The Senate Budget Committee Holds A Hearing On Climate Change And Its Impact On Insurance Markets

3 months ago

The Senate Budget Committee held a hearing on Wednesday on climate change and its impact on insurance markets.

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Transcript

00:00:00 to order and thank our witnesses for being here and our ranking member of course.

00:00:08 More than a year has passed since our hearing on climate havoc in the insurance industry, upending

00:00:21 housing markets, mortgage markets, and local property tax bases and spilling out into the

00:00:31 broader economy. That threat is just one of the systemic risks climate change poses to our economy

00:00:44 and to our financial system. Since that hearing a year ago, things have gotten worse

00:00:52 in insurance markets and worse for American families that rely on them.

00:00:59 Press reporting, risk assessments, and further warnings are piling up. I'd reference in

00:01:09 particular the recent cover article of The Economist magazine. As we heard in those

00:01:17 original hearings, you need insurance to get a mortgage. Without a mortgage, most of our

00:01:25 constituents could not purchase a home. What happens when insurance companies go bust or

00:01:32 don't renew policies or pull entirely out of a state? Families lose insurance. They can't find

00:01:41 a decent policy. They can't afford what's available. Some even pack up and move away.

00:01:47 Some end up with state-backed insurers of last resort, which may or may not be solvent.

00:01:59 Some end up with small insurers, which may or may not have the resources to pay claims.

00:02:05 This is what we've begun to see in multiple states. One is Florida.

00:02:13 Ten percent of our nation's homeowners live in Florida.

00:02:18 Florida homeowners pay on average over $6,000 for insurance, the highest in the country,

00:02:27 indeed more than three times the national average, which is $1,700.

00:02:33 Florida's average premium has doubled between 2020 and 2023,

00:02:41 and the trajectory is that it is going to get worse. This has put a strain on many Florida

00:02:50 residents. They install hurricane windows and doors to reduce risk, but premiums continue

00:02:59 -- are you tracking the charts? Premiums continue their upward march. They put off retirement

00:03:06 or skip vacations. For some, such as Deb Wood and her husband, it is simply too much.

00:03:16 In Florida, insured losses grew by 206 percent between 2003 and 2018.

00:03:24 2022 saw Florida residents file over 678,000 personal and commercial insurance claims.

00:03:34 Over 40 percent were hurricane-related. NOAA predicts an 85 percent chance

00:03:44 of an above-normal 2024 hurricane season, with 17 to 25 total named storms and four to seven

00:03:54 major hurricanes. In 2022 and 2023, more than a dozen insurance companies left

00:04:04 the Florida residential market, including national insurers like Farmers. Residents fled

00:04:12 to Citizens Property Insurance, the state-backed insurer of last resort, which ballooned from a

00:04:19 4 percent market share in 2019 to as much as 17 percent last year. If it has to pay out claims

00:04:29 that exceed its reserves, citizens can levy a surcharge on Florida insurance policy holders

00:04:41 across the state. Good luck with that, particularly if the surcharge grows to hundreds

00:04:49 or even thousands of dollars. To depopulate its books, Citizens has let private insurers

00:04:59 cherry-pick out its least-risk policies. Those private insurers may have problems of their own.

00:05:11 As we will hear today, this all looks like an insurance market that is swirling the drain.

00:05:19 As one of our witnesses put it, and I quote, "Unreliable insurance could result in a situation

00:05:27 where large climate shocks may cause property damage at the exact time that the property

00:05:34 insurer becomes insolvent, increasing household default incentives and losses given default."

00:05:43 What will the collision of increasingly unreliable insurance

00:05:51 and greater mortgage defaults mean? Who will be left holding the bag?

00:05:59 The federal budget takes a hit because these insurers and their policies are accepted by

00:06:06 Freddie Mac and Fannie Mae, who either own or guarantee a large part of our $12 trillion

00:06:13 mortgage market. This all sounds eerily reminiscent of the run-up to the mortgage meltdown of 2008,

00:06:26 including a role of potentially captive or not fully responsible rating agencies.

00:06:33 Florida is far from alone. A New York Times investigation found that the insurance industry

00:06:42 lost money on homeowners' coverage in 18 states last year. And the states may surprise you.

00:06:49 The list includes Illinois, Michigan, Utah, Washington, and Iowa. Insurers in Iowa

00:06:58 lost money each of the last four years. This is a signal that hurricanes and earthquakes,

00:07:08 once the most prevalent perils, are being rivaled by hail, windstorms, and wildfires.

00:07:19 Last year, the U.S. experienced 28 separate billion-dollar extreme weather events.

