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MONDAY, JULY 12, 1999
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:58 a.m., in the Hillsborough County Aviation Authority Board Room, Third Level, Blue Side, Tampa International Airport, Tampa, Florida, Hon. Rick Lazio, [chairman of the subcommittee], presiding.

    Present: Chairman Lazio; Representative McCollum.

    Chairman LAZIO. The Housing and Community Opportunity Subcommittee shall come to order.

    Let me begin by saying how wonderful it is to be in a cooler climate than New York.


    Chairman LAZIO. I am very, very pleased to be back in Florida again, particularly addressing a very important subject to the entire Nation and most especially in the great State of Florida. And I am very proud to be here again at the request of my colleague and friend, and one of the true motivators behind this legislation, Bill McCollum, who is the Vice Chairman of the Full Committee on Banking and Financial Services.
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    Today, we meet to hear testimony on homeowners' insurance availability in disaster-prone areas and solutions to offer Federal reinsurance where the private markets are failing.

    Again, let me note how pleased I am to be with the Vice Chairman of the House Banking Committee, Representative Bill McCollum, who has invited me back to Florida and I want to thank him right now for his extraordinary leadership to protect families in Florida and across the country from the devastating losses associated with natural disasters. It was really Bill McCollum who began to put real life around the policy, he began to talk in tones of losses for people in the aftermath of these natural disasters, what is left behind in terms of people trying to put their lives back together again, having been a first-hand witness to some of the most difficult storms and hurricanes in our Nation's history.

    Seven 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. Hurricane Andrew shocked the Nation, and its impact, both psychological and financial, is still felt by many.

    Since Hurricane Andrew there continue to be stories of families unable to obtain homeowners' insurance. In the worst cases, families are left unprotected from catastrophic loss. The risk to homeowners will only increase as experts predict a prolonged siege of more frequent, more forceful storms. And we have heard testimony already on that subject.

    More destructive storms, coupled with population and development in coastal areas, means that disasters resulting in multi-billion dollar losses will become increasingly common. In the last fifteen years alone, natural disasters have cost taxpayers almost $80 billion.
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    Americans see on the news the destruction that hurricanes cause and some of the rebuilding efforts, but they do not always see the long-term instability of the affected communities. They may not understand the insecurity residents feel when insurance for their homes, the center of their lives, becomes unavailable. Insurance cannot prevent disasters, but it can help families and neighborhoods put their lives back together after one strikes.

    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 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 the Federal Government can and ought to play.

    Washington cannot and should not solve the problem directly. Insurance is best regulated at the State level, where the unique needs of a 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 $50 billion or more.

    Before our Committee is legislation designed by Representative McCollum and I that would encourage greater private market participation in disaster-prone areas and provide States additional protection against losses from mega-catastrophes. Our proposal passed the House Banking Committee in the last Congress with a wide margin of bipartisan support, including that of then-Deputy and now current Secretary of the U.S. Treasury, Larry Summers.

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    I should also say at this point that we would not be at the verge of addressing this issue effectively without the drive and persistence of Bill McCollum. It is our intention to consider the legislation again in the Committee this September or perhaps sooner, and we hope to pass the bill out of the House of Representatives early this fall, in terms of a timetable.

    Now if I can, I would like to recognize Representative Bill McCollum, who again I am very proud to serve with, who really does an extraordinary job for the people of Florida and I now turn to you, Bill, for your comments.

    [The prepared statement of Hon. Rick Lazio can be found on page 36 in the appendix.]

    Mr. MCCOLLUM. Well, thank you very much, Rick. I want to thank you for coming down here today and holding this hearing. This is the second time you have come to Florida in two different Congresses to hold a field hearing on catastrophic events and on this particular proposal. And it is really terrific of you to do that.

    I know that those in Florida understand how important this is, and how important it is, and meaningful for you to come as the Chairman of the key Subcommittee in the House of the U.S. House of Representatives to hear what our State has to say to Congress about what problems are here, what problems we have if we do not have legislation like this down the road when we have that big event someday like the 1926 hurricane that crossed over the line in Miami. Today we do not think about 1926, but if that darned thing hit, that would be an $80 billion loss instead of the loss like we were dealing with, with Hurricane Andrew, around a $25 billion number.
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    So, those of us who are in the midst of this are really grateful for you doing it.

    You and I introduced different legislation in the last Congress and then we got together, Congressman Lazio and I did, as we marked up bills in the Banking Committee. We did get it out of our Committee, but we never got it to the floor, because it was so late in the last session. And H.R. 21, which he and I together have sponsored, and that is the bill under consideration for this year, is the combination of the work that both of us have done.

    My father always told me that an ounce of protection and prevention was worth a pound of cure. And I think my father was a wise man, Rick. H.R. 21 exemplifies this. In my own Congressional District in Orlando, we had devastating tornadoes, but nothing like what Hurricane Andrew or a major hurricane disaster could cause. We are here today in Tampa. A few years ago, Tampa, Rick, had Hurricane Elena, I think is the way you pronounce the name—we started creating as many new names for hurricanes as we could about fourteen years ago. And that hurricane affected the Bay area, but nothing has affected it since then. But in the past 103 years, twenty hurricanes have actually hit the Tampa Bay area. In fact, every year that Tampa is spared, the likelihood that a storm comes up into this Bay area increases. Florida has not been spared though, as you pointed out about Hurricane Andrew and in many other cases. It is a fact that the entire Gulf Coast of the United States and most of the Atlantic Coast is at risk in the path of hurricanes. And additionally there are 39 States that this legislation would affect, some that have a great risk from earthquakes, as you are well aware. So while we are here today to talk about hurricanes, I think folks should know that the bill that Mr. Lazio and I are working on would encompass catastrophic risk for earthquake-prone States as well.
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    The primary goals of H.R. 21 are to make insurance more affordable and more available. It would encourage activity in tight markets such as Florida, which could be destroyed in terms of our insurance market if we had too much too soon and too often with regard to these big hits of hurricanes or if you had the one great big banana. However, it allows the private sector reinsurance market to dedicate capital for its other insurance markets and provides the opportunity for us to see the private reinsurance market re-enter this field if, at any time, there is an opportunity for that.

    Right now, the real issue here is that we have seen over the last few years the loss of the private reinsurance market to insurance companies in Florida and elsewhere, those who cover homeowners and homeowners' policies, for large, catastrophic events such as the earthquake or the hurricane.

    I was interviewed by one media outlet here recently who said, ''Well, what is reinsurance?'' And the reality is that reinsurance is just the same as what you and I have as our own insurance, except it is what insurance companies and the catastrophic fund like Florida has, would buy to ensure that in the case of huge losses, they are protected and their company does not go bankrupt. And for most insurance products, reinsurance is readily available. But for the purposes of a big loss, like from a hurricane, wind storm damage or from an earthquake, that reinsurance is no longer around. There just is not any. And it is that risk that adds the cost to much of our policies and why homeowners have as high a premiums as we have to pay and why the risk is so great in Florida that some do not even want to come here and be exposed to it.

    So our legislation addresses that 1-in-100-year event, which in Florida is about a $35 billion loss. Say you had two or three of these storms in a year, or even two or three in Florida of that size or larger in a two- or three-year period. It would be greater than the capacity probably that Ms. Murphy is going to describe to us for the CAT Fund to fully absorb. We could be left with a major insurance void, not just simply higher amounts of money that have to be paid out in premiums.
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    Florida was able to rebound from the damages that occurred from Hurricane Andrew, but I particularly want to commend after that hurricane what the State legislature has done. State Representative Waters is here today, Leslie Waters, and she is going to testify in a few minutes about what they have accomplished recently with regard to what might happen and the potential of a second storm, if we had two. And Florida's Catastrophe Fund now I think is far better off because of what Representative Waters has been able to do with her committee in the State legislature in what they call the ''Second Season Disaster Bill.'' But that still does not make up for the problem that we have in Florida if indeed we had the big double hit.

    The simple act of protection can provide the Nation untold opportunities to save for the future. What we are talking about works with the existing legislative products in Florida or California or Hawaii. It is complementary, rather than being a substitute for it. We do not in any way supplant what they are trying to do. But our efforts are to minimize the cost to the Nation, as well as to provide a better opportunity for Florida and other States to have homeowners' protection, homeowners' insurance at reasonable rates, and have it at all.

    I think that as this hearing unfolds, we are all going to hear from a number of witnesses on why that is so important.

    Witnesses today represent the concerns of citizens, insurers, emergency managers across Florida, and I want to thank all of them before they participate here today for taking the time to come here to participate in this. I can assure you that what you are doing by coming out today, giving us a record—not just having Congressman Lazio and myself hear what you have to say, but giving us a record to go back and present the case to our colleagues who do not really fully have that record of knowledge, is really important.
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    Because when we go to argue, I go to argue particularly, Florida's part of this, but Congressman Lazio and I both, why this is important, why if we had a storm, for example, or several storms that caused this enormous damage, that the losses that would be involved to the Federal taxpayers coming in like was done with the Guatemala hurricane this last year—that was overseas and the Federal Government got involved and said we are going to go help with relief down there. The losses to the taxpayers would be enormously greater without what this bill, H.R. 21, would provide than it would be with it.

    So you are going to help us explain that, and I thank you for coming out and doing that today. And again, I thank you for holding this hearing.

    [The prepared statement of Hon. Bill McCollum can be found on page 37 in the appendix.]

    Chairman LAZIO. Thank you, Congressman, very much.

    Let me just again establish some framework, which is personal, because I come from a place called Long Island, which is also a coastal area, which also has faced vulnerability in terms of the adequacy of the availability of insurance. If you think through what a double hit, as we call it, would mean for a homeowner, an average working class homeowner, to lose their most important investment, to have it wiped out, to not have the ability to rebuild because there is no insurance in place. For the home that is not touched by the natural disaster, to lose the insurance so that if they wanted to sell that home and move somewhere else for a change of work, for example, there would be no opportunity for that. For people who needed to keep the real estate market strong, because they wanted to protect their investment or they wanted to sell their home, consider the decline in values that would occur when there was no insurance, because there is no liquidity, because nobody would buy their home, because no one would finance the sale of their home; what that would do to the cost of homes.
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    Then think about, for an area like mine and perhaps many areas of Florida that are property-base taxed for school districts, what that does to the tax base for municipalities and schools. You begin to understand what a true crisis it would amount to if we had the sort of double hit, not just in the immediate sense, but the reverberation of the effects on the marketplace, the ability to sell a home, the consequences to the municipalities and the school districts.

