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House of Representatives,
Subcommittee on Housing and Community Opportunity
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 1:30 p.m., in the National Hurricane Center at Florida International University, Media Seminar Room, 11691 SW. 17th Street, Miami, FL, Hon. Rick Lazio, [chairman of the subcommittee], presiding.
    Present: Chairman Lazio; Representatives McCollum, Ros-Lehtinen and Diaz-Balart.
    Chairman LAZIO. This hearing will come to order. I want to welcome all of our attendees, our guests and the panels that will be speaking before the subcommittee.
    This is the second hearing on this important subject, and the first field hearing outside of Washington. We expect to have at least one or two additional hearings before we complete hearing testimony and move toward a mark-up.
    Today, we will examine national policy approaches to the lack of available homeowners' insurance in disaster-prone areas. Five years ago, one of the most destructive hurricanes in the history of our country left more than 125,000 homes destroyed or damaged in Florida alone. There is perhaps no more appropriate place or time to discuss a subject of such importance to all Americans than here and now.
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    Hurricane Andrew shocked the Nation and its impact, both psychological and financial, is still felt by many. I would like to add, despite the fact that we've been blessed by a relatively mild season thus far, that should not seduce us into a false sense of complacency. In fact, it is the appropriate time for us to begin to martial our forces.
    Since Hurricane Andrew, there have been many stories of homeowners unable to obtain insurance. In the worst cases, the high cost of homeowners' insurance effectively prohibits the purchase of insurance. This leaves families at risk of homelessness in the event of a catastrophic loss. The risk to unprotected homeowners will only increase as experts predict a prolonged siege of more frequent, more forceful storms. That was precisely the testimony that we heard at the last hearing in Washington. Potential losses from these storms are much greater because of the development and population growth over the last several decades.
    Americans see on the news the destruction hurricanes cause and some of the rebuilding efforts that are underway. But they often don't see the long-term instability of the affected communities. They may not understand the insecurity residents feel, because insurance for their homes, the center of their lives, becomes unavailable. Insurance can't prevent disasters, but it can help families and neighborhoods put their lives back together once disaster strikes.
    Hurricane Andrew's claims forced a number of insurers into bankruptcy. Others tried to protect themselves from future losses by insuring fewer homes in high-risk areas. Many insurance companies blame their actions on the high price or lack of availability of reinsurance, the insurance that they buy to help pay their losses in catastrophic circumstances.
    Where the private sector has been unable or unwilling to provide the amount of insurance needed, Florida and some other States have stepped in to help protect their residents. But even a State as large as Florida is limited in what financial guarantees it can make without endangering the State economy. At that point, there is a role that the Federal Government can and must play.
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     Washington cannot, and should not, solve the problem directly. Insurance is best regulated at the State level, where the unique needs of the community are better understood. State responses will be adequate to handle the typical storm or earthquake. However, no State program is able to handle the worst-case scenario, a disaster with losses of $30- to $50-billion.
    The Homeowners' Insurance Availability Act, which I introduced in the House of Representatives in January, is designed to encourage private insurers to provide coverage before a disaster. State insurance programs, like the Florida Catastrophic Fund, will be eligible for a Federal reinsurance backstop for residential losses that exceed State program capacity. By encouraging the availability and use of private sector insurance, we can decrease the cost to taxpayers when a disaster occurs. We can protect both consumers and taxpayers by bolstering the financial capacity of State disaster insurance programs.
    My friend and my colleague, the Vice Chairman of the House Banking Committee, Representative Bill McCollum, on my right, has introduced similar legislation designed to ensure that property and casualty insurance is more accessible and affordable for more Americans. I would add that he has cosponsored the legislation that I have introduced, and I have cosponsored his as a sign that we are both very anxious to move the process forward.
    We'll be working together to develop a fiscally responsible plan that recognizes that the next big disaster could strike any region of the country. Natural disasters have cost taxpayers almost $80 billion since 1983. Our solution will allow us to begin accumulating funds now that we know will be needed finally at some point in the future. It assures that instead of relying on the American taxpayer when disasters strike, most homeowners will be able to rebuild with the proceeds from their own insurance policies.
    I would like to, before I turn to my friend, Representative Bill McCollum, acknowledge the fact that we have had input by a number of other Members. You in the State of Florida, I'm happy to say, are blessed by a cast of Members of Congress that are second to none, in terms of their quality and dedication. They have been great advocates in bringing the subject to my attention and to help move the process along. You will be hearing from Congressman McCollum, but I also wanted to acknowledge the phenomenal work that Congressman Lincoln Diaz-Balart has been involved in—in many different areas, but most recently, of course, to alert us to potential catastrophic losses that would occur to coastal areas, such as southern Florida, if we do not have some further Federal assistance to provide some additional help to the State actions. I want to thank you and your staff for all the help that you've given us.
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    I want to turn now to the Vice Chairman of the full committee, Congressman McCollum.

    Mr. MCCOLLUM. Thank you very much, Mr. Chairman.
    I just want to thank you right up front for coming to Miami to hold this hearing. I think all of us in Florida, from all parts of the State, are grateful for the fact that we have this hearing today and an opportunity to present, and have our State officials present, their views on the subject which so many citizens of Florida are affected by.
    I know that a lot of us have been working a long time to try to find a way to move a bill through Congress that provides some reinsurance relief to insurers, who insure residential property against such storm hazards as hurricanes or earthquakes. And, up to this point, there's been no one who has been willing to champion that cause in a critical chairmanship position until you came along, and we are all grateful for that. I speak for Democrats and Republicans alike in our State.
    As you know, we have one of the largest insurers in our State today that's a State agency, the Joint Underwriting Insurance Fund that we have here in the State. That association has been having to pick up the ball, because of Hurricane Andrew that happened 5 years ago, and we've been really, really in tough straits.
    As you said, and I'm sure that Commissioner Nelson and Representative Bainter will testify to in a few minutes, we've been in a situation where we can now, as a State, pick up the smaller hurricane that runs alone, maybe even a larger one for a one-time event. But, in cycles that come across this State, the potential for having two hurricanes in one year, having the great big $50 billion one, is so real and so grave that we desperately need to have the kind of results that this legislation would give. That is, we need to have a national effort to find the resources to provide the underpinnings for reinsurance for insurance companies that otherwise would suffer huge losses they can't afford, and in that way bring down the insurance premiums that everybody has individually who is a homeowner in this State, and, ultimately, provide insurance to a lot of people in the private sector through private insurance that, right now, aren't getting it. Insurers just are only staying here because Mr. Nelson is keeping them here, forcing them to be here.
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    The bottom line is that all of us care a lot about this hearing today. It's terribly important. As you said, you and I have worked together on lots of bills, and this one we both cosponsored each other's product. I think we probably are going to work together in the next few weeks to find something that's a merger of the two, and maybe some new things somebody suggests today.
    I want to thank you again for coming here. I particularly want to join you in thanking Lincoln Diaz-Balart and Ileana Ros-Lehtinen, because both of them have done outstanding work in helping us with this, but I want to say, and I think he will be the first to say it, when Lincoln gets his chance in a moment, that every single member of the Florida Congressional Delegation has been involved and supportive of getting a bill dealing with reinsurance and a catastrophic fund at the national fund, like your bill and my bill does. And, I think that when the chips are down, and we get our bill out of committee, which I trust we will do here in a few weeks, every one of the 23 Members of the House from Florida are going to be out there lobbying their colleagues and helping to smooth this product along.
    But, thank you very much for coming here today. We appreciate it, and I look forward to the hearing.
    Chairman LAZIO. I want to thank the gentleman from Florida, and also acknowledge the fact that these bills were introduced in weeks following the opening of this Congress, so they have been contemplated during the time directly after the last elections. They were brought together by bringing various stakeholders and a bipartisan process together when there wasn't an emergency. I think that one of the wonderful things about this hearing today, although we are almost on the date of an anniversary of a very tough event for Florida and for the country, we also, again, are blessed by the fact that we have not been involved in any catastrophic loss in this area or along the Eastern Seaboard. That's not to say that couldn't happen next week, or the week after, or the week after that, and that's precisely why this hearing, I think, is necessary. I want to thank you for your drive to make this process happen.
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    I want to turn to Congressman Diaz-Balart, and also acknowledge the fact that Janik Fenton of your office was very, very helpful to us and I want to publicly thank her, and you, for your accommodation.

    Mr. DIAZ-BALART. Thank you, Mr. Chairman.
    I'd like to begin by welcoming you, Mr. McCollum, and the Subcommittee on Housing and Community Opportunity to the National Hurricane Center. I appreciate your selection of this extraordinarily important location in the community which I have the privilege of representing, to hold a field hearing on such an important topic.
    I also welcome my former colleague, Mr. Bainter, in the Florida Legislature, and, of course, Commissioner Nelson, both of whom do such a wonderful job.
    For many of us in South Florida, Mr. Chairman, it's really hard to believe that Hurricane Andrew hit just 5 years ago. For those of us who lived through it, it was a frightful experience, and for the rest of the Nation, it served, I think, as a wake-up call to both homeowners and the insurance industry.
    No one was prepared for a storm of such magnitude. Prior to Hurricane Hugo in 1989, there had been a lull in violent weather activity. Hugo, which cost insurers $4.2 billion, was the costliest hurricane to the insurance industry to date. Andrew, which cost roughly $15.5 billion in insured property damage, was a devastating blow to insurance companies in Florida, with three large insurers sustaining losses in excess of a billion dollars each and smaller insurance companies actually became insolvent.
    In the 103rd Congress, right after you and I were elected, Mr. Chairman, right after Hurricane Andrew, and after a series of other natural disasters that have occurred in a short time span, including Hugo and Iniki, and the Northridge, California earthquake, as well as Midwest floods, the House leadership at that time appointed a 16–Member Bipartisan Congressional Task Force on Disasters, and I was asked to serve on that Task Force by then-Minority Leader Bob Michel. The Task Force worked for the better part of 1994, meeting with numerous experts on disaster management and policy, taking a serious look at the role of the Federal Government, and after many meetings, briefings and revisions, we developed and agreed upon a set of recommendations aimed at improving the Federal role in natural disasters.
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    We recommended the following: encouraging individual home and property owners to assume greater responsibility in preparation for disasters, and to help make insurance and other resources more available to meet those responsibilities; supporting the work of voluntary organizations and fire and emergency response services; encouraging State and local governments to take active roles in disaster preparedness, mitigation, response and recovery, and strengthening their ability to fulfill those roles; improving the coordination and efficiency of Federal disaster programs; and, reducing the cost of disasters to the taxpayer and emphasizing the supplementary backstop role of the Federal Government.
