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/ ' THE AVAILABIUTY OF INSURANCE IN AREAS AT RISK OF NATURAL DISASTERS Y4.B 22/1:103-92 The ftvailabilitg of Insurance in Ar... FIELD HEARING BEFORE THE SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE OF THE COMMITTEE ON FINANCE AND BANKING, URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS FIRST SESSION NOVEMBER 1993 1, Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 103-92 U.S. GOVERNMENT PRINTING OFFICE 73-548CC WASHINGTON : 1994 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-046026-3 THE AVAILABIUn OF INSURANCE IN AREAS AT RISK OF NATURAL DISASTERS y 4.B 22/1:103-92 The Availabilitg of Insunnce in Ar... FIELD HEARING BEFORE THE SUBCOMMITTEE ON CONSUMER CREDIT AND INSURANCE OF THE COMMITTEE ON FINANCE AND BANKING, URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS FIRST SESSION NOVEMBER 1993 1, Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 103-92 --~» / .? U.S. GOVERNMENT PRINTING OFFICE 73-548CC WASHINGTON 1994 : ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments.CongressionalSalesOffice,Washington.DC 20402 ISBN 0-16-046026-3 HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HENRY B. GONZALEZ, Texas, Chairman STEPHEN L. NEAL. North Carolina JAMES A. LEACH, Iowa JOHN J. LaFAIX;E, New York BILL MCCOLLUM, Florida BRUCE F. VENTO, Minnesota MARGE ROUKEMA, New Jereey CHARLES E. SCHUMER, New York DOUG BEREUTER, Nebraska BARNEY FRANK, Massachusetts THOMAS J. RIDGE, Pennsylvania PAUL E. KANJORSKI, Pennsylvania TOBY ROTH, Wisconsin JOSEPH P. KENTSTEDY II, Massachusetts ALFRED A. (AL) McCANDLESS, California FLOYD H. FLAKE, New York RICHARD H. BAKER, Louisiana KWEISI MFUME, Maryland JIM NUSSLE, Iowa MAXINE WATERS, California CRAIG THOMAS, Wyoming LARRY LaROCCO, Idaho SAM JOHNSON, Texas BILL ORTON, Utah DEBORAH PRYCE, Ohio JIM BACCHUS, Florida JOHN LINDER, Georgia HERBERT C. KI.EIN, New Jersey JOE KNOLLENBERG. Michigan CAROLYN B. MALONEY, New York RICK LAZIO. New York PETER DEUTSCH, Florida ROD GRAMS, MinnesoU LUIS V. GUTIERREZ, Illinois SPENCER BACHUS, Alabama BOBBY L. RUSH, Illinois MIKE HUFFINGTON, California LUCILLE ROYBAL-ALLARD, California MICHAEL CASTLE, Delaware THOMAS M. BARRETT. Wisconsin PETER KING, New York ELIZABETH FURSE, Ortôn NYDIA M. VELAZQUEZ, New York BERNARD SANDERS, Vermont ALBERT R. WYN'N, Maryland CLEO FIELDS, Louisiana MELVIN WATT, North Carolina MAURICE HINCHEY, New York CALVIN M. DOOLEY, California RON KLINK, Pennsylvania ERIC FINGERHUT, Ohio Subcommittee on Consumer Credit and Insurance JOSEPH P. KENTsÊDY II, Massachusetts, Chairman HENRY B. GONZALEZ, Texas ALFRED A. (AL) McCANDLESS, California LARRY LaROCCO, Idaho MICHAEL CASTLE, Delaware LUIS V. GUTIERREZ, Illinois PETER KING, New York BOBBY L. RUSH, Illinois DEBORAH PRYCE, Ohio LUCILLE ROYBAIÂLLARD, California JOHN LINDER, Georgia THOMAS M. BARRETT, Wisconsin JOE KNOLLENBERG, Michigan ELIZABETH FURSE, Oregon DOUG BEREUTER, Nebraska NYDIA M. VELAZQUEZ, New York CRAIG THOMAS, Wyoming ALBERT R. WYNN, Maryland RICK LAZIO. New York CLEO FIELDS, Louisiana ROD GRAMS, Minnesota MELVIN WATT, North Carolina SPENCER BACHUS, Alabama MAURICE HINCHEY, New York RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania FLOYD H. FLAKE, New York BERNARD SANDERS, Vermont MAXINE WATERS, California CAROLYN B. MALONEY, New York PETER DEUTSCH, Florida (II) CONTENTS Page Hearingheldon: November 1, 1993 1 Appendix: November 1993 43 1, WITNESSES Monday, November 1, 1993 Alvarez, Jose M. 'Tepe," President, Union America Insurance 28 Cisewski, Sharon, President, Space Coast CondominiumAssociation, Inc 6 Cosgrove, Hon. John F., Representative, Florida House ofRepresentatives 10 Fraynd, Paul, President and ChiefExecutive OfTicer, Aires Insurance Co 30 Machnic, John A., Director, Florida ConsumersAction Network 32 McWilliams, Tim, President, McWilliams Marketing, Inc 23 Schlitt, Louis L., President, Schlitt Insurance Services 7 Taylor, Patricia Bums, Executive Vice President, Bamett Mortgage Co 25 APPENDIX Prepared statements: Kennedy, Hon. Joseph P., II 44 Alvarez, Jose M. "Pepe" 232 Cisewski, Sharon 46 Cosgrove, Hon. John F 58 Fraynd, Paul 