    Mr. MCCOLLUM. If the gentleman would yield to me.

    Chairman LAZIO. I will yield to you.

    Mr. MCCOLLUM. One point before we hear the witnesses. I really want to hear them, but if you had just a single event in Tampa Bay right here and you had a big major hurricane, a really big banana, move up from the southwest part across Florida to the northeast, you could have $70 billion worth of damage, according to a group called Risk Management Solutions. And I think that is why you needed to come here for us to demonstrate, at least talk right here at the source of it, how dangerous that can be for the residents of this community, but the enormous danger to everybody from the insurance capacity standpoint—$70 billion. That is more than twice the 1-in-100-year event trigger mark of $35 billion for our State. And it could happen. Now hopefully, the odds are it is not going to happen, but it could happen. And if it ever did and we did not have this legislation in place, I guarantee you it would not take two storms here. Suppose two of them hit like that—you know, those are small odds, but you are right, two much smaller storms in Long Island would do the same thing.

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    But thank you for being here.

    Chairman LAZIO. Let us be prepared. Thank you very much.

    Well, we are blessed by having some excellent witnesses today, many at the courtesy of Representative McCollum. We are going to begin and I know that the Congressman may want to make some remarks as well.

    On panel one, I want to welcome both Representative Waters and Commissioner Murphy, for their attendance and for having submitted testimony.

    First, Representative Leslie Waters represents the Tampa area in the Florida House of Representatives, and she is the Vice Chair of the Committee on Insurance; and Congressman McCollum has already outlined some of the outstanding work she has done on behalf of homeowners throughout, not just the Tampa Bay area, but the State of Florida.

    Ms. Susanne Murphy has been the Deputy Commissioner of the Florida State Department of Insurance since 1995. Prior to joining the Florida Insurance Department, Ms. Murphy was the Chief Insurance Commissioner of the State of South Carolina. And I want to welcome you here as well.

    Ms. MURPHY. Thank you, Mr. Chairman.

    Mr. MCCOLLUM. Yes, I want to say a couple of words. First of all, we also have County Commissioner Jim Norman of Hillsborough County on this panel with us this morning and I talked to Jim, Rick, and you know we have been trying to get County Commissioner Norman—or actually I think even another Commissioner was originally scheduled to come over here, and he gave up his day with no session today this week with his family, to come here today.
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    Mr. NORMAN. My wife appreciates you taking me here.


    Mr. MCCOLLUM. Well, we really do appreciate it. But the reality is Jim Norman is doing a great public service because Hillsborough County is the center of where that storm would be I mentioned awhile ago and we want to thank him for coming.

    And I want to again reiterate what Leslie Waters has done in the legislature this session. It was something I alluded to, but did not fully do an introduction with you. She is the champion on the key committee for the purposes of what has been done recently, she is going to explain to us—for Florida's catastrophe fund. That is, again, what she and Ms. Murphy will talk about. And they have laid the predicate, with their leadership, to get us to a certain point where we probably would not have the same kind of problems with a Hurricane Andrew again, or maybe even a couple of those, but we, I think as she will explain, are not there for what we want. But again, I want to thank all three of you for being here today.

    Chairman LAZIO. Let me thank you also, Mr. Commissioner, for coming in on relatively the last minute notice. We appreciate your responsiveness.

    Representative Waters, you are recognized.

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    Ms. WATERS. Well, good morning, Congressman McCollum and Congressman Lazio. As you know, my name is Leslie Waters and I was recently elected to the Florida House of Representatives from, I must say, Pinellas County, which is right across Tampa Bay. And for the last six months, I have had the privilege of being the Vice Chair of the House Insurance Committee.

    It is an honor and a privilege to be here today. It is not often that a Committee of the U.S. Congress travels all the way to the Tampa Bay area to seek input on legislation pending in Washington. Your presence here today is welcome.

    I have been a resident of Florida all my life. But Florida is a much different place than I remember in my youth. Back in the 1960's when I was in high school, summer was the time to stock up for ''hurricane parties.'' The notion of a storm lurking in the Caribbean was an event to savor, and since no storm of any consequence struck our State for nearly a generation, many of us developed a false sense of security. We built where and how we wanted. We stopped paying attention to the danger. We thought that the huge storms that the history books told us about were just that—history.

    Of course, Hurricane Andrew changed all that. A $16 billion storm will do that, particularly since another degree in latitude and it all could have been five times worse. In 1999, after Hurricane Andrew, Opal and several near misses, summer is a more serious time. Now summer is a time to stock up on bottled water and batteries, confirm insurance policies and coverages and plot evacuation routes. The devastation of Hurricane Andrew still haunts us all.

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    I know from prior accounts of hearings you gentlemen have chaired in Washington, that you were both quite familiar with what happened to Florida in the aftermath of Hurricane Andrew, and you have just shared that with us. And a big part of the story here in Florida was the sudden and rapid deterioration in the homeowners' insurance market. I will not repeat that history for you today, but suffice it to say that it has taken the better part of a decade for Florida's insurance market to return to some state of normalcy. It has not come easy.

    It took a concerted effort on the part of State government, local government, homeowners, insurance companies and the rest of the Florida business community to rebuild confidence in our system. Our successes have included the creation of the very first of its kind State-operated catastrophe reinsurance program, the Florida Hurricane Catastrophe Fund, which you have referenced and know about.

    We have also stopped the continuing exodus of insurance companies from our State, reducing the number of homeowners covered by the Florida Joint Underwriting Association, a pool of last resort and at one time the second largest insurance company in the State.

    Plus, we have allowed for a gradual increase in homeowners' insurance rates to better reflect the actual risks and likely costs of future hurricanes.

    We should feel proud of these accomplishments to be sure; however, it would be a mistake to conclude that our improving circumstances are really the byproduct of the work we have done. The simple fact is that we have just been lucky, lucky that since 1992, Florida has dodged the bullet of a truly colossal storm. Without such luck, the Florida Hurricane Cat Fund would not have a surplus, the insurance market would be shrinking and we would probably be in a near panic.
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    We have been lucky—and with that luck I fear has come some of the same complacency that I remember in the Florida of my youth. It is true that the Joint Underwriting Association has been depopulated by nearly 60 percent and that is terrific, but it is also true that much of that business of the JUA has simply gone to the Florida Wind Pool Association, and like the JUA, this is a vehicle which was never designed to assume such a heavy burden.

    It is true that the Florida Hurricane Cat Fund has a surplus of nearly $4 billion, and that with bonding capacity, we can now reinsure $11 billion in losses from the next major storm. This past year, we increased and strengthened the funding mechanism to be better prepared for that second event in one calendar year.

    But it is also true that the capacity is derived largely from the promise of Florida's homeowners and businesses to pay even more for insurance coverage in the future, and that once the bonding capacity of the Cat Fund is exhausted, our system is once again facing the possibility of failure.

    We should not forget what it was like in the State in the years after Hurricane Andrew, because it will be like that again and worse, as you all have mentioned, when our luck runs out. Imagine if Hurricane Mitch—Congressman McCollum, you referred to that hurricane, the storm that last October decimated Nicaragua and Honduras, killing more than 9,000 men, women and children—if that hurricane had struck this area, the very place that you are sitting today; yes, it would have been a $70 billion event. The 150-mile per hour winds from Mitch battered the Central American coast for nearly 48 hours. No comparison—Hurricane Andrew was less than six hours. Florida was not, is not, and never will be, prepared for the type of worst-case storms that are possible and likely to hit our State in the future.
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    We need your help, Congressman McCollum and Congressman Lazio, not just for the sake of Florida, but for every part of the country that is prone to earthquakes, hurricanes and similar natural perils. We need to take the financing of such crises from what we have done here in Florida to the next level, and that is where you gentlemen and the Congress come in. And that is by passing a Federal disaster reinsurance plan such as H.R. 21.

    This is not a new issue for either of you gentlemen. Mr. McCollum, I know you have been a forceful advocate for some time on this subject. One of the recent times I have seen you in Tallahassee a couple of months ago, we spoke about this. And last year, your combined efforts resulted in the House Banking Committee reporting natural disaster reinsurance legislation for the first time ever.

    We need a Federal reinsurance program now, not after the next major catastrophe. Move the bill, move it quickly, do not let it be watered down by those who would set the levels of reinsurance coverage so high that it will do nothing to help Florida or other States that are at risk.

    Move the bill and move it now, while H.R. 21 enjoys bipartisan support with more than 100 co-sponsors and a tacit endorsement from the present Administration. Move the bill and move it now while we can afford to implement it carefully and rationally, instead of in response to a crisis.

    Move the bill and move it now, please, so that we can all rest a little easier knowing that our insurance system will survive the worst that Mother Nature can send our way. We need your continued leadership and passion over this very important subject.
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    Bless you both, thank you very much for coming and thank you for inviting me here today.

    [The prepared statement of Hon. Leslie Waters can be found on page 41 in the appendix.]

    Chairman LAZIO. Thank you, Representative, excellent testimony.

    I would now like to turn to Commissioner Murphy. You are now recognized.


    Ms. MURPHY. Thank you, Mr. Chairman, Representative McCollum.

    I followed the instructions that were in the letter of invitation that asked me to give a little bit of background about the effects of Hurricane Andrew, the creation of the Cat Fund, the JUA and I will add a little extra piece for just a couple of minutes about the status of the FWUA, the Florida Windstorm Underwriting Association.

    I am here, as you know, on behalf of Commissioner Nelson, who could not be with us today. You probably both know from his previous testimony and his comments in various forums in the last couple of years that he very much supports a Federal reinsurance program to help protect homeowners that live in disaster-prone areas, not just in Florida, but throughout the Nation. And I echo the comments of Representative Waters, which she delivered so eloquently.
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    Florida, as much as any other State in this Nation, recognizes that we need a Federal reinsurance program. Florida was the State seven years ago next month that suffered the costliest natural disaster of all time, when Andrew caused $16 billion in insured losses and $25 billion in total losses.