    Even though that was 3 years ago, the same general principles can be said to apply today. In order to reduce the financial ramifications of natural disasters, mitigation prior to the disaster remains our best tool. Available, affordable homeowners' insurance is certainly the best way for a homeowner to protect him or herself against potential losses, as well as using mitigating techniques such as the elevation of a structure, or the use of storm shutters, for example, in storm-prone areas.
    Many people did not maintain sufficient homeowners' insurance prior to Andrew, but in order to be fully insured against a potential hurricane you would need to buy: one, a basic policy from a private insurance company, assuming you can find one to write you a policy; two, a wind damage policy through the State's Windstorm Association; and, three, a flood policy from the National Flood Insurance Program. It is, needless to say, an expensive and complicated process.
    Encouraging people to maintain adequate insurance is an education process, in which I think we can all participate. Progress has been made, undoubtedly, in Florida, to ensure that homeowners have access to affordable adequate insurance policies. I am also hopeful that today's hearing will be an opportunity to share ideas as to how the insurance situation in Florida can be improved, as we look at the issue on a national level.
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    Both you, Mr. Chairman, as well as Congressman McCollum, have introduced, I think, very important and commendable legislation regarding disasters and insurance, and I congratulate both of you for your leadership in this critical area. There is no doubt that we have here today the two leaders in Congress on this extremely important issue.
    I look forward to a good discussion and welcome the debate, and hope that we can work toward achieving the goal of a sound, national disaster policy that can prevent loss of life and personal injury, as well as reduce costs for the taxpayer and the homeowner. Thank you very much.
    Chairman LAZIO. Thank you very much.
    I want to acknowledge the fact that Congresswoman Ileana Ros-Lehtinen is very instrumental in helping move the process along as well. She's been providing a good deal of input to our office and to Congressman McCollum's office, and we expect that she will be here, and I would ask, based on that unanimous consent request, that she be permitted to make an opening statement when she appears. Without objection, so ordered.
    I also have an introductory statement from Senator Bob Graham. I want to thank him for his interest and his commitment to helping to solve this problem. As I mentioned before, and as Congressman McCollum mentioned before, this is certainly far from a partisan issue. Hurricanes, and damage, and devastation know no partisan boundaries, and we need both sides of the aisle to reach across to find the common ground in order to solve this very difficult problem. So, we're very thankful for his interest and for his support in trying to move toward a solution here, and I am happy to ask for unanimous consent request that the introductory statement of Senator Graham be admitted in the record, and without objection this is so ordered.
    Chairman LAZIO. I thought that for the purpose of framing this hearing we would be well served by having a well-known personality in the southern Florida area, perhaps in a wider geographic area than that, and I have asked one of the most recognized personalities in southern Florida, certainly since Hurricane Andrew, to describe his experiences from 5 years ago and to discuss how Florida has dealt with the aftermath.
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    Bryan Norcross is Director of Meteorology and News Anchor for WFOR–TV, Channel 4, and serves as an on-air hurricane expert to CBS News during hurricane season. Mr. Norcross spent more than 22 straight hours on the air during Hurricane Andrew and talked southern Florida through the worst of the storm. Mr. Norcross, I understand that you will be showing some video coverage of Hurricane Andrew and will conclude with a discussion of your first-hand experience of the events, and with that expectation I want to welcome you and thank you. It's a pleasure to have you before the subcommittee, and we'll turn to you and acknowledge you.

    Mr. NORCROSS. Thank you, Mr. Chairman, very much.
    Thank you, welcome to Miami. It's good to have you all here.
    It was quite a time, actually, what I'm going to show you here in just one moment is an excerpt from the hurricane special, an anniversary hurricane special, that we aired on Channel 4 here last Thursday and yesterday, and in going back and looking at the coverage from 5 years ago, honestly, many of us had forgotten how bad it was. It's funny how the mind works, but it was something to never, ever, ever repeat.
    So, let me begin with this just couple-minute video. I think we need to take these microphones down over here, because I need to bring the volume up here a little bit.
    [Whereupon, video shown.]
    Mr. NORCROSS. And, out of that experience we learned a lot, and many of us have taken a long time, a lot of time, to look closely at what happened, how we responded, how the Government responded, and who was affected and how they were affected from that.
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    As we look at what might happen the next time, which is really what we are talking about here, is what might happen the next time, we have to look at the oddity of Hurricane Andrew and what could not, probably would not, happen again.
    One is this ability of this community to respond to itself before the Government could respond from afar probably would not happen again. Because Hurricane Andrew was so small when it hit, and it hit in the least-populated part of metropolitan South Florida, did $30 billion worth of damage in the least populated part. But that left the most populated part with the ability to respond immediately. If the hurricane had hit in a largely populated area, or if the hurricane were larger, as most hurricanes are, South Florida, with 4 million people ready to go, would not be able to respond to one little area of 300,000 to 400,000 people. So, that would normally not happen in a hurricane scenario, as it did in Hurricane Andrew, and we thank God it was possible.
    Also, the rebuilding that has been absolutely miraculous, at best, here, I don't think would happen again in the same time. If Hurricane Andrew happened exactly the same way, and the community responded in the same way, the rebuilding wouldn't happen in the same way for a lot of reasons.
    One is that the insurance companies would not be so generous the next time. There was a thought on the part of many insurance companies that, ''We have to maintain our market share after Hurricane Andrew.'' Market share is not the concern of the insurance industry now in South Florida. There would not be a flood of insurance dollars, in fact, there would be a paucity of insurance dollars, I think.
    Many, many people do not have ''replacement value'' insurance anymore. In Hurricane Andrew, a lot of people, most people—I don't know what the percentage is, but they were able to replace their property with new property because they got the money for the new property. But the windstorm pool does not replace it. The windstorm pool gives you the current value of the property, in general.
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    So, without replacement value insurance you don't have these dollars flooding the market, flooding the economy, giving people work to recover by operating the stores and what-not.
    Deductibles are higher than ever before. So again, without the flood of money coming into the economy, we would not necessarily expect the kind of response that we saw for Hurricane Andrew economically. So, this miracle of Hurricane Andrew, of rebuilding in 5 years to the state where we are today, physically essentially rebuilt, and better than we were before the storm, I do not think would happen again.
    In addition, most people in South Florida, in spite of the sledge hammer that Hurricane Andrew was, still have not protected their property. There is no expectation—if Hurricane Andrew were to happen again anywhere except in South Dade, because those people got the message in large measure—but anywhere except in South Dade, that it would not all happen again. Because we still don't have hurricane shutters on buildings, we have not retrofitted most buildings. In addition, there's a sense, since we are paying so much for insurance, ''I have insurance and I'm going to get what I paid for.''
    There's also a sense that Hurricane Andrew, the insurance payoff was so spectacular, it was a benefit to let it go. I don't think people are well aware of their lack in coverage today, compared to what they had during Hurricane Andrew. So, I think the public is somewhat uninformed about what insurance coverage they have. They don't have as much, and it just would not—they are not responding because of the sense that insurance will take care of the problem.
    Now, the thing we learned about how all this damage happened, it happened because of a domino effect. Something had to fail to create this catastrophic failure. The people that stayed in their homes, many people said, ''the front door failed, and then the house failed.'' If we can figure out a way to keep—and we know how to do it—to keep the dominoes from starting to fall, the end result at the end of the hurricane is dramatically, orders of magnitude different in size.
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    I would urge you to consider that lesson from Hurricane Andrew. If you stop—the best insurance money you can pay, as Representative Diaz-Balart suggested, as Senator Graham suggests, is up-front money to stop the dominoes from falling when the storm comes. Some dominoes will always fall, but if you stop most of them, that's the best insurance money you pay. Because you pay that money on the next storm, and the storm after that, and the storm after that. Every dollar you spend on mitigation you spend on all storms, as long as that mitigation system lasts. Every dollar you spend on insurance you spend on the next storm, and that dollar is gone, recovered. So, I urge you to think hard about that.
    Another lesson we learned in Hurricane Andrew, when the private houses came apart, the private houses came apart and sprayed all over the neighborhood, the expectation was the Federal Government would come and clean up the private houses. That's a huge Federal cost that will happen every time houses are protected and they spray all over public property. There's a wonderful emergency manager from the panhandle, from Okaloosa County, who said ''those trees in the front yard were private trees before the hurricane, but they were public trees after the hurricane.'' And that folks insisted that the Government come clean them up.
    It's a Government problem. We saw in a large way here that the tax base was lost after the hurricane, but it recovered so quickly because we had this flood of money coming in. Without the flood of money, the tax base stays lost, that becomes a Federal or a Government problem in general.
    It also becomes a banking problem if the banks hold the mortgage, because now we've got $200,000.00 mortgages on $125,000.00 properties if the banks hold the mortgage. But, the banks in general don't hold the mortgages, they give them to the Federal Government, the Federal Government holds the mortgage. So, there is another hidden cost of not protecting property and allowing the tax base to fail. We saw that in a big way in Hurricane Andrew in Dade County, but, again, it responded because we had so much money come in here.
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    So, there are interested parties in the hurricane equation that we found in Hurricane Andrew. It was the Government, it was the insurance industry, there's the banking industry and there's the private homeowner. The axiom, I think, that we learned from Hurricane Andrew is that without incentives to behave as if a hurricane is going to happen this year, without the incentives in the overall insurance program, none of the parties will do the right thing.
    What we don't have here in the system, taking the Government, the insurance industry, the banking industry and the homeowners into account, is sufficient incentive in the system to stop the dominoes from starting to fall.
    I just urge you in your consideration here, and I certainly support your efforts wholeheartedly, but I urge you to be sure that your efforts don't become a disincentive for what needs to be done to stop the dominoes, because that's where you get the order of magnitude improvement in the problem.
    Thank you.
    Chairman LAZIO. Thank you very much. Thank you for that wonderful introductory framework that you set forth for the subcommittee.
    I want to turn to Congressman McCollum.
    Mr. MCCOLLUM. I just wanted to comment, Bryan, and not only thank you for that, but I think you represented today, which is something the subcommittee needed and wanted, hundreds and hundreds of people in the South Florida community who could have and would have liked to have come here to testify. You've been able to put on the record and explain to the Chairman, and to all of us, the feel for what this was like, but, more importantly, the detailed probability that there will be an entirely different scenario down the road in how and why.
    So, while we don't have a lot of questions of the panel for you, what you did we are really grateful for, because I think it's very important this be on the record.
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    Thank you.
    Chairman LAZIO. I want to now turn to Congressman Ros-Lehtinen, who has done more for me in my home area, in terms of publicity, than anyone else I can think of.
    Ms. ROS-LEHTINEN. We won't mention why.
