Testimony to the House Joint Subcommittee on Housing and Community Opportunity and Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
June 25, 2006
by: Tom Schatz

Testimony

I am Thomas A. Schatz, President of the Council for Citizens Against Government Waste (CCAGW) a nonpartisan nonprofit organization that receives no money from the government.  CCAGW has long been concerned about the cost of the National Flood Insurance Program and other government programs related to natural disasters.

This hearing on H.R. 3355 is an opportunity for Congress to decide whether to expand the role of the government in disaster insurance coverage or to step back and allow the private sector to assist homeowners who suffer damage.

H.R. 3355 provides the wrong solution.  By increasing the availability of state-sponsored insurance funds and exposing taxpayers to massive costs, it would follow the expensive and unworkable precedent set by the expansion of authority established in January, 2007, for Florida’s Citizens Property Insurance Corporation.  That company now competes with the private sector for primary insurance coverage, not just as an insurer of last resort.

On April 20, The Wall Street Journal called the expansion of authority for Citizens an “exercise in Cuban economics [that] is already gutting Florida’s once-competitive insurance market.”  In fact, private insurers are leaving the state, canceling policies, and restricting the issuance of new policies.  Those who cannot obtain coverage are going to Citizens, which has lower premiums based on its implicit taxpayer guarantee and some very unsound actuarial assumptions.

Instead of spreading the risk of a disaster throughout the insurance industry, Florida is putting taxpayers at risk.  A Towers Perrin study found that every Florida household could be hit with a $14,000 bill in the event of a major hurricane because Citizens does not have the reserves necessary to provide coverage in such a disaster.

A letter sent to policyholders in April by USAA, a well-regarded insurer that serves its members, who in turn serve or have served the United States in uniform, said, “Florida politics have severely restricted USAA’s ability to charge adequate property insurance rates for the risk the association bears on behalf of its Florida members.  These actions jeopardize our ability to protect the long-term viability of the association, as well as the assets of our members.  Please consider the following facts:  1.  Over the past 10 years, USAA has paid approximately $220 million more in Florida homeowner insurance losses and expenses that it has collected in Florida homeowner premiums.  2.  Florida residents account for 49 percent of USAA’s exposure to natural disaster risk, yet make up only 9 percent of USAA policyholders and pay 12 percent of USAA’s property insurance premiums.”

USAA has restricted the number of new policies it is writing in Florida and dropped 27,000 second home policies, according to the April 20 Wall Street Journal article.
 
Under H.R. 3355, the government would be usurping the marketplace and acting as a primary insurer.  Rather than encouraging prudent behavior and pricing insurance according to risk, the implicit taxpayer guarantee would lead to more imprudent building of homes in disaster-prone locations with little concern about the cost of rebuilding.  If individuals know they will get paid off, regardless of what they pay for insurance, they will seek the least costly premiums.  That may not be risky for the homeowner, but it is extremely risky for taxpayers.

If the private marketplace provides both primary insurance and reinsurance, the risk is borne by policyholders and the companies, and can be spread throughout the insurance industry.  According to The Wall Street Journal, Florida “accounts for 27% of all hurricane-exposed property in the U.S., worth some $2 trillion.  After Katrina, private insurers paid more than $40 billion to 1.7 million policyholders in Florida.  But the state government and its taxpayers may end up paying for the next big one largely by themselves.”

In his report “Coastal Disaster Insurance in the Era of Global Warming: The Case for Relying on the Private Market,” Justin R. Pidot, a Fellow at the Georgetown Environmental Law and Policy Institute, notes the three types of proposals before Congress to address the “crisis” in coastal insurance rates.  One is to expand the current federal flood insurance program to cover wind damage, the other is to make the United States a reinsurer for coastal insurance, and the third is to allow private insurance companies “to offer coastal insurance by eliminating taxation of premiums that companies dedicate to reserve funds to pay for future catastrophic losses.”

Mr. Pidot calls the pending congressional proposals “misguided” and suggests that the United States stay out of the insurance business as much as possible, allowing private companies to provide coverage that “reflects its true market cost.”  In fact, he calls the NFIP “a public policy disaster” that Congress should eliminate.  He notes that hurricanes are insurable, adding:

… a major new federal intervention in the private insurance market would likely have several unintended negative consequences, including imposing a potentially large financial burden on U.S. taxpayers, unfairly forcing those who live and own businesses in less hazardous areas to subsidize those who live and own businesses in more hazardous areas, creating an incentive for additional coastal development that would increase the nation’s long-term vulnerability to hurricanes and harm valuable coastal ecosystems, and displacing private companies and stifling the development of new and innovative techniques to spread the risks posed by coastal hazards.

Mr. Pidot suggests that governments do have a role, which should be limited to providing “maps and other information on how risks vary in different areas of the coast.”

Finally, the report suggests, and CCAGW agrees, that “the best federal policy appears to be the one that does the least, that is, that largely leaves the business of providing insurance for hurricanes and other coastal storms to the private sector.  Private insurance companies can generally provide appropriate coverage for the risks of property damage associated with hurricanes and other coastal storms while providing consumers with reasonably accurate price signals about the dangers of building, living, and operating businesses in hazardous areas.”

Like Florida’s new law, H.R. 3355 would encourage risky behavior and shift responsibility for poor decisions to the taxpayers.  Members of the subcommittees should restrain themselves from engaging in the usual Washington response of throwing money to solve a perceived problem, which is nothing more than normal marketplace disruptions in the insurance business, to assist homeowners in disaster-prone areas.  Instead, Congress should get out of the way of the private insurance markets.