    Let me describe for you, and you may already know some of these particulars, what happened after Andrew. In the testimony that I have read that has been prepared for this Committee, you have been given two different numbers of the number of insurers that became insolvent. Some say eleven and some say nine. I do not know which is correct and I do not know the reason for the difference in the figures, but suffice it to say that a significant number of insurers were unable to pay claims from a hurricane that caused such incredible damage in a fairly confined space. They were over-exposed, the capacity of the market completely vanished, reinsurers would not provide reinsurance, insurers had no capacity, insolvencies occurred, policies were non-renewed, insurers left the State in droves. It was absolute chaos.

    I was not here in 1992, but I have lived through the effect of a major hurricane when I was in South Carolina and Hurricane Hugo hit on the coast of South Carolina and decimated Charleston. So I have seen first-hand the effects of a catastrophic hurricane. I have lived in Florida with the lingering after-effects of Hurricane Andrew and have experienced two or three hurricanes since I have been in Florida.

    I think you understand from my comments and what you have heard from individuals who survived these natural disasters, and you very eloquently stated what kind of impact it has on the people who are affected. But I think what I am hearing you describe is what it has done to the insurance market as a whole. When insurance companies cannot or will not write policies, when housing is completely disrupted by the storm, when banks will not lend money to build houses, when realtors cannot close on house sales because you cannot find insurance to insure the structure, the whole economic fabric of the society completely deteriorates. There has got to be a way, which I think H.R. 21 attempts to do, there has got to be a way to provide what is critically necessary, and those are two things in my view—availability of homeowners' insurance, stability of the insurance market. I think the way that you get those two things is to provide a source of reinsurance that will encourage insurance companies to sell policies in disaster-prone areas because they will know that they can get the reinsurance they need to manage their exposure and to be able to pay claims.
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    If we do not have a mechanism that addresses those twin functions, I think what you will see is continued volatility in the market, continued unavailability of coverage whenever there is a disaster and when reinsurance capacity shrinks. That cycle and the victims of that cycle, as much as anybody, are homeowners and again, the economic engine of a particular State. Those victims will continue to suffer from the lack of availability of coverage and the restriction in capacity.

    I think that what Florida had to do after Andrew, because there was no source of coverage because insurers left the State, stopped writing. There was no reinsurance capacity, they had to create the property and casualty JUA, a State-created mechanism of last resort, to provide homeowners' coverage for ordinary people who could not find coverage.

    The JUA was almost at a million policies in 1996, the second largest insurer in Florida, with no end of growth in sight. And through successful efforts by the legislature, the Department of Insurance, insurance companies and a host of others, because it very much was a collaborative effort, we have managed to shrink the JUA to its current size of about 112,000 policies, an incredible achievement.

    But it really will be for naught if there is no reinsurance level available at high numbers, $25 billion, if there is no guaranteed source of reinsurance coverage, what will happen is when we have a storm, the JUA will just fill right back up. That is not a solution, as far as I am concerned. It is not proven stewardship of Federal money and it is not a prudent course of action for the State of Florida or the rest of the Nation to engage in.

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    So I think what we are arguing is yes, we have been very successful in the creation of the Cat Fund, which was created in 1993 and I am sure Jack Nicholson will explain the background of the Cat Fund, its current financial structure, its bonding capacity and how it works. The Cat Fund is a tremendous success story. The JUA's depopulation is a tremendous success story. We have recently had the first depopulation approved for FWUA policies, the Florida Windstorm Underwriting Association which writes wind coverage in coastal areas of Florida. Its numbers have increased tenfold since Hurricane Andrew, standing at about 450,000 policies now. We have begun the depopulation of the FWUA.

    But again, for all the success that we have enjoyed and for all the hard work that has been devoted to this very critical problem, all of our success will be evaporated, eliminated, non-existent if we do not have a source of Federal reinsurance to give companies the assurance that that coverage will be available so that you can prevent the volatile, cyclical reinsurance market from constricting availability of coverage in Florida, and in other States as well.

    We are, I think, most grateful to Representative McCollum, to Representative Lazio, for your commitment to bring this critical issue to the forefront in Congress, to make Congress and the Senate and the President understand, this is not a parochial concern; this is an issue that has ramifications for the entire Nation. And it makes sense to us that we devise a prudent system that provides reinsurance coverage to insurers, that provides a stable market, that will foster Representative McCollum's twin goals of availability and affordability.

    There is no point in passing all of these provisions in Florida to attempt to restore the private market if, with one storm, all of the effort that we have undertaken in the last few years can be completely wiped out. So we very much support the concept of a national reinsurance program that we think will serve as a very much needed backdrop for the Cat Fund in Florida and will provide us with a stable homeowners' market that is not subject to the cyclical volatility of your traditional insurance market.
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    I will be happy to answer any questions, if you have any.

    [The prepared statement of Suzanne Murphy can be found on page 44 in the appendix.]

    Chairman LAZIO. Thank you very much.

    Ms. MURPHY. My pleasure.

    Chairman LAZIO. Let me note at this point that your written testimony, if you have any, will be included into the record for submission. Without objection, that will be so ordered.

    And now we want to hear from Hillsborough County Commissioner Jim Norman, who was kind enough to join us, and Commissioner Norman, what a pleasure; we look forward to hearing your remarks.


    Mr. NORMAN. Well, first of all, let me say thank you for coming to our State, Representative. Your accent is to a point that now I can recognize it, you have been down here so much, we can call you a ''Florida Cracker.''

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    Mr. NORMAN. First of all, let me also say that you should listen to us well today, because you know that you borrow our New York Yankees who also train here.

    Let me say that I am also, as Representative Waters, a long time, all my life Floridian, never lived out of the State, and have experienced many of the things that Representative Waters has spoken of.

    As an elected official here, I am dedicated naturally, as you all are here today, to protecting life and property and maintaining and improving the existing quality of life of our citizens. The health of our current economy is dependent on maintaining some growth as well as sustainment of existing public and private infrastructure. The ability to support this growth rate is vital to our community's overall economic wellbeing.

    I offer the following thoughts on the importance of availability of insurance for residential and business properties in our community. I am not going to repeat a lot of the things that the other speakers have said today. When you speak last, you get to go through your sheet and mark out everything.


    Mr. NORMAN. Hillsborough County's population is estimated around 942,000 people today. We currently will reach the one million mark in the next couple of years here in our community. Tampa/Hillsborough County is the economic hub for the entire west coast of Florida. Our airport and seaport are the major transportation systems that import and export regional goods and services. And as you all move forward with Cuba, we will probably be the key port naturally from here to New Orleans. So this is a major, major economic boom for the Florida area.
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    Our area's two major business districts are both in vulnerable zones for the effects of a major hurricane. Our entire business districts would be wiped out if we had a hurricane the size of Andrew, or really even I guess a Category 3 storm, that would come up the Bay would devastate our community through our businesses and our economics.

    Our area has been identified by the National Hurricane Center as one of the most vulnerable metropolitan areas of the country for the potential effects of a major hurricane.

    Currently some major insurance companies are not selling new homeowners' policies in our community. These companies indicate that our vulnerability for hurricanes makes it unfeasible for them to insure our citizens today.

    I do not believe that I am overstating the case that the availability of reasonably priced insurance is absolutely essential to the ongoing wellbeing of my community. The Florida Legislature attempted to address this issue last session when they passed a hurricane catastrophic fund legislation. This bill attempts to assist insurance companies in maintaining viability after Florida suffers a catastrophic event. This bill helps, but does not completely solve the problem if a large metropolitan area like the Tampa Bay area takes a direct hit from a major hurricane when the potential claims could be in the tens of billions of dollars.

    Some form of Federal legislation on the top of Florida's is needed to ensure that the insurance industry can sell reasonably priced pre-event insurance and also be able to settle fully the legitimate claims when a catastrophe actually occurs.
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    Let me say today you are right, I was a Commissioner that was able to come here and attend, but let me say to you each and every one of my board members would have been here today to address you, to talk about the need and how important it is to our community here that you move forward and get this legislation passed.

    Also quoting Representative Waters, ''move the bill and move it now.'' That is so, so important to this community. You gentlemen sitting here today, I applaud your leadership for all of Florida really, but what you can do for this Bay area, I applaud you for coming here, for listening to us and trying to do something for our citizens here. I just cannot thank you enough, and again God bless you.

    Chairman LAZIO. Thank you, Commissioner, for that outstanding testimony.

    I have a few questions and if you do not mind, I am going to begin with some questions of Representative Waters, and actually I would open this up to the panel if they have any particular comments on this, because cost is also an issue in terms of access to insurance. I mean, you can have the potential availability of insurance, but because the cost is so high, it is priced out of the reach of an average homeowner.

    If you can walk me through for Florida what the experience was and has been and what do you see as a reasonable scenario if there was a significant direct hit in the Tampa Bay area.

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    Ms. MURPHY. Mr. Chairman, I will try to address that.

    Chairman LAZIO. Ms. Murphy, please.

    Ms. MURPHY. I can tell you, as a practical matter, what has happened since Andrew struck Florida is that through the use of actual experience from Andrew, through the use of data supplied to us which would show a company's concentration in a particular area, through the use to some degree of loss estimates produced by computer models, and through other actuarial data that has been supplied to the Department of Insurance, there have been rate increases approved for insurers in Florida that range as high as over the last seven years, 100 percent, 150 percent, some places more than 150 percent rate increases in the last seven years. So there have been significant rate increases granted to those companies that have demonstrated—now you have to understand, we do not allow a company when they pay out $1 million dollars in claims, to in the next year come back and recoup $1 million dollars. That has not occurred, that will not occur, that is not how rates are made. But there have been rate increases granted to insurance companies who can demonstrate the need for a rate increase. So we have seen significant rate increases in certain areas of Florida over the last seven years.