    Chairman LAZIO. But, I want to thank you and welcome you, and, again, thank you publicly for all the encouragement and support to move this process along of protecting ourselves in a time of disaster. If you'd like to make any opening remarks, I'm happy for you to do that.

    Ms. ROS-LEHTINEN. Welcome to South Florida, it's a pleasure to have you here with us, Rick.
    Bill is practically a part-time resident now of South Florida, so I don't need to welcome him anymore. He knows this area pretty well, but for Lincoln and I, it's a pleasure to have both of you here, and Stan and Secretary Nelson, it's always a pleasure to see you both, and we look forward to hearing the comments.
    I won't be able to stay for the whole duration, but certainly this insurance problem, affordable insurance, making it more accessible, is a worrisome topic for us. Very timely that you should have this hearing with us today, obviously, because of the anniversary that we just experienced, but also, as Bryan pointed out, there's still a lot of problems that have not been worked out, and certainly affordable, accessible insurance is a real problem for all of us homeowners in South Florida. If we were to have another Andrew, heaven knows how many insurance companies would be written off, and with that so many policies. The State can only do so much, and the Federal Government also can only do so much. We are limited with FEMA funds and special appropriations, and I'm glad that both of you have similar plans to address this problem, because it needs to be resolved. We can't deal with an emergency-by-emergency basis, there's never going to be enough money for that, and it's very tough for us to keep going to our colleagues and say, ''This is a special case, please appropriate $25 billion for us.'' And then there's another earthquake in southern California, and wildfires in Colorado, and volcanoes. It's just very difficult to keep doing it this way.
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    We look forward to helping both of you with your legislation. We are both cosponsors of each of those bills, so we just hope to get more congressional support and build up the momentum to finally pass them.
    We get more cosponsors every time a disaster hits another area, but there's easier ways to get cosponsors.
    Thank you.
    Chairman LAZIO. Mr. Diaz-Balart.
    Mr. DIAZ-BALART. Mr. Chairman, I want to thank you for inviting Bryan Norcross. It's really historic. We in this community all came together, first watching, and then listening to Bryan that night. We started watching him on television, and then we lost power. The radio station continued to broadcast, and if you had—like we had, and I think most folks had—battery radios, we continued to listen to him. It was amazing the way in which he was awake, like he said, for over 20 hours reporting.
    And, I have a personal recollection I'll never forget. I was in West Kendall, west of here and south of here. We had gone there because we wanted to get away, as much as possible, from the coastal area, thinking that that would be safer. And, I remember first watching Bryan and then listening to him. The lights were out, and he said at one point—and I could tell things were getting pretty bad, much worse than we expected. He said, ''Those folks in West Kendall, it's time to put a mattress over your heads.'' I don't know if he remembers, but he said that. Well, that really drove it home, how serious the situation got.
    I want to thank you for bringing him here, because Bryan Norcross is someone who really understands the issue, and has some personal experience and has followed through by gaining more expertise.
    Thank you.
    Chairman LAZIO. Thank you.
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    I should also mention that a couple of months ago, I had the opportunity to go out to North Dakota, to Grand Forks, to visit the devastation of that community from the flooding. The sense that many people have that FEMA comes in and makes people whole is just a false sense, it is not so. People lose everything, everything, and we are looking for ways in which we can help people put their lives back together when disaster hits.
    Now, if I can move to the first panel, I have the great pleasure of being able to make this introduction, and, Congressman McCollum, if you would like to add anything else, I'm happy to turn to you. Our first witness is Commissioner Bill Nelson, former colleague and Member of Congress. He holds the elected position of Florida State Treasurer, the Insurance Commissioner and Fire Marshall.
    As I mentioned, Commissioner Nelson is a former Member of the U.S. House of Representatives and served on this subcommittee, the Committee on Banking and Financial Services.
    Commissioner Nelson has devoted untiring efforts to rebuild the homeowners' insurance market following the devastation left by Hurricane Andrew, and I am very impressed by what I hear about your work. I want to welcome you.
    I will turn first to you, and then I will hear from State Representative Bainter, who I will introduce in a second. I also want to remark that we have your remarks, as written, and they will be inserted in the record, without objection, that's so ordered. If you could try and limit your comments to about 5 minutes that would help us, so we can get to the question and answer period.

    Mr. NELSON. Mr. Chairman, I'm here to support this legislation, and I will go anywhere, anytime. I will go into the House gym and lobby for you. I will go on to the floor and lobby for you, because the big one happened to hit us. It could have hit your constituency of Long Island. It could have hit New Orleans or Houston, but it hit the traditional high-risk area of a land known as paradise, which is a peninsula of land sticking down into the middle of hurricane highway. And, as a result, we have had to suffer for it.
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    We had never had a hurricane that cost over a billion dollars of insured dollars, and then we had a wake-up call with Hugo in South Carolina in 1989, $4.4 billion in insurance losses, and then along comes Andrew, whammo, $16-billion-plus in insurance losses. Just to put that in the right perspective, it's the largest, most costly natural disaster in the history of the United States in insurance losses.
    Second came a few months later, the Northridge earthquake. Third in all-time insurance cost is Hurricane Hugo. And then, interestingly, the fourth in the history of this country is Hurricane Opal 2 years ago. That ravaged five States, but our windstorm losses in the Florida Panhandle were much less than that Category 3-type storm, because so much of the damage came from the wall of water—the storm surge. Therefore, we were compensated by the Federal Flood Insurance Program.
    Just to corroborate what Bryan has told you. As I flew over that coast in a helicopter, I'd look down and literally see two structures side-by-side, one built 1960's vintage and it was history, it was nothing but rubble. The one right next to it on the coast, built according to the new code and enforced by the local jurisdictions, was relatively unscathed.
    And, as Bryan told you, one of the lessons of Andrew was not only the force of the wind, but the lesson of the shoddiness of construction. I remember, I had just retired from the Congress, and I went down in an Army helicopter, and over ''ground zero'' I saw two things standing. One was the bank, and the other were four old Florida ''cracker'' houses, about 60 or 70 years old, that had been built to withstand the wind. And, I saw my friend, Millard Fuller months later, the Chairman of Habitat for Humanity. I just thanked him and thanked him, because the Habitat homes withstood it. And, I said, ''Millard, why is that?'' He said, ''Inexperience.'' I said, ''What do you mean 'inexperience'?'' He said, ''Well, we build with volunteers, and the volunteers, instead of putting in one or two nails, they put in ten nails.''
    Mr. Chairman, we need your legislation. No one State, and no one insurance company, can withstand the big one. What scared the bejabbers out of the entire industry, not just in Florida, but around the world—and the re-insurance markets of the world went haywire after Andrew. What scared them so much was, had Andrew turned one degree to the north, and drawn a bead on downtown Ft. Lauderdale, instead of downtown Homestead, it would have been a $50 billion insurance loss storm. That would have taken down every major insurance company in the country that was doing business in that part, and would have nearly wiped out the then-$17-billion surplus of State Farm, and would have caused then-Allstate, a subsidiary of mother Sears and Roebuck, to have been completly bailed out by their mother company.
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    Thus, in convincing your colleagues to vote for your legislation, the very financial roots of this country would be shaken if another Andrew came and hit a high-density area. If it hits North Miami, Ft. Lauderdale, and then goes up the coast and then into the center and hits my old colleague, Bill McCollum's constituency, you are talking about big-time losses.
    What I would urge you to consider is that Congressmen in Iowa and Nebraska who think that hurricanes are Florida's problem, and that earthquakes are California's problem, there's a big fault line running down through Cape Gerardo and into Memphis, Tennessee. If the hurricane were to hit your constituency, Mr. Chairman, it could be the $50- to $60-billion insurance loss range. So, nobody is spared.
    Today, we saw on those screens right over there, how—mercifully El Nino is sending eastward the high altitude winds that are shearing off the tops of these tropical waves as they come westward off the Sahara, off of Africa. But, you never know when those currents are going to change, allowing the counterclockwise motion to occur and start for the New World. And, thus, we need your kind of legislation.
    In Florida we haven't been able to rely on the Federal Government, even though when you talk to that Congressman from Iowa and Nebraska, what you've got to convince that Congressman is, under present law, his constituents are paying for the disaster.
    Take, for example, the Northridge earthquake. In California, they do not have mandatory earthquake coverage that homeowners have to take, like we have in Florida—mandatory windstorm coverage that is a part of the homeowners' policy. And, thus, when so much devastation occurred in California, who bailed them out? FEMA, a lot of Federal funds.
    When I went to Congress, one of the first natural disasters in 1979 was Mt. St. Helen's volcano blew. What Member of Congress, totally unaffected by such a natural disaster, is not going to vote for an emergency supplemental appropriations bill to try to help out people? The fact is, the taxpayers in Iowa and Nebraska, and all the other non-affected earthquake and hurricane areas, are footing the bill now. The brilliant approach that the two of you have taken, with whatever you configure your final legislation, I can tell you I support it. The brilliant approach that you have taken is to let a State that's affected—as we have been, because we had to. We are making it up as we go, nobody has ever gone through this before—we've tried to do our own reinsurance concepts. We've tried to bring in the Government as an insurer of last resort, so Florida's economy could still keep perking. But we're running out of options.
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    The insurance companies, in the meantime, not knowing if that 1-in-250-year storm is going to hit, are trying to charge through the moon, because they don't know if they are going to get hit, and they don't want to bet the entire company on that big blow, and so we are running out of options.
    The only option left is you can only spread the cost of catastrophe so much over the people of one State, and the reserves of one insurance company can only provide for so much. But when you get into the ranges of mega-mega-catastrophe it is the equivalent of national disaster—of which we are not even asking in your bill for the Federal Government to bail them out. To the contrary, you want to get FEMA to stop paying everybody a low interest loan, or giving them a grant. What you want to do is create a national reinsurance program, or the concept of auctioning packages, as in the McCollum bill, which spreads the risk over 260 million people in the country instead of spreading the risk just over the 14 million people in Florida, or over the 5 million people in South Florida. That's the concept, I support it, and I'm ready to go to work for you.
    Chairman LAZIO. Thank you very much.
    Let me introduce our next witness, State Representative Stan Bainter. He's a member of the Florida State House of Representatives, and serves on the Financial Services Committee. He is the Immediate Past President of the National Conference of Insurance Legislators, an organization devoted to the rights of States to regulate and legislate insurance matters.
    Representative Bainter, welcome. Thank you for your good work. I look forward to hearing your testimony.
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    Mr. BAINTER. Thank you very much for allowing me to——
    Mr. MCCOLLUM. Before you do that, Mr. Chairman, I've got to interrupt. I've got to say something. I know that we all know Bill Nelson, because he was our colleague. I could have said that I slept under his mother's piano, which is true. But Stan Bainter has been my State Legislator for awhile, and I was his Congressman for awhile, so I would be remiss in not introducing him in that way with you, to let you know that he is from my area of the State, and a good friend and constituent. So, we are just delighted he's here.