00:07:26 Over the past decade, 28 states have been hit by such events more than twice in a year.

00:07:36 I should say twice or more in a year. 38 states were hit in back-to-back years.

00:07:45 And losses are expected to climb. So, too, will premiums. That is where insurers are even willing

00:07:54 to stay. In one example, the premium on a $250,000 home for a 40-year-old couple

00:08:03 with a combined good credit rating and clean claims history would increase by as much as

00:08:10 63% in Louisiana and 61% in Nebraska. To borrow from the Times article,

00:08:20 "The question facing insurance companies around the country and the homeowners who rely on them

00:08:26 is which state might be heading in the same direction as Florida. The answer from our

00:08:35 reporting, it could be any of them." Or, as a former state insurance commissioner said,

00:08:44 "We're marching toward an uninsurable future." This isn't all that complicated. Climate risk

00:08:54 makes things uninsurable. No insurance makes things un-mortgageable. No mortgages

00:09:04 crashes the property markets. Crashed property markets trash the economy.

00:09:10 It all begins with climate risk. And a major party pretending that climate risk isn't real

00:09:18 imperils our federal budget and millions of Americans all across the country.

00:09:24 I'll just add in closing that the scale of the exposure that we're talking about today

00:09:31 and the paucity of our response and the numerosity and severity of the warnings

00:09:42 we have heard from responsible people and the role of underinsurance and potentially

00:09:53 unreliable ratings from rating agencies is really ringing a lot of alarm bells with me of what we

00:10:02 looked like going into 2008. With that, I'll turn to my distinguished ranking member, Senator Grassley.

00:10:10 Senator Grassley. Thank you, Mr. Chairman. Welcome to our panel of experts.

00:10:18 If the federal government is going to remain ready to respond to the natural disasters and

00:10:24 national emergencies, we have to have the capability of doing that. And it seems to me that begs

00:10:32 to put the nation's fiscal house in order. Yet, even with interest on our national debt,

00:10:41 and that is set to surplus defense spending this year, the majority refuses to write a budget or

00:10:49 work together to curb reckless Washington spending. This week is more of the same with our 19th

00:10:57 hearing on climate change. President Biden and the majority would like us all to ignore our

00:11:07 exploding $34 trillion debt. The majority hopes that we stop discussing how unchecked deficit

00:11:17 spending has fueled inflation, hammering hardworking Americans, and I will say shortly,

00:11:24 has something to do with driving up the cost of insurance. Families now face prices that are 20%

00:11:35 higher than when President Biden took office. 65% of Americans report that entrenched inflation

00:11:43 has made the financial situation worse off under the Biden administration,

00:11:49 and that's not Chuck Grassley, that's according to the Federal Reserve. Moreover, recent high

00:11:58 interest rates have contributed to Americans struggling to pay record high credit. That

00:12:08 means their credit card bills or afford a home mortgage. As Federal Reserve Chairman

00:12:15 Powell has said, quote, it's probably time or pastime to get back to an adult conversation

00:12:26 about elected officials. I missed something. Among elected officials,

00:12:35 about getting the federal government back on a sustainable fiscal path, end of quote. Absent

00:12:44 corrective action, Iowans and for that matter, all Americans will be faced with even higher interest

00:12:54 rates, lower incomes, and elevated inflation, and that will be the situation for years to come.

00:13:03 As to the subject of today's hearing, we've seen this show before. The majority continues to

00:13:16 crusade against American fossil fuel companies. They want to bully insurers into abandoning

00:13:24 their diversified portfolios so they stop underwriting all fossil fuel projects.

00:13:31 If the majority get their way, Americans can expect to pay much more to put gas in their cars

00:13:41 and to heat their homes. Now, I've done battle with big oil in the past,

00:13:46 particularly when it comes to their opposition to fossil or to biofuels, and I support reasoned

00:13:55 oversight over insurance companies, but oversight isn't the same thing as advocacy that seeks to

00:14:06 punish those that hold different views from one's own. As Justice Sotomayor wrote in last week's

00:14:18 unanimous NRA versus Volo decision, quote, "Government officials cannot attempt to coerce

00:14:28 private parties in order to punish or suppress views that the government disfavors," end of quote.

00:14:35 Insurance premiums are far too high across the board and may increase after the recent storms,

00:14:47 including those very storms in my state of Iowa. Climate change isn't the primary driver

00:14:55 of insurance rates hikes and collapse of the insurance industry isn't imminent,

00:15:04 although I'll have to say Iowa had six property and casualty companies pull out of insuring Iowans.

