital market capacity. Instead, it is more likely to encourage the development of state programs that will displace the private market and require a federal government bailout in the event of a catastrophe.
As introduced, H.R. 2555 establishes: (1) a "consortium” or pooling mechanism that would enable states to purchase natural catastrophe reinsurance and sell catastrophe bonds to private investors; (2) a federal guarantee for the debt issued by eligible state programs; and (3) a federal reinsurance program allowing the Secretary of the Treasury to sell reinsurance to eligible state programs. To varying degrees, we have concerns with each of these components.
Regarding Title I’s consortium, states already have the option to pool their risk with other states, but have chosen not to do so. This is because a lower-risk state receives no benefit in pooling its risk with a relatively higher-risk state. In fact, when lower-risk states pool risks with higher-risk states, the lower-risk states are effectively subsidizing insurance costs in higher-risk states. Second, individual state programs can access capital markets today, without being part of a consortium and without the need for federal legislation.
Next, the federal “Catastrophe Obligation Guarantees” in Title II (which pledges the “full faith and credit” of United States to pay the debt in the event that an eligible state is unable to meet its obligation to bond holders) is also of concern. This guarantee mechanism incentivizes a state to under-fund its state program in the expectation that it can simply issue additional debt guaranteed by the federal taxpayer. Moreover, when insurance rates are artificially suppressed by the government, it generates moral hazard by encouraging people to build and locate in more catastrophe-prone areas.
Title III’s federal reinsurance program appears to be based on the notion that large-scale natural catastrophes are uninsurable in the private sector. We respectfully disagree with this premise. While the devastating storms of 2004 and 2005 certainly impacted earnings, the private property and casualty insurance industry remains strong and resilient. Similarly, private reinsurers and capital markets continue to assume catastrophe risk.
We are particularly concerned with these proposals since they are likely to encourage the growth of existing state programs, and the establishment of new ones. State programs displace private market insurance and reinsurance, and encourage a state to warehouse its catastrophic risk within the state, rather than spread risk through global reinsurance markets.
Importantly, the bill does not require a state program to charge risk-based premiums, maintain adequate reserves, establish a solid, private-market reinsurance program, or manage its finances to an acceptable level of risk. In other words, the legislation does not require that the state program to have any “skin in the game.”
Finally, subsidies are not fair to federal taxpayers who do not live in catastrophe-prone states, but would nonetheless bear the costs of these proposals.
For all these reasons, AIA opposes the Homeowners Defense Act.
Thank you for the opportunity to present our views on this important policy matter. We stand ready and are willing to work with the Subcommittees to develop a comprehensive set of reforms designed to maximize the ability of the private insurance markets to manage better the risk of natural catastrophes."