    Chairman LAZIO. Thank you.
    Mr. MCCOLLUM. Thank you.
    Chairman LAZIO. Thank you for helping to get him here, as well.
    Mr. MCCOLLUM. Please, go ahead, Stan.
    Mr. BAINTER. Thank you very much for giving me the opportunity to be here.
    My background was 30 years in the insurance business before being elected 11 years ago to the House of Representatives, of which I spent the last 11 on the insurance committee. So, 41 years, 7 of those years living in Homestead, Florida, in the insurance business between 1960 and 1967, so I'm aware of what hurricanes are. I've been through several back then, certainly nothing like Andrew.
    In this past year, I served as President of the National Conference of Insurance Legislators, and in that position, being a member of that for 9 years, we were able to take Florida's problems and Florida's ideas of catastrophic fund to NCOIL. In fact, you may remember that we visited the hill many times with model bills and resolutions, and we've waited 4 1/2 years now for this opportunity. So, you know, we are really, really encouraged by it.
    Let me say that Hurricane Andrew changed everything. It taught us that we grossly underestimated what hurricanes could cost, and the market has not been blind to this reality. Science tells us that the recent 30-year lull in hurricane activity is over, and, believe me, the market has not been blind to this reality either. But, the adjustments have not been smooth. The market has failed to provide the coverage to everyone who needs it, even those in the center of the State who are normally unaffected. It's failed to provide the coverage that consumers perceive to be affordable. The problem is, there is simply not enough money capacity to go around.
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    So, what we have in Florida is a problem with insurance capacity. You solve capacity, you solve the availability, you solve the affordability.
    We've been trying at a State level to assure that there will be enough money to pay for the next big storm, and then the one after that. But with all that we've done, our problems continue. The problem is not local, nor is it regional, it's a national problem, because Florida's demands on the insurance resources of the industry will eventually make homeowners' insurance harder to get everywhere.
    Our availability-affordability crisis has repeated itself in other areas already, that are vulnerable to the natural disasters. But in the end, it's a problem everywhere. As long as capacity is limited, the effects of the shortage cannot be confined to one market. And, of course, although Florida and California are the States most likely to suffer these multi-billion dollar disasters, costly natural disasters could occur anywhere.
    If we're unable to pay the cost of a natural disaster through insurance or other means, there will be a huge cost to the economy, not only of the State, but of the Nation, in addition to the devastating impact on the lives of our residents.
    We need to be sure that people, not just in Florida, but throughout the country, can continue to buy and sell homes. That's why NCOIL supports involvement in this area. The resources of the Federal Government can be used to increase this capacity and encourage creative State-based solutions like Florida's Catastrophic Fund and California's Earthquake Authority. NCOIL has adopted a resolution calling for Federal legislation that would support—which we have forwarded to you—loss prevention through mitigation and through enforcement of land use and building codes; State-based efforts to expand markets and capacity; availability of reinsurance coverage; and encourage an appropriate reserving by making catastrophic reserves exempt from Federal taxation.
    All of these individually, or in combination, will help alleviate the market problems in States like Florida and help prevent those market problems from affecting the less disaster-prone States.
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    In summary, we must have enough timely money to rebuild after a disaster. Any plan that adds capacity and guarantees the insurance industry from bankruptcy is the goal. We want a plan that's self-supportive, not a bail-out. The question is, do we pay before or after the event? So, the companies currently really are not looking so much at profit as they are at just plain going broke. That's their problem.
    Speaking on behalf of many State legislators that belong to NCOIL, and from both parties, I'd like to offer our support to you, and as you move this legislation through Congress we can help you. We can help you build a coalition from coastal and other disaster-prone States, and we can help you communicate the fact that these are national problems. We appreciate your efforts, and we would welcome you to ask us to assist you in this effort.
    Thank you.
    Chairman LAZIO. Thank you very much. I'm going to withhold my questioning and turn first to Congressman McCollum to ask a few questions.
    Mr. MCCOLLUM. Well, thank you very much, Mr. Chairman, and, again, I want to thank both Commissioner Nelson and Representative Bainter for being here today. I know all of us appreciate your taking the time to come some distance from your respective homes and offices to be here about this subject.
    I've got just a couple of general questions that go to some of the detail work we are having to do now in preparing to bring a product that, Rick, I believe, is going to bring to the committee first and then the floor of the House. The variations that Commissioner Nelson, you alluded to, between the Lazio and McCollum proposals center on basically two things. One is the fact that there is an auction in my proposal of the insurance contracts as opposed to his, and the other is that there is an opportunity for insurers separately to be able to buy in some States the reinsurance, in addition to the catastrophic funds like Florida's is buying the reinsurance.
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    And, I think all of us want to come to some resolution on some combination that's right here. I have understood from your staff, through my staff, that the auction mechanism would work all right, but there's particular concern in Florida that if we were to go—and I don't know that we are going to do that—but if we were to go to an auction method on these contracts, that there would be an opportunity for State funds, such as Florida has, to come in and participate at the beginning level, and not get bid up, not have the price bid up on it, at some floor level, which the bill I have offered does not yet provide. Is this generally your understanding? Am I correct in that?
    Mr. NELSON. That is.
    Mr. MCCOLLUM. And, Representative Stan Bainter, do you know of any particular problem with either of these two bills? I know you've looked at both of them. We've got different approaches, and I think, again, Congressman Lazio and I are going to get together in the next few weeks and see if we can't present something that we both agree on, something out of both of these. Is there anything in particular, other than the auction question that Mr. Nelson's office has raised?
    Mr. BAINTER. No, and we think that there are good points in both bills, and we feel that you probably will merge the two and all. We would reserve the right that we want to make the suggestion to you on exactly what it is we want to do, or feel that you should do with it. We're going to be working closely with it.
    Now that we finally feel that we're making progress, and it's for real, we'll be notified.
    Mr. MCCOLLUM. Well, I appreciate that.
    Let me ask one last question of you, Bill, and that has to do with your announcement last week of a merger of these various associations and funds in Florida. I don't know if my good friend, Rick Lazio, has been briefed on that, but in a nutshell could you tell us what Florida is about to do, and most importantly, how, if any way, does this change our Catastrophic Fund as far as trigger mechanisms and how we might expect it to respond to a national bill of either version where you'd seek to have reinsurance for the fund or for the companies under the fund?
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    Mr. NELSON. The proposal that I'm making to the Legislature will raise the level at which the present Catastrophic Fund would trigger. The Florida Catastrophic Fund triggers today at about $3.2 billion of industry losses. I am proposing, and just using as an example, this is just a starting point, the residential losses of Hurricane Andrew, which were $10 billion, as a trigger. The industry would be able to plan what their looses are, because no more than $10 billion would the industry be required, and, therefore, they wouldn't have to charge up to the moon for their rates, because they know they'd be charging for, in this example, a 1-in-60-year storm, instead of a 1-in-250-year storm, which they are planning to charge now. And above that level, whatever it is, $10 billion, $15 billion, $7.5 billion, whatever the level of the cap would be, that there would be created a mega-hurricane facility, a Florida hurricane facility, a follow-on to the Florida Hurricane Catastrophic Fund. And, it would kick in as a non-profit, non-taxable corporation, would have actuarily-sound rates, but all the administrative costs and taxes normally attendant to a premium dollar paid through a private insurance company, would be stripped out of it.
    Therefore, our actuaries are estimating that if you had a $10 billion cap for the industry, that you could squeeze out 5 or 10 percent, or in other words, a rate rollback. But more importantly, as Stan said, more importantly, since insurance companies would know what they had to plan for, then they do not have the fear of going out of business into insolvency. And, therefore, the market would come back, there would be a new fresh supply of homeowners' insurance, a happy condition that we are starting to experience all over Florida. But still in South Florida, Congressman Diaz-Balart, we still well know that there's a shortage of homeowners' policies.
    Now to answer your question with regard to your approach. If the Legislature enacts this new approach, either one of your approaches would work, because your Federal offering of reinsurance would come down and fit like a hand in the glove of the Florida hurricane facility, be it either through your reinsurance concept, or be it through either your auction concept, either one.
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    Mr. MCCOLLUM. Well, one last follow-up then. Does it make any difference in your judgment where the Federal trigger is? Now, in my version—I've forgotten Rick's—it's a $10 billion point, which is now what yours is. You know, we've got to look at this nationally, so the figure we choose, or however the mechanism works in the Federal legislation, won't necessarily be dictated by Florida.
    But, from your perspective, I think you've just said it doesn't make any difference. But the $10 billion figure, you know, even if we raised it some, it sounds like it would be satisfactory to Florida, now that you are coming up to the $10 billion mark here in this State, right?
    Mr. NELSON. Remember, we are talking about residential losses.
    Mr. MCCOLLUM. No, I understand.
    Mr. NELSON. And, $10 billion is equated to a total loss of about $25 billion in commercial and automobile and all other losses. So, if you set yours at residential losses, anything within that range, we and other States can adapt to. So, it's a question for you as to where, in your interpretation, is the mega-catastrophe?
    Mr. MCCOLLUM. Right.
    Mr. NELSON. We think that it's anything above Andrew. Andrew was $10 billion residential losses, $25 billion total losses. I've got to correct that—$10 billion in residential losses, and $16 billion in total insurance losses, or $25- to $30-billion in overall losses, which included Government infrastructure and so forth.
    Mr. MCCOLLUM. Well, I appreciate it. I don't want to dominate the questions here, but I appreciate it.
    Before I turn back to my Chairman, though, I've just go to ask, Stan, I assume you haven't really had a chance to digest this proposal Commissioner Nelson is offering. But if you adopted it, I assume his representation probably would be similar to your thinking, it wouldn't make much difference to what we are doing.
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    Mr. BAINTER. Not at all. As you know, the devil is in the details, and we haven't seen—it hasn't been presented to us yet. So, it would have to dovetail with whatever you all do.
    Mr. MCCOLLUM. Thank you.
    Thank you very much, Mr. Chairman.
    Chairman LAZIO. Yes, thank you very much, Congressman.
    Let me just see if I can follow up on this question, because it's an important question in terms of where the cap might be.
    In the legislation that I have introduced, which Congressman McCollum has cosponsored, we would set different caps for different States, with a maximum $10 billion, or in excess of the capacity of what that State could provide.
    In your legislation, if it were adopted by the Legislature and signed by the Governor, what level would it be appropriate for us to begin the Federal backstop?