240 Machnic, JohnA 243 McWilliams, Tim 224 Schlitt, Louis L 48 Taylor, Patricia Burns 226 Additional Material Submitted for the Record Bacchus, Hon. Jim, miscellaneous material submitted fortherecord 247 Cosgrove, Hon. John F.: Florida Hurricane and Catastrophe Fund, Legislation and Legislative Analysis/Economic Impact Statement (HB 31 C) 66 Summary ofHurricane Catastrophe Fund Bill (HB 31 C) 78 TextofHB 31 C 83 Hurricane Insurance Solvency and Coverage Package, Legislation and LegislativeAnalysis/Economic Impact Statement (HB 33 C) 95 STeecxttioonf-HbyB-S3e3ctCion SummaryofProperty Insurance Bill (HB 33 C) 112165 Graphic Illustrations I-XI 193 "AfterThe Storm: AYear In Review", An Intergovernmental Perspective . 205 Schlitt, Louis L., resume 57 (III) THE AVAILABILITY OF INSURANCE IN AREAS AT RISK OF NATURAL DISASTERS MONDAY, NOVEMBER 1993 1, House of REPRESEhfTATivES, Subcommittee on Consumer Credit and Insurance, Committee on Banking, Finance and Urban Affairs, Washington, DC. The subcommittee met, pursuant to notice, at 9:30 a.m., at the Florida Institute ofTechnology, Melbourne, FL, the Hon. Joseph P. Kennedy [chairman ofthe subcommittee] presiding. Present: Chairman Kennedy and Representative Deutsch. Also present: Representative Bacchus of Florida. Mr. Weaver. Good morning. My name is Lynne Weaver and I'm the president ofthe Florida Institute ofTechnology. It's a pleasure for Florida Tech to host this congressional hearing upon such an important topic as pertaining to the property liability insurance brought about by recent national disasters. We extend a special welcome to the Members of the Congress and their staff and I commend Congressman Bacchus for his hard work in putting together this hearing and the work he's doing to support his congressional district. For that we appreciate that very much, Jim. I also want to welcome those who have been on our campus before and hope that you will return again for other events that we hold here at Florida Tech. Again, I welcome each of you and I hope that this hearing will be very productive for you. Chairman KENNEDY. The subcommittee will please come to order. First of all we thank Dr. Weaver for his opening and welcoming remarks. We appreciate very much Florida Tech's willingness to host this important meeting ofthe Consumer Credit and Insurance Subcommittee here in Florida today. I also particularly want to thank Jim Bacchus for asking the subcommittee to come here to central Florida and to investigate many of the problems that have occurred within the insurance industry. Peter Deutsch, a new Member of Congress, also deserves tremendous credit for the work that he's done in just a few short months in the Congress in raising the issue ofinsurance. I want to particularly thank Jim Bacchus for all ofthe fine work that he has done on the committee over the course of the last several years. I think Jim Bacchus is really one of the finest Members of Congress that I have had the pleasure to work with. He is so knowledgeable about every issue, from trade matters to the con- (1) cems of residents here in central Florida. He is also very knowledgeable about our subcommittee issues that deal with the banking industry, with housing loans and with homeowners insurance. Given the many problems the people across the State have expe- rienced due to hurricanes and other flooding problems, both Peter Deutsch and Jim Bacchus have really been tremendous advocates for working people and for the ordinary citizens of this State. It's a great pleasure to have both of them on the committee and we're very much looking forward to their insights here this morning. This is the second hearing that the subcommittee has held in the last 6 months on the topic ofinsurance availability in areas at risk of natural disasters. Today we want to examine what has changed and what still needs to be done to ensure that Floridians receive the insurance they need to build stable and secure lives for themselves and their families. I want to thank President Weaver and all ofthose at Florida In- stitute ofTechnology for hosting the subcommittee and we're grateful for their