    Chairman LAZIO. Do you believe that if we had a Federal backstop, if we had H.R. 21 signed into law, that that would have a positive impact on rate increases?

    Ms. MURPHY. Not the way that it is written, and I have a concern that I will express about what I understand the bill to do. The reason that I gave you the information that I just gave you about the increases that homeowners have already seen in Florida because of the either actual or perceived threat of hurricanes in this State, is to demonstrate for you that Floridians have already paid and are now paying much higher rates than they paid before Andrew. And the reason that I am testifying that way is to make certain that you understand how much Floridians are already paying for homeowners' insurance and to argue that if there is a Federal solution, I think it would be folly to assume that you could simply pass on twice—as I understand the bill—twice the loss cost of that reinsurance layer straight onto the backs of the policy holders. Because as you correctly point out and so did Representative McCollum, the goals of the bill would be stability, availability and affordability. And if you have two of those and not the third, I do not know what you have accomplished. You want people to be able to buy the coverage, to be able to afford to insure their homes. So we have to just keep in mind, Floridians are already paying significantly more for homeowners' coverage than they were prior to Hurricane Andrew.
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    Chairman LAZIO. I guess, Commissioner, though, our expectation also is that that pricing would be a percentage of what one might be able to get if they could get it in the private reinsurance marketplace.

    Ms. MURPHY. As I read the summary of H.R. 21, what it tells me is that a Commission would establish the actuarial loss cost for this reinsurance and then the price for that reinsurance when sold either to a company or a State fund, would be two times the actuarial loss cost. Now I would assume that if a company were to buy that cover or the Cat Fund were to buy the cover, depending on how this bill ends up being structured, that the cost of that layer of Federal reinsurance would then find its way into the rate base that every homeowner would pay.

    So my concern would be—and we would certainly like to work on this aspect and maybe others of the proposal, but the concern there that I think you two have indicated you share is that if that actuarial loss cost at two times the figure of the Commission is then passed on to homeowners, I think my concern would be that it would make insurance unaffordable to the very people that we are trying to help.

    Chairman LAZIO. Let me try and explain where we are with this. We are trying hard to build support for this legislation and we also do not want to provide an opportunity for folks to cost-shift to the public sector when we have a private solution in reinsurance.

    The reason why the Federal Government, as I understand it from most experts that we have consulted with, can offer this backstop at a fraction of the cost of private reinsurance is because unlike private reinsurers who have to face the consequences of enormous loss and therefore the possibility of bankruptcy, insolvency, the risk of loss in that case of ruin is so great, that that forces them not to be competitively priced. So we are working to ensure this. We will be happy to continue to address this with you.
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    Mr. NORMAN. Could I offer something?

    Chairman LAZIO. Yes, of course, Commissioner.

    Mr. NORMAN. To reinforce again a lot of the points I was making, we do not, as a local government, expect the Federal Government to come in and do everything for us. We have recognized the need so much of your type legislation that you are bringing here, our Board has just invested $65 million to go back and retrofit communities that have been developed under the old development rules and regulations. We are stepping up to the plate also, that we are trying to protect these kind of neighborhoods with the resources we have. We do not want you all to be solely having to come in and take care of local government, take care of State government. We are also doing our job. But what you are trying to do is just so important, as you just said, the backstop. Because, you know, when you have the wind damage and things, that is things that we cannot legislate away today, but we can come in and try to save some neighborhoods, move the water, things like that.

    We are trying to do our part of that. And just please, please continue on with this. I know there are some problems, I know there are some language changes. But you are going in the right direction and we need that here locally.

    Chairman LAZIO. Thank you, Commissioner.

    I am going to turn now to Congressman McCollum.

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    Mr. MCCOLLUM. Thank you very much, I appreciate it.

    Again, I want to thank the whole panel for being here today and Ms. Murphy, I want you to thank Commissioner Nelson for me personally, because he has supported our legislative efforts in this Congress and the last Congress and we are sorry he could not be here today to be with us. But you have ably represented him, and our State, by making a very articulate statement about this.

    I would like to make a comment about something too and see if I do not get concurrence from Representative Waters and Commissioner Norman in particular. I noticed that not only is there a problem with insurance premiums in our State, I have noticed that we have huge deductibles as well that have now come about for windstorm. My own policy, I do not know about you, we do not have any average citizens out there, but I represent them. Am I right about that? Because my own policy, and I do not know if it is different from yours and I do not want to name publicly my insurance company, has gone from where I had a $100 deductible for windstorm and hurricane, to where I have a $5000 deductible. So the homeowner is exposed in ways that are far greater than might be imagined. I suppose that is just so we can have insurance at all.

    Is that the sort of thing you are seeing here in the Tampa Bay area, Commissioner Norman?

    Mr. NORMAN. Oh, yes, sir. And let me just say, first of all, I am so average it is unbelievable.

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    Mr. NORMAN. That is probably why I have been elected three times, you know.

    But let me just say you are dead-on. People are—the rates are increasing, more and more costly, the wind damage problems that we are facing here locally—you are exactly right. And this is just highway robbery. These people have nowhere else to go, they have to have that to buy and sell homes, to protect their one major investment that most families will have in their life. That is eating into their quality of life to be able to have things with their families, it is all invested in that home.

    In the state of affairs that Representative Waters spoke of, you are right, there was the day that, you know, ''Hey, here comes a storm, let us grab a surfboard and run out there.'' Those days are over, we have now recognized, through Andrew and those kind of catastrophic storms, that the Baby Boomers or whatever, we are having to put all our money there. And it is escalating.

    Mr. MCCOLLUM. Well, you mentioned a Category 3 storm, and that would cause a huge surge up this Bay, I guess, if it came in the right way. If you had a Category 5, the big one I talked about, that would be, you know, enormous.

    Mr. NORMAN. You know, that would——

    Ms. WATERS. That would wipe out the county.

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    Mr. NORMAN. It would wipe out Hillsborough, Davis Island all the way up through our business districts.

    Mr. MCCOLLUM. It would probably make the Honduras story pale because they did not have the infrastructure to be damaged like that.

    Ms. WATERS. Well, and Pinellas County, as you know, just looking at the map, I mean, we are a peninsula, we are surrounded by water on three sides, so we are just hanging out there almost like a target. But your observation is true, deductibles are higher, therefore to keep your premium lower. So a lot of folks who do have some sort of homeowners' insurance are paying less with a higher deductible.

    Mr. NORMAN. And the bottom is going up also. Your deductibles, but that floor of any payment at all—I mean to get it anywhere reasonable in a budget——

    Mr. MCCOLLUM. But see, when you talk about affordability and availability of insurance, I am thinking well, sure, I can buy the insurance now, but suppose I am living on the margins like so many people are and I have a $5000 deductible and a hurricane hits. It is going to be an enormous problem for me maybe to even keep my house.

    Ms. WATERS. Right.

    Mr. MCCOLLUM. And that is the kind of thing that disturbs me about this.
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    Mr. NORMAN. Let me also say, you are getting into a really sensitive area for our community. Another thing we have here is a large population of seniors——

    Mr. MCCOLLUM. There you go.

    Mr. NORMAN. ——and they do have that very sensitive budget that—I mean a few dollars really puts their home in a dangerous area, that they may lose it. I mean, their budgets are so sensitive that—and our population here locally for seniors and Sun City even more—and these raised rates, they may lose their homes.

    Mr. MCCOLLUM. Some of these people live in mobile homes and they are small and maybe the dollar amount is a lot less for them than I just said, but the dollar amount means as much or more to them.

    Mr. NORMAN. I bet you even have some seniors in Polk County.

    Mr. MCCOLLUM. There are seniors in Polk and Orange and Osceola and all over.

    Ms. Murphy, one thing you said disturbed me a little bit because I agree with you that we do not want to have any insurance premium increases as a result of this unintentionally, so Congressman Lazio and I want to work very hard on that. But my understanding is that right now, cost of reinsurance in the private market, which frankly these insurance companies are not buying because they will not pay it, is five or six times the actuarial cost. So if we came down to two times the actuarial cost, if they were willing to buy it, that would be a big plus; at least they would be buying it. But your fear, as I understand it, is that even paying two times the actuarial cost might actually cause it, if we allowed them to pass that cost on, or you allowed them to, a greater increase in premiums rather than a reduction.
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    So I want to be sure we understand. We want to work this out because there are two things involved—the concern over the cost and the concern over the availability. If we have the big storm, you would concur, I am sure—or multiple storms that do damage to the current status of a Cat Fund, we would have an availability problem as well. And while we would like to get this down from five or six times, to two and below-two times actuarial cost, anything we can get in the way of something for them to be able to buy, some reinsurance would be better than where we are today, would it not?

    Ms. MURPHY. Representative McCollum, my comments were on the assumption that a company which has not heretofore bought reinsurance at that upper level, and then buys this reinsurance and expends that cost for the first time, it would seem to me logical that if that cost were allowed to be passed on to the policyholder in the form of a rate increase, that we could have rate impact from this provision.

    I do not know the reason that the two times the actuarial loss cost was selected. From your comments, it seems a quite reasonable compromise from the five or six times the actuarial loss cost that you spoke about, and I beg forgiveness for my ignorance on that particular piece of this legislation. But I think all my comments are meant to do is to make certain that we try to keep in the forefront that if the reason for this bill is to provide market stability, affordability and availability of coverage, that we have just got to keep all those three things as goals as we move forward.

    Mr. MCCOLLUM. I appreciate it. And I want to thank you for clarifying it and letting me help you clarify it, because Congressman Lazio and I have to work with the Treasury Department and we have to figure out something to get legislation through. But believe you and me, our ears perk up because our goal here is both affordability and availability. And we may be getting at least something available, but if we are not getting the affordability end of it, we do not want to be doing it.
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    So we are out there every day trying to improve this bill if there is any way to nudge it. But we need to get the bill over in the Senate and get ourselves a chance to have legislation. And I think this is part of that. How do we get it over there? Representative Waters understands that.

    Thank you very much.

    Chairman LAZIO. You are very, very welcome.

    I want to thank the panel for outstanding testimony.

    Ms. WATERS. Thank you, gentlemen.

    Mr. MCCOLLUM. Thank you.