00:15:12 Climate change doesn't explain why auto insurance premiums in 2024 have increased

00:15:20 by a whopping 20% year over year. It also doesn't account for the consistent failure

00:15:28 of liberal cities to fight crime, which has raised insurance risk and even caused insurers

00:15:35 to deny coverage. Expensive liberal policies, not climate change, are much to blame

00:15:45 for these market dynamics. Insurance companies and reinsurers are scrambling to wrangle inflation

00:15:55 like the rest of us. Disasters cost more than ever because of goods and services

00:16:02 are much more expensive. Moreover, there are more rich people living in areas affected by weather

00:16:14 all the way from Newport down to Miami Beach. It's simply more costly to pay the bill for insurance

00:16:24 claims. What's more, the Federal Reserve can't keep up with the Biden inflation,

00:16:31 despite hiking interest rates to a 23-year high. Reinsurance companies are in the business of

00:16:42 purchasing risk from insurance company portfolios. It's only rational for them to forego

00:16:49 risky investments when the U.S. Treasuries pay such a healthy return. Inflation has become

00:16:58 embedded in the economy, and historic levels of borrowing by the Federal Government are crowding

00:17:05 out the private sector. It only makes sense that the majority would rather point the finger at

00:17:12 climate change. To do otherwise means that they acknowledge their reckless spending is a major

00:17:21 cause of the problem. So I welcome all today's witnesses, and I look forward to each of your

00:17:27 testimonies, and hope you guide this committee to focus on our primary responsibility. Thank you.

00:17:35 Thanks very much, Senator Grassley. Before I introduce the witnesses, let me just point out

00:17:40 that we have a budget agreed to in bicameral and bipartisan fashion. And with respect to reducing

00:17:46 fiscal risk, I've been pursuing that on four routes. One is de-risking the budget, which is

00:17:53 important, because a third of our national debt came from shocks, economic shocks, that we could

00:18:00 have predicted that were not part of regular and ordinary budgeting. Second, raising revenues,

00:18:06 particularly on the corporate sector, whose contribution to our government revenues has

00:18:11 declined dramatically across recent decades. And of course, high-end people, including billionaires

00:18:16 who literally pay zero in income tax. Third is to reduce health care spending. It's a major

00:18:23 component of our spending. And with system reforms that the Ranking Member and I have

00:18:28 discussed, and a number of bipartisan bills we're working on, I think we can make real progress

00:18:33 there. And the last, and probably the least, is to review appropriated spending. That is not

00:18:38 the highest value or the most significant important focus, I think, in terms of getting

00:18:43 to a balanced budget, but it is a small part of the overall equation.

00:18:48 >> Could I respond to that before you introduce our people?

00:18:52 >> Yeah. We don't have a budget resolution for 2025. What we do have is called a DEMER.

00:19:01 And it's no substitute for a real congressional budget resolution that can be debated and amended

00:19:09 on the floor by all 100 senators. A DEMER has none of the basic contents of a congressional budget

00:19:17 required under Section 101 of the Budget Act. And while a budget resolution can offer a serious

00:19:24 financial plan for the federal government, DEMERS, based on baseline estimates, are simply

00:19:32 placeholders until we finish a real budget. Last year's debt limit deal explicitly said

00:19:39 that a DEMER does not prevent Congress from doing a real budget resolution for 2025.

00:19:46 Thank you very much. >> That is true, and it remains the case

00:19:49 that we have a budget that was agreed to in bicameral and bipartisan fashion.

00:19:53 The first witness is Raed Mussolin. Raed is an actuary with 45 years of experience in insurance,

00:20:01 specializing in property pricing, natural perils, reinsurance, agriculture, catastrophe risk modeling,

00:20:10 public policy development, and climate risk. Specifically, he spent many years working in

00:20:15 Florida, including as chair of the Florida Hurricane Catastrophe Fund Advisory Council

00:20:21 during the time in which Citizens' Property Insurance Corporation was established.

00:20:26 Our second witness is Dr. Ishida Sen. Dr. Sen is an assistant professor at Harvard Business School.

00:20:33 Her recent research examines the pricing of property insurance and the interactions between

00:20:38 insurance and mortgage markets. This includes the role that institutions and the regulatory

00:20:43 landscape play and the broader consequences for real estate markets, climate adaptation,

00:20:49 and our overall financial stability. Our third witness is Deb Wood. Ms. Wood and her husband,

00:20:56 Dan McGrath, are both retired Floridians. They moved to South Florida in 1979 and lived in Broward

00:21:02 County, which includes Fort Lauderdale, for 43 years until skyrocketing insurance premiums became

00:21:08 too much. They now reside in Tallahassee, Florida. I will now turn to my ranking member, Senator

00:21:16 Grassley, to introduce the Republican witnesses. - Thank you for the privilege of introducing my

00:21:24 invitees to this committee. Dr. E.J. Antoni is a research fellow at the Heritage Foundation Grover

00:21:35 M. Herman Center for Federal Budget. His research focuses on fiscal and monetary policy,

00:21:43 and he previously was an economist at the Texas Public Policy Foundation. Antoni

00:21:52 earned his master's degree and doctor's degree in economics from Northern Illinois University.