    Mr. NELSON. If you chose a $10 billion residential trigger point, then I could well see that the Legislature, in its deliberations in Florida, would set the overall industry loss at some figure less than that, thereby, giving the homeowner even greater savings. Because then the Federal Cat Fund would trigger in at $10 billion residential losses, where you are getting cheaper reinsurance, because you are spreading it over a much greater pool of people.
    Chairman LAZIO. But, you believe that the State capacity could be $10 billion?
    Mr. NELSON. For residential today?
    Chairman LAZIO. For residential loss, right.
    Mr. NELSON. We could stand another Andrew, but, mind you, what happens if we have an Andrew in August and another Andrew in September? You know, Lord forbid that we ever have another Andrew, but Lord especially forbid that we would have a double hit all in one year.
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    Chairman LAZIO. Let me ask Representative Bainter about the mitigation proposal, and we'd love to take a look at it if you can send it to us. Could you just describe to us generally what's in the proposal?
    Mr. BAINTER. Well, the mitigation is kind of the proactive approach. If we'd have been working on mitigation for the last 30 years in helping the homeowners, or even local governments in their construction and furnishing money to do it, which our Cat Fund allows, I believe it's $20 million we have in the Cat Fund each year that can be used for litigation purposes. Had all of this been in there, then your loss reductions are down.
    So, the use of it ahead of it reduces your losses on the other end, and that's the important part of it, is being proactive. Mitigation is just simply being proactive, and we should be doing that.
    Chairman LAZIO. And, your bill would not necessarily guarantee a particular result in terms of mitigation, it just funds activities I presume the Commissioner would think would be appropriate in terms of mitigation?
    Mr. BAINTER. Through our Department of Community Affairs we did our mitigation this year, finally got around to doing it, but the money is there in our Catastrophic Fund. And, certainly, we would want the Federal Government to look at this same concept with their Catastrophic Fund.
    Chairman LAZIO. Yes, I guess that's my next question then. My question for both of you. If we had a mitigation dimension in the final product, what ought it look like? Understanding that I think it certainly would leave maximum discretion to the States, in trying to meet those mitigation goals. How would you go about framing that?
    Mr. BAINTER. Well, again, we addressed that issue this year. That was one of the stipulations from the IRS on the tax exemption, that we would have mitigation within our Catastrophic Fund, and they gave us the latitude until we got it built up to some point to be able to do that.
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    And, we brought in Community Affairs, which your subcommittee handles housing and everything anyway, so it would be within the same committee. We sat down and we broke it down in percentages, about how much we could actually help a homeowners' percentage of it, and how much of it would be done by local Governments, to work with everybody, but it would be handled through our Department of Community Affairs.
    Mr. NELSON. May I add, Mr. Chairman, two very significant parts of mitigation that we've taken on? Stan has mentioned one, in order to get the non-taxability of the Catastophe Fund, the IRS required that there be a $10 million at least, per year set-aside for mitigation.
    That was not entirely appropriated by the Legislature this year, although there is some question of definitions there, and part of that appropriation was vetoed by the Governor because it didn't meet it.
    But, what we've started with $3 million of that $10 million, is a low-interest loan pool, where banks can lend money at lower interest so that the consumer will have a personal interest in making their home more hurricane proof. Then they can get a certificate, take it to the insurance company, and the insurance company then lowers the premium. That's one important part of mitigation.
    The other part we did 2 years ago. I asked the Legislature to pass a new law which makes local communities pay attention to enforcing their building code, after what we learned with Andrew, and gets the homeowner in the loop with a financial incentive.
    We now rate all the jurisdictions in Florida according to their effectiveness in enforcing their building code, just like we rate the fire departments, whether it's a good fire department or a bad fire department.
    And, if the community is enforcing their building code they get a higher rating. That higher rating translates into a lower premium for the homeowner.
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    Chairman LAZIO. Final question. If we fail to enact legislation that is signed by the President to provide some compliment to the State efforts, what kind of effect might we expect on housing prices, liquidity, assessments, public investment if we have another natural disaster in excess of what the Catastophic Fund could handle? If you could paint the picture for us.
    Mr. NELSON. Well, if we have another natural disaster with no ability to spread that mega-disaster over the country, you are going to see Florida, as Bryan said, take an economic nosedive. But, even if we don't have another disaster, come the end of 1998, the moratorium law that I got them to enact, that says that insurance companies can't pack up their bags and walk out of Florida, that moratorium law ceases to exist.
    We have extended it three times already, and I doubt the constitutionality that we can extend it a fourth time. So, the clock is ticking for Florida to get a national Catastrophic Fund in place, and to get our reform plan in place, so that we don't have a mass exodus of insurance companies from South Florida at the end of 1998.
    Mr. MCCOLLUM. Rick, could I ask a follow-up question?
    Chairman LAZIO. Please.
    Mr. MCCOLLUM. Mr. Chairman, you raised mitigation, and I do have a mitigation component, as you know, in the version I have. It's a 5 percent set-aside of the premiums that are paid in, in the reinsurance program. In my case, it's auction, as Commissioner Nelson mentioned. And, it does allow maximum flexibility to the States.
    But, in that—one of the questions that's been raised, since we were here at Florida International University, about whether there needs to be some component of that, or whether the State would voluntarily use some of these monies to go toward research, and whether or not that type of research is needed. You know, we have a research center here at this university on hurricanes. Is that something that we should allow or permit at the Federal level in whatever mitigation provisions we might adopt?
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    Mr. BAINTER. We had a considerable amount of research language in our mitigation, yes. I think it's absolutely necessary because things change. And, we've had a lot of cooperation, as you said, from the different universities who want to do this very thing, and, yes, the answer is yes, research is part of it.
    Mr. MCCOLLUM. And, you would agree, I assume, Commissioner?
    Mr. NELSON. Yes.
    Mr. MCCOLLUM. Let me ask one last thing here, it has to do with reinsurance itself. We've been talking about it here today, because we all know what we are talking about, I suppose, but I'd like to put on the record explicitly, and I'll ask you this first, Representative Bainter. Is there a problem in terms of the overall picture that you and Commissioner Nelson described today in Florida, in catastrophic situations, at least in part, if not in large measure, due to problems with the private reinsurance market? And, if there is, to what extent do you see that? Above all, Congressman Lazio and I don't want to negatively impact the existing private reinsurance market, but we just are under the impression it's not adequate and I wondered if you could tell us your perspective on that?
    Mr. BAINTER. Well, you are going to hear both sides of this. There was no reinsurance available at all right after Andrew, and then all of a sudden, then it was available again. But at what price, at what cost is this reinsurance?
    Their capacity after Andrew was almost zero, but they were able to recoup better than anybody else. And, yes, there is reinsurance available, but the horror stories I've heard about it—it's just something that we need to approach reinsurance from the tax exempt area first.
    Many of the smaller companies are going to have to have that line or reinsurance level in between what they can handle and what the Catastrophic Fund can handle after that anyway.
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    Mr. MCCOLLUM. If there's a big enough hit they are not going to be able to handle it in any event, right?
    Mr. BAINTER. No, that's right.
    Mr. MCCOLLUM. And, Commissioner Nelson, do you want to comment on that, because I think it ought to be clarified. I'm not trying to get you into battle over where you draw those lines, but just in general terms.
    Mr. NELSON. If there's a big hit, and your proposal can take care of the big hit as a national Catastrophic Fund, that leaves plenty of opportunity for the reinsurance industry to offer that product, and the more that you have, the more competition, the more that their rates are lowering, as is the case.
    As Stan said, in the aftermath of Andrew, it was hard to find at any price. Now, however, competition has come back into the marketplace, and the prices of reinsurance are coming down.
    You will not run them out of business if you are insuring for the mega-storm, because companies can't buy enough reinsurance for the mega-storm. That's the appropriate role for you to step in and provide that national catastrophic reinsurance.
    Mr. MCCOLLUM. And, that's why you are looking at the $10-billion-and-up residential base line. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman LAZIO. Thank you very much, we appreciate your participation.
    I'd like to ask the second panel, please, to come forward. While the second panel is settling in, I want to acknowledge that Doctor Demmon, who is the Chief of Staff to Congresswoman Carey Meek, has joined us, and will be reporting back to the Congresswoman, and we appreciate her being here.
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    I want to welcome the second panel of distinguished scholars, and look forward to your testimony. If I can provide the introduction and Congressman McCollum, who I'm sure has got personal familiarity, can chip in.
    I'll introduce the first of the witnesses, Dr. Jack Nicholson, who works for the Florida State Board of Administration as the Chief Operating Officer for the Florida Hurricane Catastrophe Fund. Prior to coming to the State Board, Dr. Nicholson worked for the Florida Department of Insurance, holding a number of positions over a period of 8 years.
    Dr. Nicholson has a Ph.D. in Risk Management and Insurance, and we are certainly delighted to have his experience and expertise for our discussion today. Dr. Nicholson, welcome.

    Dr. NICHOLSON. Thank you.
    Mr. Chairman, Mr. McCollum, it's an honor and a privilege to be asked to address the subcommittee. My name is Jack Nicholson, and I am the Chief Operating Officer for the Florida Hurricane Catastrophe Fund, and I have played a major role in the development and implementation of the fund since its inception.
    Following Hurricane Andrew, eleven insurers became insolvent. The damage, as reported earlier today, was $16 billion, $10 billion of which represented residential losses. This damage exceeded the projections of insurers for their probable maximum loss. As a consequence, they began to reduce their exposure in Florida. Many Florida citizens were then unable to find coverage.
    Worldwide reinsurance capacity was severely impacted. Aggregate reinsurance limits were only available for $200 million or less per company, and the cost many times exceeded 25- to 30-percent of the coverage. The terms of reinsurance contracts were also tightened, resulting in less coverage. The private reinsurance market was basically found to be inadequate to meet the needs of Florida insurers and their policyholders.
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    A State program was needed to create the additional capacity for the State and to maintain a viable and orderly private sector market for property insurance. The Florida Hurricane Catastrophe Fund was created by the Florida Legislature in a special session during November, 1993. The Cat Fund is a tax-exempt trust fund administered by the State Board of Administration, which is composed of the Governor, the Comptroller, and the Treasurer, who also is the Insurance Commissioner. The fund has a nine member advisory council as well.
    As far as coverage provided by the Cat Fund, the Cat Fund provides coverage for insurers writing residential structures and contents in Florida. This includes commercial-residential, which would be condominium associations and apartment buildings. Insurers have an option of coverage. They can select 45 percent coverage from the fund, 75 percent, or 90 percent, and this is paid above a certain retention level that each insurer would absorb.
    Unlike private reinsurance, the Cat Fund does not load its rates for commissions, profits or risk loads. The fund operates very efficiently with a small staff of six full-time employees and two part-time workers. The fund also contracts for various other services.