    Chairman LAZIO. Now I will ask panel two to please come forward. We are very privileged to have four witnesses and we expect to have outstanding testimony from all four. Let me again reiterate that the submitted testimony, the written testimony, will be included in the record, which will be published. And that will be done without objection.

    And let me also note, if I can, that we have one witness who was very kind to come in, has a pressing issue, which is a flight that is leaving in a few minutes, so I would like to get him on. We are going to take him a little bit out of order, if that is OK with the rest of the witnesses, at my request. It is Rade Musulin, who is Vice President and Actuary of Florida Farm Bureau Insurance Companies. Mr. Musulin has worked with Senator Stevens in the past in the development of disaster legislation from previous Congresses and is an expert on the issue and I think he will be very helpful. We are very hopeful that Senator Stevens will again show leadership on this. Mr. Musulin also testified in support of H.R. 219 before the full House Banking Committee in April of 1998.
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    I am going to retain the introductions for the three other witnesses until we hear from Mr. Musulin, but we will take him out of order, perhaps we can ask a question or two and then we will release you. Mr. Musulin, you are now recognized.


    Mr. MUSULIN. Thank you, Congressman, I do appreciate the opportunity to be here and your consideration in helping me catch my plane.

    My name is Rade Musulin and I am, as you said, Vice President and Actuary of the Florida Farm Bureau Insurance Companies based here in Gainesville, Florida. I have spent a good part of the last six or seven years helping to recover from Hurricane Andrew and to fashion some of the solutions that have been implemented in Florida to this terrible crisis.

    I appear before you today to express support for your efforts to draft legislation to plan for extremely large and devastating natural disasters. This issue is of critical importance to the people of Florida who have experienced first-hand the consequences of not being well prepared for a storm.

    In retrospect, Florida was not ready for Hurricane Andrew and as a result, we endured tremendous hardship for years after the storm. As you heard earlier, we have made tremendous progress in rebuilding the shattered property insurance market in this State. Many major reforms have been implemented since 1992. Foremost among them was the creation of the Florida Hurricane Catastrophe Fund, which you will hear about from Jack Nicholson in a few minutes.
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    Florida made two fundamental choices about funding hurricanes. First, we formed a public/private partnership to finance the cost of hurricanes. Florida considered and rejected proposals for a State takeover of the catastrophe insurance market. Instead, Florida chose to foster private sector solutions, supplementing them when necessary with public resources.

    Second, Florida recognized that there is a limit to its ability to fund hurricane losses and that its commitments had to be renewable after events in order to be effective.

    Barring a mega-event, Florida has put in place a system that provides a reasonable assurance that claims will be paid promptly and that insurers can continue to provide coverage without a repetition of the chaos which followed Hurricane Andrew.

    All of our hard work, however, is threatened by the one problem Florida cannot solve on its own, which is the statistically unlikely, but possible, mega-event that could cause losses of $25–$35 billion or more.

    If such an event were to occur today, the health of Florida's economy would be seriously threatened. Despite the Cat Fund, many insurers would experience financial difficulty. Large assessments would be placed on Florida's consumers and almost certainly, there would be a widespread consumer disruption similar to that which was experienced in 1992.

    The Federal Government can and should do something to help Florida and other States prepare for a major event, by enacting natural disaster legislation.
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    Like Florida's successful Catastrophe Fund, the Federal disaster plan should foster a public/private partnership to tackle the problem of financing mega-catastrophes, leaving the private sector primarily responsible for underwriting property insurance. Federal involvement should be reserved for large mega-events and focused on providing essential liquidity to the insurance system to fund claim payments and, very importantly, to continue operations after an event. I believe H.R. 21 embodies these principles.

    In closing, I would like to discuss three arguments that have been made with regard to this legislation.

    First, some have argued that catastrophes are uninsurable in the private sector and that the Federal Government should directly take over underwriting catastrophe insurance. Florida rejected these arguments, and the Federal Government should also. The private sector has access to tremendous resources in the capital markets and these can play an important part in funding natural disasters. Through competition, creative energies in the market can be brought to bear in finding new ways to underwrite coverage, identify risk and encourage mitigation.

    Second, others have claimed that sufficient resources are available in the private sector such that no Federal involvement is needed. I believe these arguments are equally flawed. While it is possible that a huge natural disaster could be funded solely with private resources, the real question is whether it can be funded in a way that minimizes post-event disruption for both consumers in the catastrophe-prone areas and for our economy in general. As we learned the hard way in Florida, the post-event trauma can be very serious. The Federal Government can and should play a part in promoting market stability, just as it successfully does in other parts of our financial system.
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    Finally, some have argued that natural disasters only affect a handful of States and not the Nation as a whole. Unfortunately, the effects of a mega-event would ripple through our economy, affecting citizens in all 50 States. Many Floridians thought Andrew was just a South Florida problem, but in fact, we found out that all of Florida was affected. Similarly, the effects of a much larger event would not be confined to the State where it occurred.

    Florida has not sat idly by waiting for the Federal Government to solve its natural disaster problem. However, there is a limit to what any State or the private sector, for that matter, can do to fund natural disasters. The Federal Government must be part of the solution to the problems of the property insurance market in catastrophe-prone areas and it must do so by enacting Federal natural disaster legislation.

    Thank you.

    [The prepared statement of Rade T. Musulin can be found on page 49 in the appendix.]

    Chairman LAZIO. Thank you very much, Rade.

    I am going to withhold my questions and turn to Congressman McCollum and recognize him.

    Mr. MCCOLLUM. I am not going to ask much of any questions, I know you have to catch a plane, but I think in your prepared statement and I am not sure if I just heard you say it, you said that the combined current Florida Cat Fund with the combined insurance industry in Florida could probably handle a 1-in-65-year storm, and I assume from what you are saying that you do embrace what we are doing here.
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    Mr. MUSULIN. Yes.

    Mr. MCCOLLUM. You concur we need this legislation for that 1-in-a-100-year event.

    Mr. MUSULIN. Yes, sir. What I said in my written remarks was that the Florida's Catastrophe Fund's obligations would be exhausted at approximately a 65-year event; however, the private insurance industry does have capital and surplus and some other resources to close some or all of that gap between the 65- and the 100-year storm. So I did not mean to imply that we would stop paying claims at a 65-year storm or something like that. But the Cat Fund right now is designed to get to about a 65-year storm.

    Mr. MCCOLLUM. What happens is that we have several storms at one time or in sequence, or you have two in one year or you have that 1-in-100-year event, you are going to have a problem. And essentially that is why we need this legislation. That is really what you are saying. We have got a pretty good cushion out there compared to where we were before, but we do not have nearly where we need to be.

    Mr. MUSULIN. Yes, sir. And the important thing is that the financial markets and the insurance community has confidence that there is a backstop there and that the company's very financial solidity is not threatened by one of these mega-events, which is highly unlikely, but companies have to prepare for this and make sure the claims can be paid. So the existence of a Federal program can go a long way toward stabilizing the insurance market and preventing the repetition of that post-event chaos that we saw after Andrew.
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    Mr. MCCOLLUM. And probably encouraging more companies to come in here and compete, I would assume too.

    Mr. MUSULIN. Yes, sir.

    Mr. MCCOLLUM. Thank you very much, Mr. Musulin. Thank you, Mr. Chairman.

    Chairman LAZIO. Thank you, Mr. McCollum. Thank you, Rade, I hope you make your flight.

    Mr. MUSULIN. We will see if I can run fast enough. Thank you very much.

    Chairman LAZIO. We are very appreciative.

    Now we have the following three witnesses which I am going to now introduce. Dr. Jack Nicholson is Chief Operating Officer of the Florida Hurricane Catastrophe Fund. I can only imagine, Doctor, the kind of phone calls you get when people look at your name in the phone book.

    Dr. Nicholson served as the Insurance Department's liaison with the Florida State Board of Administration regarding the Cat Fund from its inception and played a major role in its implementation.
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    He earned his Ph.D. in risk management and insurance from the University of Georgia in 1980.

    Dr. Nicholson testified before the Subcommittee in support of H.R. 219 in Miami during the last Congress, the 105th Congress.

    Mr. Larry Gispert is the Director of Emergency Management for Hillsborough County, Florida which, as we know, is one of the largest counties, municipalities, in our Nation.

    Ms. Pamela Duncan is the Director of the Department of Community Affairs' Office of Legislative Affairs within the State of Florida.

    I want to welcome all of you here, thank you for your testimony and for your willingness to come forward.

    Let me turn now first to Dr. Nicholson.


    Mr. NICHOLSON. Thank you, Mr. Chairman. It is an honor and a privilege to be asked to address the Subcommittee. My name is Jack Nicholson and I am the Chief Operating Officer of the Florida Hurricane Catastrophe Fund.

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    Following Hurricane Andrew, which occurred on August 24, 1992, there were eleven insurers that became insolvent. Susanne Murphy mentioned that there was nine to eleven. I think the fact is there were eleven, I do not know that all elelven were impacted by Hurricane Andrew, but in the aftermath, there were these insolvencies. Andrew caused in excess of $16 billion of damage, of that $11 billion was due to residential type losses. This damage far exceeded the probable maximum loss estimations for insurers. Prior to this, they did not conceive that there could be this large of a loss in Florida. I think some of the numbers were like $4 billion would be the maximum loss that you would see in Florida.

    As a consequence, insurers reduced their exposure in Florida as well as in other coastal States. The result was that Floridians were unable to purchase insurance at adequate or reasonable prices and in some cases were unable to get insurance.

    The Residential Property and Casualty Joint Underwriting Association was formed in the latter part of 1992 as a temporary measure for providing coverage, and despite the efforts of the legislature and the Department of Insurance, the RPCJUA grew to over 900,000 policyholders at its peak in 1996. Although the growth has been reversed in recent years, the Florida Windstorm Underwriting Association has grown dramatically and now is approaching 500,000 policyholders. It has an exposure somewhere between $80 and $90 billion for the State. This has significant implications for other Florida policyholders in that they are subject to possible assessments from losses to both these associations.