00:21:58 Commissioner Glenn Mulready has served as Oklahoma's 13th insurance commissioner and

00:22:08 was first elected to this position in 2019. Commissioner Mulready started his insurance

00:22:16 career as a broker in 1984 and also served in the Oklahoma State House of Representatives.

00:22:24 He supports efforts to continue to apply best practices, modernizing the Oklahoma Insurance

00:22:32 Department, and embracing new technology to serve the people of Oklahoma. Welcome to both of you.

00:22:42 With that, Mr. Musilin, you have five minutes and your entire written testimony, which was very

00:22:51 helpful and I appreciate, will be made a part of the record of the proceedings. Please proceed with

00:22:55 your oral statement. - Chairman Whitehouse, Ranking Member Grassley, and distinguished members of the

00:23:01 committee, thank you for the opportunity to appear before you today. My name is Ray Musilin. I'm an

00:23:06 actuary who has extensive experience in natural hazard risks and funding arrangements for the

00:23:12 damage and loss they cause. I've worked with many public sector entities on policy responses to the

00:23:19 challenges of affordability, availability of insurance, and community resilience. This work

00:23:25 included participating in Florida's response to Hurricane Andrew, which included the creation of

00:23:31 the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation. The

00:23:36 Cat Fund and Citizens can access different forms of funding than traditional insurance companies.

00:23:42 Instead of holding sufficient capital or reinsurance before an event to cover the cost

00:23:47 of potential losses, both entities use public sources of capital to reduce upfront costs

00:23:52 by partially funding losses post-event through bonding and assessments. All property casualty

00:23:58 insurance policyholders, whether in Citizens or not, are subject to its assessments, while the

00:24:03 Cat Fund can also assess almost all policies, including automobile. This approach exposes

00:24:09 Floridians to debt and repayment if large losses occur, and it subsidizes high-risk policies from

00:24:16 the entire population. These pools, others like them in other states, and the NFIP have contributed

00:24:24 to rapid development in high-risk areas, driving higher costs in the long run. In Florida,

00:24:31 national insurers have reduced their exposure, as a significant proportion of the insurance market

00:24:37 has moved to Citizens or smaller insurers with limited capital that are heavily dependent on

00:24:42 external reinsurance. Now, to date, Florida's system has been successful in meeting its claims

00:24:48 obligations, while improvements in building codes have reduced loss exposure. However, for a variety

00:24:55 of reasons, including exposure to hurricanes, claims cost inflation, and litigation, Florida's

00:25:01 insurance premiums are the highest in the nation, causing significant affordability stress for

00:25:05 consumers. According to market research from Bankrate, the average premium for a $300,000

00:25:12 home in Florida is three times the national average, with some areas five times the national

00:25:17 average. A major hurricane hitting a densely populated area like Miami could trigger large

00:25:22 and long-lasting post-event assessments, or even exceed the system's funding capacity.

00:25:29 Continued rapid exposure growth and more extreme hurricane losses amplified by climate change

00:25:35 will cause increasing stress on the nation's insurance system, which may be felt through

00:25:40 solvency issues, non-renewals, growth of government pools, and affordability pressure.

00:25:46 Evidence of increasing risk abounds, including Hurricane Otis in 2023, which rapidly intensified

00:25:53 from a tropical storm to a cat-five hurricane, and devastated Acapulco in Mexico. Last summer,

00:25:59 water temperatures off Florida exceeded 100 degrees Fahrenheit. Last week, as was alluded

00:26:05 to earlier, NOAA forecast an extremely active hurricane season for '24. We've seen losses in

00:26:12 the mid-Atlantic from Sandy, record flooding from Harvey, and extreme devastation from Maria,

00:26:18 among others. In coming decades, we must prepare for the possibility of more extreme hurricanes

00:26:25 and coastal flooding from Texas to New England. Florida's experience is a warning of what we may

00:26:32 see in the future in other states. Despite its innovative and extensive efforts to address its

00:26:38 hurricane problem, premiums are high, consumers may face large assessments, and many are dependent

00:26:44 on citizens and smaller insurers. Most current building codes and land-use policies in the

00:26:51 country do not reflect potential future risk. Even if we undertook rapid action to address this,

00:26:58 existing exposure and likely development will leave us vulnerable to large losses for decades

00:27:04 to come, which may trigger more widespread availability and affordability issues,

00:27:09 or even calls for federal assistance. The combination of demographics, development,

00:27:16 and disasters pose a significant risk to our financial system, and climate change increases

00:27:24 that risk. Addressing this will be a long-term effort which involves very difficult public

00:27:30 policy choices. Thank you. Thanks very much. Dr. Sen, please proceed with your testimony.

