Continuing the Congressional interest in natural disaster issues, on April 11, 2007, the Senate Banking Committee held a high-profile hearing on the "Six-Pack" of bills recently introduced by Senators Bill Nelson (D. FL) and Mel Martinez (R. FL) focusing on natural disasters and insurance. Responding to pressure from back home that their congressional delegation "do something," Nelson suggested that this legislative package was designed to bring national attention to the issues and provide a framework for a consensus-building discussion on a national response.
The Committee heard testimony from Florida Governor Charlie Crist (R) regarding his belief that federal action is necessary to buttress state and local efforts at disaster relief. Additionally, two policyholders, a former Florida homeowner and a New Orleans small business owner, testified regarding the specter of rising insurance premiums for natural disaster coverage following their experiences with hurricane-related losses. Witnesses representing insurance, reinsurance and state regulators also testified about their reactions to natural disasters and whether state or federal regulatory action would help or hinder the industry's ability to manage risk and respond to disasters.
Attempting to set a sympathetic stage for Senator Nelson's performance, Chairman Dodd (D. CT) framed the discussion by noting the importance of affordable homeowners insurance for all Americans. Getting closer to specifics, Dodd proposed consideration of four potential initiatives: (1) up to $100 million a year in tax deductions for homeowners' insurance premiums in areas where premiums have been significantly increasing for working and middle class Americans; (2) increased investment in mitigation; (3) strengthening the National Flood Insurance Program; and (4) gathering information for long-term solutions. In this connection, Dodd expressed interest in creating a national commission of insurance experts and leaders to make recommendations to Congress on how to better prepare for and protect Americans from natural disasters. Based on his opening remarks, which stopped way short of endorsing the Nelson-Martinez bills, Dodd emphasized the need for a process of discussion and engagement on these issues to strike a balance between short-term remedies and long-term solutions.
The current betting is that if anything is to move quickly in the committee, it will be some type of a commission. As a practical matter, Dodd is caught between his desire to politically help Gulf State Democrats, balanced against a decided lack of enthusiasm from big segments of the insurance industry and from within the committee for most of the ideas in the Nelson/Martinez package. Of course, a devastating hurricane season could change this betting calculus dramatically.
With this backdrop, the hearing generated mixed reactions to each bill from a spectrum of witnesses and members alike. Testimony from Florida Governor Charlie Crist (R) and NAIC President Walter Bell (Alabama) argued that while both property insurance premiums and catastrophic risk exposure are increasing, insurance is becoming less available in many areas even outside of the Gulf Coast. They also asserted that the insertion of federal authority was appropriate because the economic losses from natural disasters far exceed the scope of privately insured risks and thus ultimately are borne by taxpayers. Dr. Edward Lazear, Chairman of the Council of Economic Advisors, noted that burdening taxpayers in Indiana to foot the bill for his decision to live in an earthquake-prone area is fundamentally unfair. Similarly, American Insurance Association President Marc Racicot testified that the greatest threat to private-sector risk transfer mechanisms was not a natural disaster but government regulation.
Throughout the hearing, Ranking Member Shelby (R. AL) focused on whether the Nelson-Martinez package or any regulatory response was preferable to market-driven solutions. As a counterpoint to Dodd's welcoming tone, Shelby's attitude was skeptical—at best—about how the legislation would ensure actuarially—rather than politically—based pricing, what impact the legislation would have on the federal budget during times of financial constraint, and whether the legislation was anything more than the showering of special benefits on citizens in a few select areas at the expense of all Americans. Laying on a thick coating of criticism, Shelby argued that government programs, such as the National Flood Insurance Program, are notoriously prone to financial mismanagement, noting that private markets are more innovative and better risk managers than the government. At best, Shelby seemed willing to go along with additional legislative discussion, as an alternative to rejecting the bills outright at the beginning of the process. Although Shelby's skepticism was perfectly predictable, the high level of scorn he heaped on the bills was not, especially since Shelby has some constituent interest in the Gulf Coast, himself.
At best, therefore, the Nelson-Martinez package facilitated some discussion, but not momentum. Since both Dodd and Shelby favor additional discussion and the possible formation of a national commission of insurance experts and leaders, it is unlikely that any significant action will develop any time soon. This is particularly true because of the committee's current focus on the soon-to-expire Terrorism Risk Insurance Act, which must be reauthorized by the end of the year if the program is not to terminate.
Here is a vest-pocket description of the Nelson-Martinez "Six-Pack":
- Policyholder Disaster Protection Act, S. 926, 110th Cong. (2007). The bill would allow insurers to establish tax free reserves to pay claims arising from natural disasters. The Act would permit insurers to contribute to Policyholder Disaster Protection Funds, which are capped based on a multiplier specific to the type of disaster covered by the fund. Furthermore, the bill would require certain annual distributions from the fund.
- Catastrophe Savings Accounts Act, S. 927, 110th Cong. (2007). The bill would provide direct relief to families hit by natural disasters through tax relief. This bill would allow individuals to create tax free savings accounts of up to $15,000 for qualified catastrophe expenses.
- Homeowners Protection Act, S. 928, 110th Cong. (2007). The bill, which is essentially the Allstate proposal from last year, proposes the creation of a federal reinsurance program for residential property insurance losses arising out of natural disasters when those losses reach trigger levels on a state-by-state basis. This program, under the direction of the Treasury, would serve as a backstop for residential property losses that had been insured or reinsured under an eligible State Natural Disaster Program that had purchased federal reinsurance. The bill would create a Consumer Hurricane, Earthquake, Loss Prevention (HELP) Fund in the Treasury Department that would be financed by the premiums on federal reinsurance contracts, as well as from tax free amounts earned on investments of Fund principal. The federal reinsurance and participating state programs would cover all types of natural disasters except flood. The bill would establish a variety of threshold requirements for participating state programs such as a mitigation element that incorporated nationally recognized building codes and prohibitions on post-disaster "price gouging." Perhaps by inadvertence, the bill is identical to the bill introduced in the House of Representatives in the last Congress by Representative Ginny Brown-Waite, rather than the amended bill introduced by Brown-Waite this year.
- Nonadmitted and Reinsurance Reform Act, S. 929, 110th Cong. (2007). Under this legislation—which was passed by the House in the last Congress—an insured's home state in a surplus lines transaction would be given exclusive authority to collect premium tax. derived from that transaction. The bill would also permit the states—it may be read to require one agreement among all 50 states—to negotiate procedures to allocate premium taxes among themselves. The bill would also establish uniform standards for nonadmitted insurers writing surplus lines business. Title II of the bill focuses on reinsurance regulation by establishing universal credit for reinsurance when the domicile of a ceding insurer is an NAIC-accredited state, or has substantially similar solvency requirements, and recognizes credit for reinsurance of the ceded risk. Similarly, if a reinsurer's state of domicile is NAIC-accredited, or has substantially similar solvency requirements, that state would be solely responsible for regulating the solvency of the reinsurer.
- Hurricane and Tornado Mitigation Investment Act, S. 930, 110th Cong. (2007). This bill would allow homeowners to receive tax credits for up to 25% of their expenses incurred in measures taken to mitigate damages in the event of a natural disaster such as roofing improvements.
- National Hurricane Research Initiative Act, S. 931, 110th Cong. (2007). The bill proposes to improve the understanding of air-sea weather interactions with the goal of better predicting when a hurricane will strengthen, and when storm surges and inland flooding from hurricanes and tropical storms will occur. Another goal of the legislation is to improve technologies for disaster response and evacuation planning.