    In Florida, we continue to endure a difficult marketplace with high insurance rates, with no immediate end in sight, seven years after Hurricane Andrew. And that is despite the efforts of elected officials and the legislature to work diligently to solve many of these problems.
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    We found that following Hurricane Andrew, world reinsurance capacity contracted. The aggregate reinsurance limits that were available at that time were for $200 million or less. We found that the cost many times exceeded 25 percent of the premium—excuse me, 25 percent of the coverage. The terms of the contracts were severely tightened, resulting in less coverage for insurers. And we find that today, although the reinsurance market has improved, Hurricane Andrew has taught us an important lesson in that it is difficult to rely upon the private insurance market due to the limitations that it has. It is not able, and was not able following Hurricane Andrew, to meet the needs of Florida insurers. So this is a reality, not so much a criticism of the private market, it is a reality of the nature of the destructive forces associated with catastrophes and the tremendous exposure that has built up here in the State of Florida.

    The Florida Hurricane Catastrophe Fund was created in November of 1993 for the purpose of creating additional insurance capacity. It never was for the purpose of providing protection for the big one, for the $50 or $60 billion storm. It was mainly for the purpose of providing the additional capacity needed to provide a stable ongoing insurance market in the State of Florida.

    In conjunction with the Cat Fund, a moratorium—as a matter of fact, I think I probably should say the moratorium was created and the Cat Fund was created to work in conjunction with the moratorium. The moratorium was for the purpose of keeping insurers in the State, the Cat Fund was then for the purpose of providing the needed reinsurance to be able to do business in the State.

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    The Cat Fund is a State-run tax-exempt trust fund administered by the Florida State Board of Administration, which consists of the Governor, the Comptroller and the Treasurer, who is also the Insurance Commissioner. It has the advantage in that it can accumulate reserves on a tax-exempt basis. It can also finance with tax-exempt debt. The monies in the Cat Fund are secure in a State managed trust fund.

    H.R. 21 is a very important bill, and I think it is a very flexible bill the way it is drafted. The more I read it, the more I like it in terms of the provisions and the flexibility that is presented there. It is needed to deal with potential catastrophic loss exposure that faces the Nation today.

    The catastrophic problem is a growing one, and as you have heard earlier through testimony, we have an immediate need that needs immediate attention.

    State catastrophe programs are limited in what they can do. H.R. 21 is designed to coordinate a Federal catastrophic program with State programs and to operate to greatly enhance the ability of any State program to respond to future catastrophic losses. It has the advantage of not placing an undue financial burden on Federal taxpayers by allowing States to fund the program through premium payments. Although the Cat Fund was designed to provide additional reinsurance capacity for the State, as I mentioned earlier, it cannot provide for the $50 to $60 billion hurricane loss that may come along. Certainly our hurricane models show that that could be a possibility.

    H.R. 21 should help open up the marketplace in Florida and should encourage insurers to do more business in the State by providing an extra layer of catastrophic protection.
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    I want to commend you for your thoughtfulness in this legislation. I think you have been very thoughtful as well as sensitive to the issue and this is a very positive and proactive approach to dealing with the catastrophic problem that this Nation faces today.

    As I said, this is a very good bill, I believe it is flexible and it will solve a lot of the problems that we face today.

    Thank you.

    [The prepared statement of Dr. Jack E. Nicholson can be found on page 53 in the appendix.]

    Chairman LAZIO. Thank you very much, Dr. Nicholson.

    Ms. Duncan, good morning.

    Ms. DUNCAN. Good morning.

    Chairman LAZIO. Good afternoon actually.

    Ms. DUNCAN. Yes.

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    Ms. DUNCAN. My name is Pamela Duncan and I want to thank you for this opportunity to speak to you today in support of H.R. 21, the Homeowners' Insurance Availability Act of 1999. I am the Legislative Affairs Director with the Florida Department of Community Affairs and I am here on behalf of Secretary Steve Seibert, and Joe Meyers, our Director of the Division of Emergency Management, who unfortunately were unable to attend today's hearing.

    This issue is vital to the State's efforts to respond to emergency management issues. Ever since Hurricane Andrew devastated much of south Florida, the Department has aggressively sought new ways to reduce our exposure to future natural and non-natural events. This bill has the potential to further our efforts.

    No other State in the Nation, with perhaps the exclusion of California, is as vulnerable to natural disasters as Florida. Florida has experienced over 160 hurricanes or tropical storms since 1888, causing billions of dollars of damage. In fact, Florida has experienced four hurricane events in under 35 years that caused over a billion dollars of damage each.

    Portions of Florida have been declared disaster areas by the President for 19 events in just the last seven years. This does not include dozens of agency declarations over the same time period for events of lesser consequences and events that are not covered by the Stafford Act.

    Dr. William Gray of Colorado State University's Department of Atmospheric Science, has predicted that we have entered into a phase of increased hurricane activity that will last several decades. This same trend has occurred before during the 1930's, 1940's and 1950's, when the population of Florida ranged from 1.47 million in 1930 to 2.77 million in 1950. When compared to today's estimated population, which is approaching 15 million, it is obvious to see our vulnerability has exponentially increased.
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    A quick look at our population distribution is also cause for great alarm. Everyone who moves to Florida wants to live near the coastline. In 1998, nearly 80 percent of the entire State population resided in a coastal county. Of that amount, 6.5 million residents lived within five miles of the coast.

    It is not hard to see why Florida has been and continues to be concerned about the availability of residential insurance. Hurricane Andrew was a major wake-up call for us. This single event caused several insurance companies to become insolvent and several others to terminate all residential and commercial policies. This was a result of their inability to secure reinsurance policies and their fear of another catastrophic hurricane event causing even more insolvency.

    We talked a lot today about the Cat Fund. As previously stated, Florida's Cat Fund is a remarkable achievement and contributes mightily to a healthy private insurance market for our residents. Yet when considering the devastating impact of another catastrophic event, the State of Florida's Cat Fund needs the added protection H.R. 21 would afford through the creation of contracts for reinsurance coverage.

    As it stands now, it is estimated the Cat Fund could support two catastrophic events in a two year period through its on-hand reserves and ability to leverage bonds. But what would happen if we had three or four major events in sequential years, as was not uncommon during the 1940's? How would we guarantee homeowners would be able to recover from such events if their private insurance carriers became insolvent? There is a great need for Federal involvement to create the infrastructure necessary to provide an additional layer of catastrophic protection. Doing this would add an extra layer of protection for homeowners and their insurance providers and have a stabilizing effect on the marketplace.
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    We understand the need to reduce Federal expenditures for disaster recovery. However, if the insurance providers cannot or will not provide primary coverage for homeowners, the Federal cost for recovery will skyrocket. Thousands of victims will qualify for Federal disaster assistance programs, who would not have been eligible before, due to the lack of insurance coverage. And long term assistance will be necessary, as victims try to rebuild their lives after sustaining major economic losses.

    The State of Florida has wholeheartedly embraced the magnitude of this problem and has been active in pre- and post-disaster activities. State funded initiatives for capability enhancement, coupled with public/private partnerships with the insurance industry have dramatically increased our ability to cope with otherwise disastrous storm events. State and local expenditures for preparedness, response, recovery and mitigation measures demonstrate our commitment to protect Floridians.

    We have also maintained a strong State component of the National Flood Insurance Program and heavily encourage our communities to participate in the community rating system as a way to lower the uninsured costs of flooding events. Florida spends hundreds of millions of dollars on pre-storm mitigation activities annually. Each measure undertaken lowers the cost to the Federal treasury for disaster consequence expenditures.

    In closing, we believe this legislation will support our need to keep private insurance available and affordable for our residents. Without it, we can only expect the overall cost to the Federal Government to increase as more and more victims seek Federal reimbursements for their losses, in lieu of having the first layer of protection private homeowners' insurance affords. Therefore, it is our hope that this legislation passes.
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    Thank you again for this opportunity to speak to you today and I have one of our experts in our recovery programs here with us, Jim Loomis, and he has been working quite extensively with the insurance industry and FEMA on these issues, if you have any questions.

    Thank you.

    [The prepared statement of Pamela Duncan can be found on page 58 in the appendix.]

    Chairman LAZIO. Thank you very much, Ms. Duncan. And thank you for bringing some additional assistance to the Committee.

    And finally for the second panel, Mr. Larry Gispert, who is the Director of Emergency Management for Hillsborough County, Florida. Again, welcome to you—you should welcome me I guess.

    Mr. GISPERT. Welcome to Tampa. I hope you are staying overnight so you can leave some of your green stuff.

    Chairman LAZIO. Thank you very much, Mr. Gispert, great to see you.

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    Mr. GISPERT. Good afternoon, Congressman Lazio and Congressman McCollum.

    When I was approached to appear before this subcommittee, I was given instructions that I am to paint the picture on how bad it is in the Tampa Bay area when the big one comes. In our world of emergency management, the statement is not if, it is when. It may not be this year, it may be next year, it may be the year thereafter, but it will happen eventually. Statistically speaking, one day, we are going to get the big one.

    I also caution you that the world of emergency management has four responsibilities. We are supposed to plan for it, we are supposed to respond to it, we are also supposed to recover from and try to mitigate the extent of future disasters. That is a mouthful to do.

    I live in Hillsborough County, I work in Hillsborough County. Our county is larger than seven of the smallest States in the Union. We are living around this very, very shallow, large body of water called Tampa Bay. We often hear and compare the Tampa Bay area with Southeast Florida, Fort Lauderdale and Dade. We have one problem that they do not. We have the potential of 28-foot of storm surge at the top of the Tampa Bay area, which is just adjacent to the downtown business district. Water weighs approximately 1760 pounds per cubic yard. There are millions of cubic yards in a storm surge tide. Very few of our infrastructure is going to withstand the onslaught of that water.