00:27:39 Good morning, Senators. I am Ishita Sen, Assistant Professor at Harvard Business School,

00:27:45 and my research studies insurance markets. In recent work with co-authors at Columbia

00:27:51 University and the Federal Reserve Board, I examine how climate risk creates fiscal

00:27:56 and potentially financial instability because of miscalibrated insurer screening standards

00:28:03 and repercussions to mortgage markets. Insurance is critical to the housing market. Property

00:28:09 insurers help households rebuild after disasters by preserving collateral values and reducing the

00:28:16 likelihood that a borrower defaults. Insurance directly reduces the risks for mortgage lenders

00:28:22 and the government-sponsored enterprises such as Fannie Mae and Freddie Mac. Mortgage lenders

00:28:28 therefore require property insurance, and the GSEs only purchase mortgages backed by insurers

00:28:36 who meet minimum financial strength ratings, which measure insurer's solvency and ability

00:28:42 to pay claims. The GSEs accept three main rating agencies, AMBEST, S&P, and more recently,

00:28:51 Demotech. And to provide an example, Fannie Mae requires insurers to have at least a B rating

00:28:58 from AMBEST or at least an A rating from Demotech to accept a mortgage. Now, despite having this

00:29:06 policy in place, we find a dramatic rise in mortgages backed by fragile insurers and show

00:29:13 that the GSEs and therefore the taxpayers ultimately shoulder a large part of the financial burden.

00:29:20 Our research focuses on Florida because of availability of granular insurance market data,

00:29:25 and we show that traditional insurers are exiting, and the gap is rapidly being filled by insurers

00:29:32 rated by Demotech, which has about 60 percent market share in Florida today.

00:29:36 These insurers are low quality across a range of different financial and operational metrics

00:29:44 and are at a very high risk of becoming insolvent. But despite their risk, these insurers

00:29:50 secure high enough ratings to meet the minimum rating requirements set by the GSEs. Our analysis

00:29:57 shows that many actually would not be eligible under the methodologies of other rating agencies,

00:30:03 implying that in many cases these ratings are inflated and that the GSEs insurer requirements

00:30:09 are miscalibrated. We next look at how fragile insurers create mortgage market risks. So,

00:30:17 in the aftermath of Hurricane Irma, homeowners with a policy from one of the insolvent Demotech

00:30:23 insurers were significantly more likely to default on their mortgage relative to similar borrowers

00:30:30 with policies from stable insurers. This is because insurers that are in financial trouble

00:30:36 typically are slower to pay claims or may not pay the full amounts. But this implies severe

00:30:41 economic hardships for many, many Floridians despite having expensive insurance coverage in

00:30:47 place. However, the pain doesn't just stop there. The financial costs of fragile insurers go well

00:30:53 beyond the borders of Florida because lenders often sell mortgages, for example, to the GSEs,

00:30:59 and therefore the risks created by fragile insurers spread from one state to the rest

00:31:04 of the financial system through the actions of lenders and rating agencies. In fact, we show

00:31:09 two reasons why the GSEs bear a large share of insurance fragility risk. First is that lenders

00:31:16 strategically securitize mortgages of loading loans backed by Demotech insurers to the GSEs

00:31:23 in order to limit their counterparty risk exposures. And second, that lenders do not

00:31:29 consider insurer risk during mortgage origination for loans that they can sell to the GSEs,

00:31:36 even though they do so for loans that they end up retaining, indicating lacks insurer screening

00:31:43 standards for loans that can be offloaded to the GSEs. Before I end, I want to leave you with two

00:31:50 numbers. Over 90 percent, that's our estimate of Demotech's market share among loans that are sold

00:31:57 to the GSEs. And 25 times more, that's Demotech's insolvency rate relative to AMBEST among the

00:32:06 GSE-eligible insurers. Projections suggest risks will continue to grow with climate change and more

00:32:13 building in risky areas, that is unless action is taken to correct incentives and strengthen

00:32:19 insurance markets, which include properly accounting for insurer solvency risks and

00:32:24 climate risks. A necessary starting point for all of this is access to granular insurance

00:32:31 underwriting data. I urge regulators to collect these data in a comprehensive way and make it

00:32:36 widely available for research. I really appreciate this opportunity, Senators, and your timely

00:32:41 efforts on this issue. Thank you. Thank you very much. I now have the pleasure of welcoming Ms.