hospitality. I particularly want to thank all of the witnesses that are coming before us today for their testimony. We understand that the entire State of Florida and all of its legislature is going to be focusing on the issue ofinsurance this week. I've read about it in several ofthe newspapers already today and understand the grave concerns that people have with the huge increase in rates and also with the po- tential that exists for people to lose their policies. We also want to acknowledge that many of our witnesses have traveled far to be here. I understand that Mr. Cosgrove is on his way and I'm going to ask the panelists to jump right in as the second panel, but when Mr. Cosgrove does arrive I'm going to call a temporary halt to the second panel's testimony. I will then go back to the first panel, let Mr. Cosgrove testify, and then continue with the second panel. It's been said that the only people who can get decent insurance in this country are the people that don't need it. That has certainly been true in the area of health insurance. Many now fear that it is becoming true in the area of property and casualty insurance. 1992 was trie worst year of natural disasters in our Nation's his- tory. Hurricane Andrew, Hurricane Iniki, and the December storm that ravaged much of the east coast destroyed over $23 billion worth ofproperty. These events have triggered an insurance crisis of unprecedented size and scope. Millions of Americans in Florida and other States have faithfully paid their premiums for years and even decades, and yet they now find themselves feeling abandoned and gouged by the companies that they trusted for so long. They are being dropped by the good hands people and the good neighbors are act- ing more like the McCoys and the Hatfields. Here in Florida over a half a million residents face the imminent cancellation oftheir homeowners insurance when the current moratorium expires on November 15, and millions more face premium increases ofanywhere from 40 to 65 percent. This same pattern of massive dislocation and sticker shock is emerging throughout the rest of the country, from New York to California, from Kansas to Massachusetts, and it's having a dev- astating consequence on the ability ofcommunities to maintain economic stability. This is not simply a Florida problem. It's a national problem. Finding a solution to this crisis will not be easy and vsdll require all ofus, insurers as well as consumers, and State and local as well as Federal Governments to work together. Florida officials, particularly Governor Chiles and Commissioner Gallagher and Representative Cosgrove, have taken important steps by imposing the 6-month moratorium on cancellations and establishing a blue ribbon commission to help shape a permanent solution. The commission has recommended several steps that should be taken if we are going to protect homeowners. First and foremost, companies should not be allowed to drop customers like hot pota- toes. Any withdrawals from a State should be capped at 5 percent of policies enforced for any one year. This is the best way to avoid a panicky overreaction by insurers to a natural disaster. I'm pleased to see that this proposal will apparently be submitted by Chairman Cosgrove to the legislature's special session. Second, States should require companies to submit business plans that explain mass cancellations. These plans should be made public and subjected to public debate. At the very least people should have a right to know why they are losing their policies en masse. Third, insurance company claims about the need to cancel policies and raise rates should be tested against scientific and impar- tial standards. Too often State regulators are forced to rely on in- formation submitted by insurers themselves in deciding whether they ought to be allowed increased premiums. That's like letting an accused wrongdoer pick his own judge and jury. States need some objective standards to test industry claims. In this regard the Federal Government can be very helpful. Fed- eral risk assessment and management authorities, such as the Fed- eral Insurance