    Let me give you some area demographics with a caution. I am going to speak strictly of Hillsborough County. Now Hillsborough County is one of the largest counties geographically and population-wise in the area, but we have over 2.2 million people living around that Bay that we are talking about. So I only lay claim to 942,000, there is about a million-plus somewhere else that is going to have an effect when the big one comes.
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    Residential units, where we live, we have a total in Hillsborough County of about 421,000. I am going to round these figures off, the exact figures are in my stated testimony. Of the 421,000, 251,000 are single family dwellings, your houses, like you and I live in. We have about 123,000 multi-families, apartments, duplexes, and so forth. And unfortunately, we have about 47,000 mobile homes. Mobile homes do not withstand any effect of any hurricane. That is approximately 100,000 people that are in danger just because they live in a mobile home regardless of their location in our county.

    Businesses. You have already heard that the Tampa Bay/Hillsborough County area is the business hub of the whole west coast of Florida. If the Tampa Bay Port takes a direct hit and is incapacitated, within three days, you will not be able to buy any gasoline for 100 miles around. All the gasoline for the west coast of Florida comes through the Port of Tampa. Those gasoline tanks are within spitting distance of Tampa Bay. Remember the 28-foot storm surge, remember how much water weighs? We will probably not have a gasoline storage terminal after the big one.

    Business, total, we have approximately 64,000 businesses, 452,000 employees. Our downtown Tampa business districts have over 1,000 businesses, 25,000 employees. Our west shore business districts, which unbeknownst to most people is the largest business district in the southeast United States, has over 4000 businesses with almost 80,000 employees. Both of these districts are in the hurricane-vulnerable zone. They will both be affected by the big hurricane.

    Area insurance exposure. Residentially we have approximately 256,000 residential policies, homeowners' insurance, $42 billion worth of total exposure there.
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    Businesses, we do not know how many policies, but we guesstimate the approximately exposure of about $6.3 billion.

    Total insurance exposure, approximately $50 billion. That is Hillsborough County alone. Remember the other one-point-some-odd million people that we are talking about.

    In our business, we use computer modeling, because we do not even want to really test the real thing. We have a very popular model that NOAA put together ten years ago called the Sea, Lake, Overland Surges Due to Hurricanes, popularly called SLOSH. It is the one that predicts the onset of seawater.

    In Hillsborough County, we have 86,000 residential units that are in one of the SLOSH surge zones. That is 20 percent of our residential homes are exposed to surge. Our businesses in the surge area are about 12,000, about 18 percent.

    Let me caution you, Andrew was a major wind event. What I am talking about is a major surge event. Historically speaking, over 90 percent of the people who lose their life as a result of a hurricane drown in the surge. My primary goal in Hillsborough County Emergency Management is to get the people away from the water.

    We also use a new popular model called the Arbiter of Storms, TAOS. This one does a very good job of predicting the debris, another unpopular item to think about. Debris is the largest public expense recovering from a disaster. A community will spend more in debris removal than all the other public expenses combined.
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    In Hillsborough County for a Category 5 worst-case storm, we are looking at 40.5 million cubic yards of debris. If you convert that, you might want to know it is seven million truckloads. We expect it will take almost a year to remove and reduce this debris. It will probably totally wipe out our only sanitary landfill.

    What are the biggest challenges in emergency management in the recovery period after we take the big one? I hope I have impressed you that we are going to have a little devastation around here.

    The biggest challenge I am going to have is the initial provisions of basic services. We are going to have a bunch of people we are going to have to feed, we are going to have to give them drinking water and a place to stay. It is going to be devastating.

    This is probably the most heart rendering effect of Hurricane Andrew, is when CNN was on the ground, you saw the little people all disheveled and they could not find their way and they said they did not have anything to drink for three days and food to eat. We are going to be sure we can try to feed them and at least give them something to drink. It is going to be a major undertaking in this Bay area.

    Another big problem, temporary housing. By the way, the Arbiter of Storms predicts 99 percent of all structures in Hillsborough will receive some sort of damage from the big one. Your damage will be directly proportional to your closeness to the water. The closer to the water, you are totally devastated and as you move inland, you will receive less damage. But 99 percent of all structures will be damaged.
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    We will have a temporary housing shortage of upward of 300,000 units. We will need to put 300,000 units on the market. There is not enough mobile homes in any mobile vendor sale in the whole State of Florida to cover that problem. So where do we sleep these people that their homes have been devastated? Big, big problem.

    We are also looking at potential complete rebuilding of infrastructures, the power grid, the telephone circuitry, roads, bridges and streets. You are looking at a pretty, you know, disheartening situation for local government.

    Here is another problem—joblessness. We expect for a period exceeding six months after the storm that approximately 170,000 Hillsborough County residents will be without a job. That is 37 percent of our work force. If you are without a job, you have no money. If you have no money, you have no community. How are we going to put these people back to work?

    Now, as you all know, Florida is a tourist-based economy. We cannot even speculate what the loss for the lost tourism is, because we do not know how long people will stay away from Tampa after the big hit. We do know it will probably be in the billions of dollars. If we take the big hit, it is going to take us a couple of years to get back on our feet. So Tampa is one of the major entry ports for the west coast of Florida for the Disney World area. How long can we convince them to come back through us?

    In closing remarks, I commend you for your efforts on H.R. 21. The State of Florida attempted to do what it could for itself. We need some help on top of that. For those people who live in North Dakota, realize that homeowners' insurance trickles throughout the entire United States. If we bring the homeowners' insurance industry to their knees in Florida, they may have difficulty getting homeowners' insurance in North Dakota.
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    As a personal experience, my homeowner's, personal homeowner's insurance has doubled since Hurricane Andrew. My deductible went from $250 to $2,000. As a local county government employee, I want to tell you, that made a major shift in my lifestyle.

    And the funny thing about it is the insurance company that I have been paying insurance for for 35 years told me I was blessed because they would continue to sell me insurance, but they would not sell anybody else new insurance in Tampa Bay.

    Thank you very much.

    Chairman LAZIO. Thank you for that sobering testimony.

    I would like to ask a couple of questions and I want to start with you, Mr. Gispert, you laid out what a disaster might look like, not just the initial impact, but in the months and perhaps even years afterwards.

    Now, where do you think insurance—and some of those things we cannot address in our bill, we do not address in our bill. But let us talk about insurance for a moment. If people do not have insurance availability and they cannot rebuild their homes, does that exacerbate the housing shortage? It seems like it is common sense that it would.

    Mr. GISPERT. One aspect of homeowners' insurance is the ability to get temporary living expenses. If these people had relatives in Georgia or somewhere else they could go, they would need money to get there. Insurance companies would cut them a check for some temporary living expenses in order to tide them over. We are not even talking about rebuilding their home, we are just talking about their ongoing life in the interim period of time.
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    If the insurance companies are not able to pay off claims, they are not able to pay off temporary living expenses so it just exacerbates the 300,000 homeless—not only are they homeless, they have no money.

    Chairman LAZIO. And then if they cannot rebuild——

    Mr. GISPERT. Then we have no community, thank you very much.

    Chairman LAZIO. So let us talk a moment if we can, and I am going to open this up to the whole panel, about where things are right now. I mean there is some reinsurance market in Florida, thank goodness, it does play an important role in the patchwork of assuring that there is some risk management. But is it enough right now and again, let us talk about the consequences of not doing anything, or if there was no Cat Fund.

    Let me begin with you, Dr. Nicholson, and see if you can try and address some of those questions.

    Mr. NICHOLSON. Well that is something we thought very seriously about this past legislative session and the legislation that Representative Waters sponsored had a lot to do with some of that impact, because what we were thinking about is what if the Cat Fund were wiped out and we had to start back at ground zero. In that particular instance, we would have a situation where the insurance industry would have to come back in, buy private reinsurance at perhaps the worst possible time and the cost would be astronomical to them. Our cost for the Cat Fund is about half of what private reinsurance costs, so that alone says to replace Cat Fund coverage, you would have to double the cost.
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    So this subsequent season legislation was designed to provide some come-back for the Cat Fund, some reloading. And it is successful in bringing us from say $11 billion back to maybe $5.2 billion in a subsequent season, so we have some bounce back.

    Chairman LAZIO. Could I just stop you for a moment on that? Now what you have just said is very important, because you are saying that if there is no Federal backstop, if you have to go back into private reinsurance marketplace, assuming that there is such availability, then your expectation is that the premium costs—let me not put words in your mouth. Why do you not address what the consequences might be?

    Mr. NICHOLSON. I am comparing the Cat Fund's coverage as it is designed today with private reinsurance. I was not really comparing the Federal program.

    It is not quite as comparable, because what you are really talking about is an upper layer that begins at the 1-in-100-year storm layer. So the premium for that is very small, and the reinsurers refer to that as ''rate on line,'' and the Cat Fund's rate on line is somewhere in the order of 4.6 percent or 4 percent, or something like that.

    The reinsurance program that you are contemplating would be on the order of maybe less than 2 percent, or 2 percent area.

    So it is very economical coverage that is being provided, even though you have got this 100 percent risk load thrown in there. I think there are some very positive benefits with the high retention, the co-pay that is built into this program, the way it is designed, keeps that cost down.
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    And then the other factor I think that has to be evaluated somewhere along the line is the impact on competition. As soon as you start providing more homeowners' insurance in the marketplace, competition will tend to lower prices. And I do not think that has been factored into some of the discussion, nor can it be factored in until the actual program is passed.

    So there is opportunity. This is an optional program. It is not something that is going to hurt anybody, if you do not like it, you do not have to buy it. To the extent that it is optional, then as a State program, my first job would be to evaluate it in terms of our cost and make a recommendation to the Florida Legislature on whether we would buy into it in terms of a State program or whether we would recommend that insurance companies go with the option part of it. So either way, it is a win-win situation for Florida.

    Mr. GISPERT. Mr. Lazio, I receive phone calls daily at my office, people are able to find homeowners' insurance, but they are having difficulty. They will go to the name brand insurance and suddenly discover that that name brand insurance company is not selling new policies in the Tampa Bay area. Then they are perplexed and then I have to try to say, you know, ''Go through the Yellow Pages and look. You can find homeowners' insurance, it is more expensive than it used to be, but you can find it.'' I have not received any phone calls back that they were unable to find the insurance, but it was much more expensive.