00:32:48 Deborah Wood, who can bring some lived experience to the expert testimony that we have heard. Please

00:32:56 proceed, Ms. Wood. Good morning, and thank you for inviting me. My name is Deborah Wood. My

00:33:03 husband, Dan McGrath, and I moved from New Jersey to South Florida in 1979. We lived in Broward

00:33:10 County for 43 years until we sold our home in January 2023, in part because our home insurance

00:33:17 was becoming unaffordable. My husband and I are retired. He was a public school teacher of special

00:33:23 needs children, and I was a journalist. Dan and I raised our two daughters in Florida, and all

00:33:29 four of us have earned degrees from Florida public universities. In 1994, we moved to the city of

00:33:35 Plantation, about 10 miles inland from the East Coast. Home insurance rates were reasonable in

00:33:41 those early years, and when we had to replace our roof in 2008 after a storm, the claims process was

00:33:49 very smooth. Our policy renewed each October with manageable rate increases. That changed in recent

00:33:57 years. In 2017, we paid $3,700 per year for insurance, and in subsequent years, the rates

00:34:05 increased significantly so that our proposed renewal for 2023 was more than $8,000. Our

00:34:13 problems with insurance began in 2017. Sometime before my husband and I left on a trip, a man

00:34:20 showed up unannounced saying he was from my insurance company and wanted to take a look at

00:34:25 the property. As he had no identification, I declined him access. I left the company a voicemail

00:34:32 and forgot about it until a few weeks later when I received a notice that our policy would not be

00:34:38 renewed because I had refused an inspection. I contacted them immediately, said there was a

00:34:44 misunderstanding, and asked them to send another inspector. They did. I didn't hear anything more

00:34:51 and naively thought we no longer had a problem. I was wrong. In early September, my husband and I

00:34:58 were at the Grand Canyon National Park when we caught the news of Hurricane Irma's pending assault

00:35:03 on Florida. I knew we would be covered for the storm, but I wanted reassurance that my policy

00:35:09 was on track to be renewed in October. I called the company. I will never forget that phone

00:35:17 conversation. I was told we still would not be renewed, but now the reason was because my roof

00:35:24 had failed inspection. I asked why did you not tell me this, and the answer was because we don't

00:35:30 have to. I asked for the roofing report and was told no, that was the property of the insurance

00:35:36 company. So this company that I had done business with for at least 20 years was not only dropping

00:35:43 us, but was allowing us to ride out a potentially catastrophic storm with what they had determined

00:35:49 was a detective roof without even warning us. Fortunately, we only incurred minor damage from

00:35:56 Irma, but we had to scramble to find a new company in a matter of weeks in a state that had sustained

00:36:02 major damage. Our roof passed the new company's inspection with no problems, even after Irma,

00:36:09 but unfortunately their rates were higher and kept increasing even as we had no new claims,

00:36:15 reduced our coverage, replaced our windows and doors with hurricane-proof glass at a cost to us

00:36:22 of about $40,000. My husband and I never intended to move. We loved our community, our neighbors,

00:36:29 and our friends. Our home in South Florida was the regular gathering place for extended family.

00:36:36 We truly enjoyed hosting visitors, but in 2022 we began discussions as to whether South Florida was

00:36:43 still the best place for us. There were family concerns, the weather events were becoming more

00:36:48 and more frequent, and maintaining our home is becoming expensive. The insurance quote for 2023

00:36:55 gave us the push to put the house on the market. We intended to buy another home in Tallahassee,

00:37:02 Florida near our daughter and son-in-law. We put our belongings in storage, moved in with them,

00:37:08 and looked for a new home. Flash forward to 2024, we have reluctantly made the decision that we will

00:37:15 not be buying a home in Florida. We've learned there's no escaping the insurance problems and

00:37:21 weather disasters are becoming more and more prevalent, even in previously safe areas like

00:37:28 Tallahassee. We haven't decided what our next step will be, but at this stage of our lives we are not

00:37:35 willing to risk our financial well-being by buying a home that one day may be uninsurable or craters

00:37:42 in value in a housing market fueled by the homeowners insurance crisis.

00:37:46 Thanks very much.

00:37:51 Our next witness may proceed.