Administration, the National Hurricane Center, and the National Oceanographic and Atmospheric Administration have developed sound computer models to predict the size and frequency of disasters. Several months ago I asked the National Association of Insurance Commissioners to consider, locking arms with the Fed- eral Government to give the States the tools they need. Thus far the NAIC has been unresponsive and I intend to keep pushing them. Last, many people, including several ofour witnesses today, have called on the Federal Government to establish a national disaster insurance and reinsurance program. This proposal merits careful consideration, which we all intend to give it. However, we must caution against the view that such a program is a cure-all for the country's insurance ills. If we're not careful it could become a poison pill for the taxpayer, a massive bailout of the insurance industry. As we already know from the savings and loan crisis we do not want to create a situation where the private sector gets all the profits and the taxpayer takes all the risk. If we create a program where the industry gets the gold while the taxpayer gets the shaft, then all we'll have done is simply replace one problem with another and solved nothing. That said, let me now turn to Congressman Bacchus for any opening statement that he may have. Congressman Bacchus. Mr. Bacchus. Thank you very much, Mr. Chairman, and thank you especially for your kind words. Let me assure you that the feeling is mutual. Those of my constituents who have taken time to come here today appreciate your presence as I do and I want them to know that Joe Kennedy is one of the brightest and hardest working Members we have in the House ofRepresentatives and he has gone far out ofhis way to be here with us today. Chairman Kennedy. The only trouble is, Jim, I've brought Bos- ton weather with me today. Mr. Bacchus. We wanted you to feel at home, Joe. And I'm also very happy to be here with my good friend and col- league, Peter Deutsch, from Fort Lauderdale in Broward County, who also represents Monroe County and part of Dade County, in one ofthose sinewy new districts down there. Peter Deutsch is new to the Congress this year but he is not in any way new to the issue of insurance reform. Congressman Deutsch has formerly served in the Florida Legislature and in the House ofRepresentatives in Tallahassee. He served as chairman of the Insurance Committee. He's been a leader already on Chairman Kennedy's subcommittee on insurance reform issues and we look to him increasingly in the House ofRepresentatives. To my knowledge this is the first time a field hearing of the Con- gress has ever been held in Melbourne, Florida. This is not a town meeting. This is a field hearing of the Congress. This is what you would see on C-SPAN except for the fact that it's happening here and not in Washington. What I've tried to do is bring a part of the Congress here to my constituents. And Joe Kennedy, through his kindness and through his interest and passion for this issue, has made that possible and for that we're grateful. The witnesses we'll have testifying today are not testifying solely for themselves. In many respects they are testifying on behalf of literally tens of thousands of other citizens who live here on the space coast or somewhere throughout Florida. This is an issue that is of concern to us on the space coast but also in south Florida, throughout Florida and throughout the Nation. And, we believe that our problems are urgent here and that urgent action is needed in Washington. I appreciate, again, very much the fact that Chairman Kennedy has taken the time and gone way out of his way to be here with us and next time you come, Joe, we'll try to have a little warmer weather. Chairman Kennedy. Terrific. Mr. Deutsch. Mr. Deutsch. Thank you, Mr. Chairman. And, again, I also want to thank you and your staff and also Congressman Bacchus. We in Florida and south Florida like to consider Congressman Kennedy a Member of our delegation; his family has spent time in south Florida and I know he spends a great deal of personal time in south Florida.