    The other problem that we have is, you know, the insurance industry refuses to sell homeowners' insurance once a tropical storm falls within a certain grid area, and we have received numerous complaints about stopping the economy as we wait for the hurricane, because they have a magic longitude and latitude, as long as the hurricane or tropical storm is in there, they sell no insurance anywhere in the State of Florida.
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    Chairman LAZIO. Let me ask this as sort of the last question. What happens if the claims on the Cat Fund exceed its ability to pay right now? It sounds as though from the testimony of Dr. Gispert that that conceivably could happen just in the Bay area alone.

    Mr. GISPERT. Yes, sir.

    Chairman LAZIO. Let alone if you cut a swath or hit southern Florida where there is perhaps even more of a concentration of real estate and homeownership.

    Mr. NICHOLSON. Well, the situation as it stands under the current statute is that our liability is limited to $11 billion or whatever we can raise through bonding if it happens to be less. Right now we think we can raise a lot more than our capacity, but we are capped at $11 billion. And the reason for that is so that the subsequent season capacity can grow so that we will, you know, be able to stabilize the market that way.

    But above $11 billion is where we are vulnerable and that is where I think the Federal program is needed.

    Chairman LAZIO. OK.

    Congressman McCollum.

    Mr. MCCOLLUM. Thank you very much. I think Chairman Lazio asked some very, very pertinent questions on this.
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    Ms. Duncan, I wanted to point out something that you pointed out, or reiterate it with you. I think at the end of your testimony, you gave some of the most important testimony for us to carry back to Washington. You discussed what really is true from what Director Gispert is saying and that is that the cost is going to be so great if you have one of these events, that while right now we may be talking about the Federal Government coming in and helping, FEMA, with infrastructure, but if you have a big cost factor coming in from the huge losses we would have if you had the Guatemala-type hurricane hit here, I know good and well and so does Congressman Lazio what you said is true. The taxpayers in Washington are going to put out a lot of money. We are going to put it out through Washington. And we are going to come in and start picking up a lot of horror stories in the areas of homeowners, even that we do not normally do.

    So I think that is very, very important and that is what you are talking about, is it not? You are talking about if the really big banana hits, the folks in Iowa, who are not going to see the hurricane, are going to wind up paying some of the bill they never envisioned paying.

    Ms. DUNCAN. Yes, that is exactly what we are talking about.

    Mr. MCCOLLUM. And you are also talking about, and I think Mr. Nicholson pointed this out too, the availability—and maybe some of the others who were witnesses—the availability of insurance generally in the Nation is impacted if you have a bigger problem. It is not just Florida's insurance that would be impacted if we really stretched this; is that not true, Mr. Nicholson?

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    Mr. NICHOLSON. Yeah, I think how that relates is from the standpoint of the insurance companies' impact on surplus. If they have to utilize surplus to pay Florida losses, that means that nationwide, they have less overall surplus to provide insurance in other States.

    Mr. MCCOLLUM. One thing I was curious and maybe you, Ms. Duncan, could help me with. And Mr. Lazio got into some of that. If we had a big burden of a disaster, in the post-hurricane period, in the post-period, we have a bonding and assessment mechanism that is built into our whole system in Florida, if I am not mistaken. And I am not the expert in this. That is what we legislators at the Federal level, it is sort of like ordinary citizens in this case, I am more curious as a citizen, but does that not come back later to haunt us if there really is a huge overage? Will there not be a greater assessment of some sort that winds up with an increase in our cost, or is that corrected with what Ms. Waters worked on last year in the legislature? How does that work?

    Mr. NICHOLSON. Let me answer that. The way that the Florida Hurricane Cat Fund is funded is two sources. One is through premium payments of the participating companies and there is roughly 292 companies that participate, offering homeowners' and residential insurance in the State. That is one source of funding, and that is how the Cat Fund has grown to now over $3 billion at year end in cash. The other source is that if we do not have enough cash, then we can bond. And the bonding comes through approximately 715 other insurance—which includes those, but the total property and casualty insurers in the State, excluding workers' comp, would be assessed a 4 percent assessment in any one year, or it could accumulate to as much as 6 percent over two seasons. So that 6 percent would be the amount that you and I would pay additionally in terms of the premium that we pay, on average. So if you pay $1,000 for your homeowners' insurance, you are going to pay 6 percent more just to cover the cost of that bonding. So it is somewhat a hidden cost.
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    Mr. MCCOLLUM. That is what I was getting at.

    Mr. NICHOLSON. And that is relatively minor when you look at the percentages associated with the Cat Fund. When you look at the JUA and the Wind Pool, that cost can exceed 20 to 30 percent.

    Mr. MCCOLLUM. So it really hits your pocketbook. I think it is something that we do not always relate to when we talk about this, and most of the homeowners in Florida probably, or citizens, businessmen, do not realize how that affects or could affect them if that were to happen.

    So that makes our bill, H.R. 21, all that much more important if we can get some protection at the top. You probably could sustain some of those losses, but hopefully those would be mitigated.

    Last question, when—I am trying to remember, I guess it was the Deputy Commissioner who told us this—yes, when Ms. Murphy came along and said earlier that she was concerned in our bill, and I am too, about any possibility of having to pay two times the loss cost as a part of the condition of this bill, that it might drive premiums up. And I came back and asked her, which is right, about reinsurance being now five or six times less cost, and of course insurance companies do not buy reinsurance currently because they cannot afford that.

    Would the two times—Mr. Nicholson, did I read your testimony or hear what you were saying to us a minute ago right? That while it would be better if we could get it down—and by the way, that is something Treasury has forced us to do as a consideration of this bill—that is still a better deal. And you think that is a minimal cost, based on what you see in this? I am kind of reading into what you are saying to us, but I gather that is what you are telling us.
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    Mr. NICHOLSON. I think for the level of coverage and the amount of coverage that you are providing, there is 100-year retention basically before the Federal program would kick in.

    Mr. MCCOLLUM. Right.

    Mr. NICHOLSON. And then for that layer of coverage to go up to $25 billion above that, if you figure up the total cost for that, like a rate on line that reinsurers would quote it, it would be something like 2 percent. Now I would have to go back and refigure that to be exact, but I am giving you that number as an example because that would compare with our cost of about 4 percent, even though we have no risk load at the lower level, you have a risk load at the higher level, it is because of that higher level, higher layer, that probability of loss is so small that even with the risk load, it is going to be very economical coverage.

    Mr. MCCOLLUM. Economical for the insurance company, and therefore, very economical for any expectation we would have for premium effects all the way down.

    Mr. NICHOLSON. Right. And there may be effects on premiums. You do not get something for nothing. But there also may be some other impacts associated with the competition. If you depopulate the JUA and the Wind Pool to zero—I do not think we could ever do that with the Wind Pool, but we could certainly get it down from what it is today—you have just created a much healthier insurance marketplace with competition and those prices that people were paying there that are much higher than the admitted market, would go back down to the admitted market level.
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    Mr. MCCOLLUM. And the point also is that since they were talking about very minimal, if any, impact on an insurance premium at this level, because of what you just described, it certainly is worth it compared to where we go with rates and what we are going to have to pay as homeowners for the assessments you are talking about, if we wind up with the big hit somewhere along the road and do not have this legislation.

    Mr. NICHOLSON. Right.

    Mr. MCCOLLUM. That is the real bottom line of this.

    Mr. NICHOLSON. Right.

    Chairman LAZIO. Would the gentleman yield?

    Mr. MCCOLLUM. I will be glad to yield.

    Chairman LAZIO. I just want to follow up on this because this is also another interesting point for me. Even if there were some impact on premiums because insurance companies did not have reinsurance, did not have proper coverage now bought it because of this insurance availability through H.R. 21, what you would be buying, at least in part, is the peace of mind to know that you have stability in the real estate market, so that if you get hit, if the Bay area gets hit, that the homeowner whose primary investment is their home, knows that when it comes time for them to sell or be transferred or move to a different part of the State or whatever the case might be, that there will be a marketplace there for them as opposed to what might be the case if there was inadequate reinsurance and so you have companies that may stop writing policies, pull out of the area and you have this instability which destabilizes the homeownership market as well. Is that fair as to what you are buying?
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    Mr. NICHOLSON. Right. Absolutely, because like I said earlier, it is flexible in that once it passes and we start to evaluate it and we do not see the benefits in Florida, we would not buy into it, we do not have to buy into it. But if we do see benefits, we do buy into it. So there is going to have to be an analysis done here, but I think that there are some very positive things that could impact costs just as you have mentioned, if the residual markets are reduced, insurance is made more available, competition increases—all that has to be factored into the equation when you evaluate this thing.

    Chairman LAZIO. I was introduced to Alex Sanchez from the Florida Bankers Association by Congressman McCollum and I know he very much agrees with I am sure the whole notion of stability in terms of their industry as well, the importance of being secure. Everybody is looking to make sure that they have peace of mind and to know that they are secure.

    I am sorry. Thank you for yielding to me.

    Mr. MCCOLLUM. I have no other questions, but thank you, Mr. Chairman.

    Chairman LAZIO. You have been terrific.

    Mr. GISPERT. I might want to point out one thing.

    Chairman LAZIO. Yes, sir.

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    Mr. GISPERT. We have got these 300,000 homeless people. They are going to want to rebuild.

    Mr. MCCOLLUM. You bet.

    Mr. GISPERT. And the fact that they have some stability, the homeowners' insurance market is tough, it is going to delay some of the trauma, because as you have seen time after time after time on CNN when you go into a devastated area, the citizens say, ''We want to rebuild, we live here for a reason.'' So we have got to have that insurance there in order to get them back in their homes.

    Mr. MCCOLLUM. I want to at least thank this panel. Some of them have come a great distance to get down here. I realize coming from Tallahassee is not very easy either.


    Mr. MCCOLLUM. It really is not. But thank you very much and I want to thank the County and the Aviation Authority for letting us use this facility.

    Chairman LAZIO. Thank you very much. Congressman, thank you for a great panel, great testimony. It will be of invaluable assistance as we move toward meeting the mission of improving availability of homeowners' insurance.

    I want to thank you and this hearring is now adjourned.
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    [Whereupon, at 12:43 p.m., the hearing was adjourned.]

    [insert offset folios 35 to 61 here]