    Total operating expenses for the fund in 1997 will be about 1.14 percent of annual premiums, this amounts to $5 million roughly. The Cat Fund's losses are financed by two revenue sources. One is reimbursement premiums, which are paid by the participating insurers in the fund that write covered policies. There are approximately 284 of these companies. The premium for 1997 will be approximately $455 million for reimbursement premiums.
    The other source of financing is from emergency assessments. This amounts to $600 million, which is revenue that is raised from assessing all insurers operating in the State, excluding Worker's Comp writers and accident and health writers, up to 4 percent of their premiums.
    Combining emergency assessments with reimbursement premiums, the fund has approximately $1 billion to service debt, and this allows it to provide security for the issuance of bonds. The fund currently has $1.6 billion, and by the close of this year, we should have close to $2 billion balance for the fund.
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    The estimated bonding capacity is $5.5 billion. Combining this with the year-end cash, we should have close to $7.5 billion at year end. This bonding estimate assumes the issuance of taxable debt. On the other hand, the Cat Fund is requesting a private letter ruling from the IRS, and if we are able to get that private letter ruling for the ability to issue tax-exempt debt, this could increase our capacity by another $1.5 billion, which in total would raise the capacity for 1997 to about $9 billion for the Cat Fund.
    The question of how large an event could the Cat Fund stand? We could handle another hurricane, the loss the size of Hurricane Andrew or greater. We estimate that of the ten worst storms that have occurred over the last 100 years, the Cat Fund has the capacity to handle all but one of these storms.
    The Cat Fund responds after an approximate industry retention, if you will, it's basically done on a company basis, but if you aggregate it, it's about $3 billion for the industry. So, therefore, in terms of overall losses, the Cat Fund could withstand a $12 billion residential loss, if we get tax-exempt status for the debt, that would be about $13.5 billion. This equates to a storm covering all types of losses in Florida of about $20- to $22-billion.
    The Cat Fund has been deemed an unqualified success in Florida. The Academic Task Force, which met in 1995 to review the insurance situation in Florida, determined that the Cat Fund was a positive factor supporting the private insurance market.
    The Cat Fund has strong support from the insurance industry, and is designed to coordinate with private reinsurance and provide stability for an insurer's reinsurance costs from year to year.
    It should be noted that the Cat Fund does not create an obligation for the State, and does not involve funding from general revenue.
    A Federal program, however, is needed. It is needed to complement and enhance the Cat Fund. There is a top layer of protection that needs to sit on top of the Cat Fund to provide against that shock loss which could be $50- to $60-billion. Hurricane modeling indicates that there is a possibility of a $58 billion storm to Florida.
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    If Hurricane Andrew would have made landfall 30 miles to the north, we heard numbers earlier today that this could have resulted in losses of $50 billion or more during Andrew.
    Florida has taken positive and constructive steps in dealing with its catastrophic problem, but there is still a need for additional capacity. The Cat Fund cannot provide this capacity. A Federal program can provide the additional capacity and give Florida the extra backstop that is needed.
    It's essential that there be a Federal program that provides for some type of pre-event funding for catastrophic events. States are limited in what they can do. The Federal program can help minimize the impact on the Federal taxpayer in the long run by reducing the need for Federal disaster assistance. Pre-event funding allows those directly affected by the risk of catastrophe to pay more of the cost. H.R. 219 offers a high layer of coverage and is intended to coordinate with State reinsurance programs. It accomplishes this objective without relying on Federal taxpayer subsidies, and I believe it best addresses the needs of Florida in a direct fashion.
    A Federal program could have a major impact on the Florida marketplace, and create extra capacity as well as, perhaps, eliminate the need for the State's JUA. It would also attract insurers to the State, in that they could make a profit commensurate with the level of risk that they would be taking. This is not the case today, and a Federal program is needed to help stabilize the marketplace. Otherwise, if we have a major event, it's likely that the total insurance marketplace, as well as the real estate market and other aspects of the Florida economy, could be put in total disarray following a major event. There also exists the potential for Florida citizens to be burdened with large assessments far into the future. I commend you for your work on H.R. 219, and it is an important and vital bill, and I urge you to continue to work for passage.
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    Thank you.
    Chairman LAZIO. Thank you, Doctor.
    The next witness is Frank Nutter, and I want to welcome you, Frank. He's the President of the Reinsurance Association of America since 1991. Mr. Nutter is a former Chairman of the National Disaster Coalition, and is a member of the Insurance and Reinsurance Study Commission created by the Florida State Legislature.
    I would note that Frank has been particularly helpful to me and the subcommittee staff in our discussions of homeowners' insurance availability in disaster-prone areas, and it's certainly a pleasure to see you again.
    I wonder if you could also, during your remarks, introduce your colleague, who, I understand, will not be making a formal presentation, but will be available to answer questions.

    Mr. NUTTER. That's correct. Thank you very much, Mr. Chairman, and I, too, would commend both of you for your leadership on this issue.
    It might be presumed, since I represent the domestic reinsurance industry, that my role here is to oppose the involvement of government, but, in fact, our association, for probably 20 years, has been calling for some Federal role in providing a safety net under the industry in the event of a mega-catastrophe. So, I'm here really to speak in favor of the conceptual framework that you are both working with.
    John Chaplin is accompanying me here today. He is a managing director with Guy Carpenter & Company, headquartered in New York. Guy Carpenter is the leading reinsurance broker in the United States. We do not represent John's company, so my remarks really are limited to the Association's views, but John is here because of the interest that the committee has shown in matters associated with capacity and pricing in the reinsurance area.
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    As has been commented by nearly everyone, the focus of reinsurance is really to provide capacity to insurance companies, and is particularly important in this area of natural catastrophes.
    I would point out, I think it's important for the committee to understand that the reinsurance industry is, in fact, the tail on the dog, if you will. The bulk of the natural catastrophe capacity and coverage is retained by the primary insurance industry. Some large insurance companies don't buy much reinsurance, in fact, the largest insurance company buys no reinsurance because of its own resources. But, the reinsurance industry does play an important role in providing capacity for natural catastrophe exposures.
    There are certain principles that we have operated under related to both State catastrophe programs by Government and the Federal programs. I would highlight these, because I think they are important principles.
    The first is that, in our view, natural catastrophes are insurable risk in the private sector. They indeed can be insured, and have been for years, in the private sector.
    The second is that the role of Government, as we see it, is a role protecting the claims-paying ability of insurance companies, to provide some sort of safety net under the industry, so that we don't have major insolvencies and we don't have the problem of companies being unable to pay claims to policyholders. We think it's also important that Government play the role of encouraging, perhaps funding, or providing incentives for hazard mitigation. You've heard several people speak to the value of mitigation as a long-term strategy in dealing with this. And, last, we believe that this issue is important to both the personal lines insurance, the homeowners' insurers, as well as the commercial lines insurers. As you approach this you really ought to think of that in both contexts.
    Our approach is that the private sector should play a very prominent role in providing insurance coverage to the consumer. But there are natural catastrophes that could occur—probably have not yet occurred in this country—but could occur, that exceed the resources of the insurance and the reinsurance industry to provide capacity.
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    An attachment to my formal statement is a list of private sector initiatives since Hurricane Andrew. It is notable that the capital and surplus, or basically the retained earnings of the insurance industry since 1992, have increased 57 percent. It's a remarkable development of the capability, if you will, of the industry to fund its insurance overages.
    Catastrophe modeling, that Jack mentioned, is another new development in the industry that's helped the industry assess its catastrophe exposure and help in the pricing of catastrophe exposures.
    A number of insurance companies have restructured their operations, so that they are more capable of dealing with the catastrophe exposure that they have. They have established new companies, or they've set up new companies to operate in States. In fact, the New York Insurance Department has been particularly good, the Florida Insurance Department has been particularly good in encouraging the formation of new insurers in the State and find ways to depopulate the Joint Underwriting Association, so that you do have the private sector coming back into the insurance market.
    The point here is that, clearly, people who live in high catastrophe-prone areas are struggling. There are clearly problems in these insurance markets. I would not want to suggest otherwise. But, there are also signs that the private market is seeking to deal with this by recapitalizing, by restructuring and by finding new capital resources, including resources from the capital markets that are well outside the insurance industry that didn't really exist prior to Hurricane Andrew.
    The comments that I would like to make about the legislative proposals, if I could, focus on things that you both have addressed in questions to earlier panelists.
    We believe that a basic solution here really involves making certain that people who have property at risk are paying true risk-based premiums, and that insurance companies working with regulators offer these people coverage options that helps deal with the availability and the affordability problem. Perhaps, higher deductibles on coverages offered to people may help. Perhaps, caps on certain kinds of coverages that are offered, such as the California Earthquake Authority provides, would help moderate the cost of insurance. So, risk-based premiums are an important part of this, coupled with coverage options for consumers.
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    The second is mitigation programs. Certainly, the State—Commissioner Nelson was commenting about some of the things that are being done here that are very positive, but the Federal Government should look at ways to encourage or help fund mitigation as a good long-term strategy.
    Third would be some sort of safety net under the industry and the State funds that does help secure the claims-paying ability of these funds and the industry.
    Here are a couple of comments about the Federal proposals. There's an important distinction between, Mr. Lazio, the bill that you principally introduced and Mr. McCollum's bill that I think the committee should focus on as a critical point. It is that H.R. 219 really does focus just on State government insurance programs. Mr. McCollum's bill, of course, would offer the contracts available to these State programs as well as to the private sector.
    We think that a preferred approach would be to offer Federal coverage that, indeed, provides both private and public support for insurance operations, the State funds and the private sector. If you just provide support for Government funds, what you will see is the enhancement of current Government funds, the addition of more government funds, and, frankly, there will be some incentive for some insurance companies to shift their exposure into Government funds, and to work with legislatures to try and do that.
    We think that's the wrong approach, because we don't think it encourages and enhances the private sector. We think that the Congress and the consumers should rely mostly on the private sector.
    The second issue is the ''trigger'' that you've asked about and you discussed particularly with Commissioner Nelson. We think that the triggers in both of your proposals underestimate the capacity of the private sector to provide coverage. We are optimistic that we can resolve this in discussions with you and your staff, but that, indeed, the claims-paying ability of the State funds can be manipulated, frankly, by the States to shift more risk to the Federal Government, when, in fact, we ought to be shifting as much risk on the private sector as possible.
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    And H.R. 219 does raise the issue of the solvency risk of these State funds, if you are providing direct reinsurance to State funds, or, for that matter, direct reinsurance to insurance companies. You are taking on some solvency risk. You are going to have to deal with the pricing of reinsurance to the funds and the companies, and you are going to have to deal with the claims-paying ability of these funds or companies.