00:37:55 Chairman Whitehouse, Ranking Member Grassley, members of the committee,

00:38:00 thank you for the opportunity to address you today on a topic that's becoming increasingly

00:38:04 important to homeowners across the nation, increasing homeowners insurance premiums.

00:38:09 As natural disasters continue to rise, understanding the dynamics of insurance pricing is

00:38:14 crucial for both homeowners and policy makers. Homeowners insurance is a fundamental safeguard

00:38:19 for what is for many Americans their single largest asset. This important coverage protects

00:38:24 against financial loss due to damage or destruction of a home and its contents.

00:38:28 However, recent years have seen a notable increase in insurance premiums. One significant driver of

00:38:34 this rise is convective storms and other severe weather events. Convective storms, which include

00:38:39 phenomena like thunderstorms, tornadoes, and hail, have caused substantial damage in various regions.

00:38:45 The cost to repair homes or replace belongings after such events has skyrocketed,

00:38:50 leading insurance companies to adjust their premiums to cover that increased risk.

00:38:54 Beyond convective storms, we've witnessed hurricanes, wildfires, and flooding. These

00:39:00 events have not only caused damage, but have also increased the long-term risk profile

00:39:04 of many areas. Insurance companies are tasked with managing that risk and have responded by

00:39:10 raising premiums to ensure they can cover those potential claims. Another major factor influencing

00:39:16 homeowners insurance premiums is inflation. Inflation affects the cost of building materials,

00:39:21 labor, and other expenses related to home repair and reconstruction. As the cost of living increases,

00:39:26 so does the cost of claims for insurers. When the price of lumber, steel, and other

00:39:31 essential materials goes up, the expense of repairing or rebuilding homes also rises.

00:39:37 Insurance companies must reflect these higher costs in their premiums to maintain financial

00:39:42 stability and ensure they can meet those contractual obligations to policyholders.

00:39:46 So what can homeowners do to mitigate these rising costs? One of the most effective strategies is

00:39:53 proactive mitigation. Homeowners can invest in measures that reduce the risk of damage from

00:39:58 severe weather events. For instance, installing storm shutters, reinforcing roofs, using "hail

00:40:04 resistant shingles" and using fire resistant materials can make a home much more resilient.

00:40:09 Additionally, maintaining proper drainage systems and removing potential fire hazards from around

00:40:15 the property can help. Insurance companies often provide discounts for homes that incorporate

00:40:20 these protective measures, making them a worthwhile investment for homeowners.

00:40:24 I believe the most essential aspect of managing insurance premiums is fostering a robust,

00:40:29 competitive free market. Competition among insurance companies encourages innovation

00:40:35 and efficiency, leading to better pricing and services for consumers. When insurers can properly

00:40:42 underwrite and price for risk, they create a more balanced and fair market. This involves

00:40:46 using advanced data analytics and modeling techniques to accurately assess the risk levels

00:40:51 of different properties. By doing so, insurance companies can offer premiums that reflect the true

00:40:56 risk, avoiding excessive charges for low-risk homeowners, and ensuring high-risk properties

00:41:01 are adequately covered. Regulation also plays a crucial role in maintaining a healthy insurance

00:41:07 market. Policyholders must strike a balance between consumer protection and allowing insurers the

00:41:13 freedom and flexibility to adjust their pricing based on the risk. Overly stringent regulations

00:41:19 can stifle competition and lead to market exits, reducing choices for consumers. We've seen this

00:41:25 play out most recently in another state, where there were artificial caps put in place on premium

00:41:30 increases. That worked well for consumers in the short term, but then one by one, all of the major

00:41:36 insurers began announcing they would cease to write any new homeowners insurance in that state.

00:41:41 These are all private companies, and if there's not the freedom and flexibility to price their

00:41:46 products properly, they may have to take drastic steps, as we've seen. Conversely, a well-regulated

00:41:52 market encourages transparency and fairness, ensuring that homeowners have access to the most

00:41:57 affordable and adequate coverage options. In conclusion, the rise in homeowners insurance

00:42:02 premium is driven by severe weather events and the impact of inflation. However, homeowners are not

00:42:08 powerless in the face of these challenges. By investigating investing in mitigation measures

00:42:14 and supporting a competitive insurance market, they can manage costs and ensure their homes

00:42:18 are protected. Collaboration between homeowners, insurers, and policymakers is essential to create

00:42:24 a sustainable and resilient insurance landscape. Thank you for your attention. I look forward to

00:42:29 any questions you might have. Thank you very much, sir. Appreciate you being here. Dr. Antoni.