    You are raising a regulatory oversight issue in the H.R. 219 approach that we think doesn't exist in the H.R. 230 approach, because it's an option of Federal contracts and a relatively passive infrastructure that's required to support that.
    In conclusion, I would like to say that we do applaud your efforts in this area. We think the time has come to recognize that a public and private partnership is clearly the way to go, and that the private sector can do much to address these problems with the kind of safety net that is conceptually contained in both of your proposals.
    Thank you very much.
    Chairman LAZIO. Thank you very much.
    Our final witness is Alex Soto. I welcome you today. Mr. Soto is President of Pennekamp and Soto Insurance Agency here in Miami, and is a former Chairman of the Florida Association of Insurance Agents. Mr. Soto is also Past President of the Independent Insurance Agents of Dade County, Florida, and Chairman of the Catastrophe Working Group for the Independent Insurance Agents of America.
    Mr. Soto, I welcome you here today to testify before the subcommittee, and, again, thank you for lending your expertise to this subcommittee.

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    Mr. SOTO. Thank you, Mr. Chairman. I appreciate very much being invited and included in this hearing.
    As you mentioned, I am a local insurance agent. I am President and CEO of an agency called Pennekamp & Soto here in Miami. It was established in 1959, and I have been an independent agent for well over 25 years.
    You mentioned also—and I'm rather proud of—that I had the opportunity to serve 3 years ago as Chairman of the Florida Association of Insurance Agents, which is a trade organization representing independent agents throughout the entire State. I also had the opportunity to have served in that 1993 Study Commission on the Crisis of Property Insurance and Reinsurance, and finally, I mention—and there's a special reason why I am mentioning these three things—I have served as Vice Chairman of the Florida Joint Underwriting Association, the residual market mechanism that we have had to establish in Florida.
    I mention this because, as I make my remarks today, I want to underscore to you that these problems that I am having are not problems which are individual to my agency, but really they are problems that are germane to agents throughout South Florida, and to a great extent throughout the whole peninsula.
    My work in the Study Commission in 1993 drove home to me two very important points. Number one is the tremendous magnitude of the problem. It's already been mentioned that Hurricane Andrew cost $15.5 billion of insured losses. Had it been but 20 miles north it would have been in the $40- to $60-billion magnitude, and the worst-case scenario would be one hitting north of Miami and going on to hit Tampa, which would then create about a $95-billion storm.
    And, when any of these things occur, the clock is set back to zero. As we burn through whatever resources we have here in Florida, we still have the absolute possibility of having another event immediately thereafter. And, it is that second event that is so frightening to so many of us.
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    I had mentioned my service as Vice Chairman of the JUA, because I want to also underscore that I am keenly aware of the fragile conditions of that organization. It is something that we have put in place, it is a very necessary tool, but I've got to tell you that the JUA is taking in money and paying actual claims, and it has no significant source of reserves and will immediately have to rely on assessments to insurance companies, the Catastrophe Fund and emergency assessments, in order to pay the claims resulting from a hurricane of any magnitude that strikes in Florida.
    My agency is more fortunate than most, in that we are fairly diversified and have the very good fortune to represent a great deal of major insurance companies—insurance companies whose names you recognize, they are all solid, standard insurance companies like Chubb & Son, CNA, The Maryland Insurance Company, Zurich and a number of others. We represent more companies than most other independent agents in my position.
    I want to tell you that I am in the process of a merger with two other very fine local organizations. It's going to occur September 1, and my new partners, in turn, represent the likes of the Hartford Insurance Company, General Accident, Travelers/Aetna, USF&G, all very fine standard—many of them over 100 year old, companies.
    And, not one of those insurance companies that I have just mentioned, not one of them, is currently actively writing homeowners' insurance in the areas that I serve, and to a great extent they are not writing new homeowners' policies throughout the State of Florida. They may be in certain circumstances, in certain pockets, but by and large, they are holding the line and they are not writing new business.
    Worse yet is the fact that a number of these companies, to the full extent that the law allows them in Florida—and it is the moratorium that Insurance Commissioner Nelson mentioned—they are shedding themselves of business today, 5 years after the storm. They are still non-renewing business of their clients because they are scared of what can happen to them and their financial position.
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    So, they are not writing new business and they are getting rid of business. Fully one-third of all my insurers are now in either the JUA, or some other ''pup'' company that has been created since the storm.
    The reasons that my companies tell me that they are not writing and they are getting rid of business is; one, I've mentioned, the exposure, the direct exposure of what it will mean to them if they get another Andrew or something bigger than Andrew. Number two, they are very scared of the assessments that will follow the loss. They will be assessed by the Joint Underwriting Association, by the Florida Windstorm Underwriters Association, and, ultimately, the Catastrophe Fund which takes a bit up front and, perhaps, a bite in the end. And, very importantly, the last reason is that they cannot get the right, the proper, the affordable, reinsurance at the levels that they need, at the prices that they need, in order to be a factor here in Florida. And, this is occurring 5 years after Andrew.
    I had a company 3 months ago shut us down for commercial lines, and they said, ''Because of your reinsurance treaty, we cannot afford to write any more new business in the State of Florida, we will take another look at it some time in the Spring after we renegotiate our reinsurance treaties.''
    We are going to engage in conversation as to the amount of reinsurance that is out there, the prices have come down, but the reality is, where the rubber meets the road—which is my client trying to buy his insurance from a solid, responsible company—he cannot do it. He cannot do it today, and every renewal that comes up, we have a moment or two, or period of time where we are hoping that that insured will not get a non-renewal notice from his company.
    So, I urge you to pass your legislation. I commend both of you for what you have put together. I suggest to you to be careful not to set the bar too high, and the process that we are going to have to walk through is—Commissioner Nelson just brought out his proposal on Thursday—it's going to have to be studied by the industry. We've got to be careful. If you listen to Dr. Nicholson, he spoke about the ''trigger mechanisms'' being in place now at the $3 billion level. Commissioner Nelson also, that we are now going to move to a $10 billion level, that we can afford to do that. We've got to be careful that the private industry, along with the reinsurers, can play in that arena.
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    And, if we set that bar too high, then even though you will provide a backstop, it will not be sufficient to reopen the marketplace. So, I urge you to pass your bills.
    The last thing I want to tell you is that, when I leave this hearing today, I've got to go back to my office, and I've got to call two insureds of mine, and they do not know that this is going to happen to them, but their company is about to non-renew their insurance come Christmastime when it comes up, and I've got to do that very distasteful task. It is for no other reason than they live here in South Florida, that they live on this peninsula, and their insurance will be canceled, and I will have that distasteful chore to tell them that, and then start scrambling around to try to find some other vehicle, some other mechanism, to take care of them. Thank you very much.
    Chairman LAZIO. Thank you very much.
    I turn first to Congressman McCollum.
    Mr. MCCOLLUM. Well, thank you very much, Mr. Chairman.
    I think, Mr. Soto, you've opened our eyes to the realities that you face every day on the front line. We heard the discussion earlier you alluded to at the end of your testimony, where Commissioner Nelson described his new proposal and the $10-billion trigger, and then I asked him about how that might affect us, and we got into a little discussion.
    I gather from what you are saying that you believe we should stick with, roughly, the $10-billion trigger we have in my bill, again, Mr. Lazio's is structured slightly differently. But you don't believe that what Commissioner Nelson is proposing, or the healthier nature of this situation that Doctor Nicholson is describing, justifies, or would encourage us to lift that amount of the trigger at the Federal level higher? I think that's what you are saying pretty explicitly, aren't you?
    Mr. SOTO. Yes. And I would suppose that in my druthers, I'd rather have the bar at that level. Then 2 years down the road, if we are in the very happy circumstance that the Catastrophe Fund in Florida is even more robust, that we have not had an event—because what you've got to take into consideration is that here we are 5 years later, we are having these market conditions, and in reality we have not had another significant event. Certainly, none at all in South Florida. We have had an event in the panhandle, but not of the magnitude of Andrew, in terms of: A—intensity; B—the resources of the marketplace being tested, because it's mostly flood; and C—the population that you would find in an area such as the Miami/Ft. Lauderdale corridor.
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    Mr. MCCOLLUM. And, what you are saying is that if we don't enact a bill in Washington that is somewhat like what we are discussing here today soon, then matters will actually get worse, and that, indeed, what Commissioner Nelson suggested in 1998 if the moratorium disappears, virtually, all insurance, in your judgment, is going to disappear from South Florida for homeowners, is that what you see?
    Mr. SOTO. I think pretty much you are going to see a continuous fleeing of the companies, because the private marketplace simply cannot respond to that level of magnitude.
    Mr. MCCOLLUM. Doctor Nicholson, what is the private reinsurance market in Florida? Is there enough private reinsurance? Obviously, you've indicated that things are better now than they were. We've heard Mr. Nutter's discussion, we all know what Mr. Soto is saying, but the crux of what we are doing is reinsurance, and just how do you see it? You deal with it every day, and studying it at least in the Catastrophic Fund, Catastrophe Fund, I've got to get the title right, where do we come down on that, where do you come down on that?
    Mr. NICHOLSON. I think the reinsurance industry is very healthy. I find that there are still needs for reinsurance, and we have companies that we talk to with regard to coordinating benefits with the Cat Fund, and in some cases, particularly, the smaller companies may have a problem getting reinsurance at certain levels, that underneath the Cat Fund, on the side of it, or above it, but I don't hear a lot of backlash from the reinsurance industry in Florida, in terms of the Cat Fund taking away business.
    In fact, the Cat Fund was designed to coordinate with reinsurance. There are a number of companies that have chosen 45 percent coverage as opposed to 90 percent coverage, although the companies that do about 75 percent of the business in Florida have chosen 90 percent coverage, there are some 200 or so companies that have chosen 45 percent coverage and they coordinate their programs nicely with reinsurance.
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    Mr. MCCOLLUM. Well, Mr. Nutter is concerned, as he's expressed explicitly to us, that he feels we might wind up with the proposal Commissioner Nelson is doing, and maybe if we leave our trigger mechanism at $10 billion or thereabouts at the Federal level, doing something we don't need to do, forcing the private reinsurance market out of some of the business it otherwise would have.
    On the other hand, Mr. Soto has just said he really fears that, not only is this an issue of the private reinsurance market, but the private insurance market itself if we raise this ceiling further and cause the price, if you will, to be higher for reinsurance potentially under that, that the insurance companies that Mr. Nelson talked about possibly leaving in 1998 will be more likely to leave.
    How do you see that? Is there a—there's no magic in this figure that I can sense, but yet, there is a concern that we may be going to the extreme either way. We could upset the balance if we set the trigger mechanism too high, we can hurt the private reinsurance market if we set it too low. How do we determine that?
    Mr. NICHOLSON. Well, I think the important thing is to coordinate with the reinsurance market. I feel like the Cat Fund now, I know with regard to the $3-billion trigger, we were asked at one time a couple years ago by the Academic Task Force what effect it would have to move that trigger higher or lower.
    Let me give you an example of how we responded to that question. If we moved the trigger from $3 billion to $10 billion, we drop our premiums by about one-third. We are collecting $455 million, we would go down to $172 million. If we went up to $20 billion, we'd drop it even further to $20 million. That will not be sufficient to build a fund.
    So, the question is one of mathematics, in terms of building a fund, and it's also a question of where do you want to play, basically. You need to play above the reinsurers to give them room to operate, at the same time give insurance companies an incentive to adjust claims properly. But, in the upper levels that we are talking about with these programs, the reinsurance industry cannot participate, it does not have the capital to participate, it's only the Federal Government that has the ability to absorb that shock loss on a financing basis. So, it's a matter of, if you look at premium, you are looking at like expected value of that loss. As you get higher, the premium gets smaller. However, the fact that when the loss has to be paid, if it has to be paid tomorrow, and you don't have enough money, that is what we are talking about in terms of the catastrophic program. It's financing that shock loss.
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    Mr. MCCOLLUM. Well, let me clarify this, and I want to let the Chairman have his questions, he's been generous to let me go first here, but if you look at this from the standpoint of the trigger mechanism, again, we are talking about, at least in the bill I've introduced, $10 billion is the point at which the trigger is there, $10 billion of losses for residential losses, that's what it's based on, and that's the same number that Commissioner Nelson is suggesting maybe in the new legislation for you.
    Would you recommend we keep the $10-billion trigger, if that's the trigger area, or do you think we can safely, from a Florida perspective, raise that trigger up to $12-, $15-, $20-billion? How do you come down on that?
    Mr. NICHOLSON. I don't have the details of Commissioner Nelson's program. I don't know exactly how that program will work, whether it will be a funded program with premiums, or whether it will be based on assessments to policyholders, or some combination of that. I understand it's supposed to be some way of funding, but I'm not sure, like we said, those premiums would—if the Cat Fund premiums would be reduced by one-third, what effect that would have I'm not sure.
    I can say, just with regard to the Cat Fund the way it is today, that your program fits perfectly on top of the Florida Hurricane Catastrophe Fund today, and comes in at the right level.
    Mr. MCCOLLUM. All right, that's what I wanted to know.
    Mr. Nutter.
    Mr. NUTTER. Could I offer a comment please? Let me go back and reemphasize something that I said earlier. It is that, yes, we are focused on reinsurance and the concepts that you are promoting are reinsurance concepts, but the vast majority of the catastrophe insurance coverage is retained by the primary industry. So, even though we are talking about the reinsurance capacity, keep in mind that the insurance companies that are providing coverage to consumers, the State Farms, the Allstates, the USAAs, retain a huge amount for their own risk.
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    State Farm, for instance, buys no reinsurance whatsoever. The point being that the retention of the primary industry has to be taken into consideration in looking at its capability to provide coverage, as well as what the reinsurance industry provides on top.
    Rule of thumb, and—perhaps, Mr. Chaplin, who is, in fact, in the marketplace every day could comment on your question—rule of thumb is that if you took 5 percent of the industry's total capital and surplus as what it really retains in the way of catastrophe losses—the industry's capital and surplus currently is about $260 billion, so 5 percent is $13 billion—and you added the reinsurance capacity on top of that, that would give you, in residential and commercial exposures, a sense of what the catastrophe capacity of the industry insurance and reinsurance would be.
    But, if you don't mind, Mr. Chaplin, could just comment quickly.
    Chairman LAZIO. I have a follow-up question on the subject.
    Mr. CHAPLIN. Another rule of thumb that might be helpful, and some studies have been done on this in the past, if you were to look at an industry loss of about $15 billion, reinsurers portion of that is probably 25 percent of that loss, if you go up the scale to something on the order of $20- to $30-billion, at least theoretically reinsurers percentage of that ought to be higher, and something on the order of 30 percent. So, the insurance company is bearing 70 percent of the exposure and reinsurers 30 percent.
    Just in terms of the market for reinsurance for Florida exposures, it appears to us at this point in time that there is catastrophe reinsurance available, and by that I mean, specifically, catastrophe excess of loss reinsurance, on the order of about $4 billion.
    I have seen estimates of reinsurance availability on the order of $8- to $10-billion for the Southeast, the preponderance of which would be Florida, and if you consider that reinsurance is provided through other types of contracts, proportional contracts like quota shares and surplus reinsurances, facultative reinsurance, I probably wouldn't argue with that amount of available capacity.
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    Some of that capacity right now is sitting on the sidelines, some reinsurers believe that rates for the reinsurance contract should actually be higher. They are willing to provide the coverage at a higher rate on line than is being paid by some of the insurance companies.
    I would also say that over time the reinsurance market, where it sees an opportunity, will seek out that opportunity and provide the coverage if it believes that they can make a profit there, and over time historically the rates for the reinsurance have come down if reinsurers experience has been good.
    Mr. MCCOLLUM. Mr. Chairman, I yield back.
    Chairman LAZIO. Thank you very much.
    I am just going to have one or two questions, and then submit written questions, if you don't mind. If you could get back to the subcommittee, I would appreciate it.
    I think one of the fundamental questions here, when we are talking about reinsurance, is if there is excess capacity or additional capacity in the reinsurance industry, why have we seen this level of volatility in States like California and Florida, even when you've seen sort of additional, as I understand it, higher prices for insurance, and I'm wondering if I could begin with Doctor Nicholson and ask Mr. Nutter to also respond to that question.
    Mr. NICHOLSON. I think the volatility that we're looking at in Florida has to do with the growth of the JUA, rates increasing and that sort of thing. And, I think that that's a function of insurers perceiving they do not have enough dollars to compensate them for the risks that they are effectively taking.
    Chairman LAZIO. So, it's a pricing issue which all gets passed on, ultimately, to the consumer in terms of higher premiums?
    Mr. NICHOLSON. Right. It's a pricing issue from the standpoint of the catastrophic element, and that's why the consumer pays for the cost of insurance.
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    Mr. NUTTER. If I could comment.
    Chairman LAZIO. Yes, please.
    Mr. NUTTER. It's really a pricing issue at that level. I think a lot of the companies believe in the high-risk areas that risk-based premiums are not necessarily in place.
    I'm not an actuary, but companies have been filing rate requests, rate increases, in Florida and other States to try and bring premiums in line with what they perceive to be the exposure.
    In our view, it's not the pricing at the reinsurance level, it's the underlying question of whether or not there's adequate revenue coming into the system to fund the exposure. Whether it's the JUA, or the insurance company that buys no reinsurance, or the company that's heavily reinsured.
    Chairman LAZIO. But, you see higher prices in States that are disaster-prone passed through to consumers, and even with that, if I understand you correctly, you are saying the compensation to reinsurers is not great enough to absorb the full capacity, or excess capacity that's out there. So, there does come a point, a breaking point in terms of price, and I know you are talking about other buffers that may be out there to absorb some of that, but in the end there is a breaking point, obviously, for consumers where it becomes so unaffordable that is tantamount to having liquidity problems.
    Mr. NUTTER. No question about it, and I guess what I'm saying as well is that, as I understand the reinsurance market, is that there is underutilized reinsurance capacity in some markets, because insurance companies are retaining the risk, that they are choosing not to buy reinsurance in Florida, that that's a choice they are making, a business decision that they are making.
    Chairman LAZIO. Which is a pricing issue, I guess, as well.
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    Mr. Soto.
    Mr. SOTO. The comment that I want to make is that, right now insurance companies, at the level that they play at, it is not just the level that they retain, but within that they are buying reinsurance. When we talk about a trigger mechanism of $3 billion to activate the Catastrophe Fund, we are talking about insurance companies that look at their exposure and what they are going to bear, what they are going to cede first to the private marketplace, the Catastrophe Fund in Florida, and their determination is that the combination of what exists today, in spite of 5 years of no storms, is still not sufficiently safe for them to expand.
    Let me make a couple of comments about the current market conditions. Number one, Insurance Commissioner Nelson has done a yeoman's job in trying to depopulate the Joint Underwriting Association, but the reality is that as we take them out the back door they are still coming in the front door.
    He made a comment the other day that we have taken out 600,000 policies. Well, we still have 600,000 policies in there, and we never had 1.2 million policies. We had 800,000 or thereabouts. They are coming in as they are going out the back door, and that's a condition of the market.
    Furthermore, if you look carefully at the risks, the people that are taking policies out—and a number of insurance companies have made an attempt to do that—are taking; one, the lesser-risk policies; number two, they are taking the policies where the windstorm can be excluded; and number three, there's a profit motive because the JUA is paying up to a $100.00 bounty for every policy that is taken out. And, we still have a rather large JUA with not a great deal of strong financial underpinning.
    It is no accident, in my mind, that a number of the ''pup'' companies that have been created to take business out in the State of Florida today, are companies that do not bear the name of the parent company, and they are set up in a separate structure, so that the day that the hurricane occurs, if that company has to go under, so be it. There is no link between ''ABC'' insurance company and—name a major company, and that is no accident.
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    We had that situation happen in Andrew, where a company went under and was affiliated with a major corporation in the United States. Nobody made the connection, and the major corporation said, ''let them go,'' and they went under and, ultimately, the cost was picked up by the users of the insurance in Florida. In fact, right now we are paying—every policyholder in the State of Florida—is paying a bonded premium of 2 percent in every property insurance to pay off the debts of the Guarantee Fund of half-a-billion dollars, and will be paying that for the next 5 years.
    So, we are reshuffling the deck, and we need your help.
    Chairman LAZIO. Let me thank you.
    I want to thank the panel for some outstanding testimony. I appreciate it very much, and will be in contact and look for more input from the very distinguished group.
    I'd like to conclude by thanking Doctor Robert Berpy, the Director of the National Hurricane Center, and, in particular, Public Affairs Officer Frank Lepore for his help in setting this hearing up at the center. It's been a wonderful forum, and everybody has been very helpful and made me feel very much at home.
    I want to also end by saying that I would not be here but for the fact that Congressman McCollum has insisted that I come down here to hold a field hearing. If we are successful with legislation, it will be largely the result of his efforts and his drive. I want to thank and acknowledge him for all the work he's done.
    Mr. MCCOLLUM. Thank you, Rick, appreciate it.
    Chairman LAZIO. And, with that, this hearing is adjourned.
    [Whereupon, at 3:35 p.m., the hearing was adjourned.]