00:42:37 Chairman Whitehouse, Ranking Member Grassley, members of the committee, thank you for the

00:42:41 invitation to discuss with you today the current state of the insurance and reinsurance markets,

00:42:46 and especially how they have been impacted by inflation and climate change. I'm a public finance

00:42:52 economist and the Richard F. Astor Fellow at the Heritage Foundation, where I research fiscal and

00:42:56 monetary policy with a particular focus on the Federal Reserve. I am also a senior fellow at the

00:43:02 Committee to Unleash Prosperity. Since January 2021, prices have risen a cumulative 19.3 percent

00:43:09 on average in the American economy. Construction prices for single-family homes have risen much

00:43:14 faster, up 30.5 percent during the same time. This has been a direct result of public policy choices

00:43:22 made here in Washington, D.C., and those choices have imposed significant costs on the insurance

00:43:28 industry. Unprecedentedly large federal deficits over the last four years, financed by the Federal

00:43:34 Reserve's purchase of Treasury securities, increased the money supply by trillions of dollars,

00:43:39 much faster than the increase in the real economy. Roughly one-third of all dollars in existence were

00:43:45 created in just a few years. That transferred wealth from the people to the government and

00:43:50 devalued the dollar at rates not seen in four decades. Consequently, it now takes more dollars

00:43:57 to purchase the same products and services. This has increased repair and replacement costs

00:44:02 throughout the economy, which has directly contributed to higher insurance premiums and

00:44:07 losses for insurers and reinsurers alike. Actuarial tables used in underwriting to estimate risk and

00:44:14 future losses, as well as calculate premiums, rely heavily on those input costs. When prices

00:44:20 increase radically, precisely as has happened over the last several years, old actuarial tables are

00:44:26 of significantly less use when pricing premiums because they will grossly understate the future

00:44:32 cost to the insurer. The sharp increase in total claim costs since 2019 has resulted in billions

00:44:39 of dollars of losses for both insurers and reinsurers, prompting large premium increases

00:44:45 to stop those losses. This has put significant financial stress on consumers who are already

00:44:50 struggling with a cost of living crisis and are now faced with much higher insurance premiums,

00:44:56 especially for homeowners insurance. Other factors, mostly stemming from public policy failures,

00:45:01 have contributed to today's insurance premiums as well. The widespread rioting caused by groups

00:45:07 like BLM and Antifa in 2020 caused $100 billion in damages, a massive financial loss for the

00:45:13 insurance industry, likewise general lawlessness in American cities over the last several years,

00:45:18 and the refusal of government authorities to protect private property has resulted in more

00:45:22 damages, more claims, and ultimately higher premiums. Overregulation has also put upward

00:45:28 pressure on premiums by increasing repair and replacement costs, a fact which is frequently

00:45:33 omitted from the cost-benefit analysis conducted when such regulations are proposed. Lastly, while

00:45:39 some assert that climate change has been a significant contributor to higher premiums and

00:45:43 general stress in the insurance industry, there is no empirical evidence to support this claim.

00:45:48 In fact, the evidence indicates it is not true. For example, hurricanes are not becoming

00:45:52 significantly more numerous nor more powerful, but we are building more homes in their path,

00:45:58 and we are building more expensive homes there, too. The increase in claims related to weather

00:46:03 events has undoubtedly increased, but it is not due to the climate changing. This is why the

00:46:09 insurance and reinsurance markets do not rely heavily on climate modeling when pricing premiums.

00:46:15 Furthermore, climate models are inherently subjective, not merely in how the models are

00:46:19 constructed, but also by way of the inputs that the modeler uses. In other words, because

00:46:25 insufficient data exists to create a predictive model, a human being must make wide-ranging

00:46:30 assumptions and add those to the model in place of real-world data. Thus, those models have no

00:46:37 predictive value for insurers. If government broadly, and this committee specifically,

00:46:43 seek to relieve stress to the insurance industry and lower costs to consumers, your focus should

00:46:49 be on reducing the government spending that created the inflation, which is responsible

00:46:54 for most of the increase in insurance premiums over the last several years. Passing a budget,

00:46:59 ideally a balanced one, would be a good place to start. Thank you kindly for your time,

00:47:04 and I look forward to your questions. Thank you. Mr. Masoulin, your testimony is that a

00:47:11 major hurricane hitting a densely populated area like Miami could trigger large and long-lasting

00:47:19 post-event assessments or even exceed the system's funding capacity. What does exceeding the system's

00:47:27 funding capacity look like? Your microphone, please. It's on, sir. Sorry. According to public

00:47:35 statements, the system can currently cover events like in citizens up to their modeled

00:47:41 hundred-year event. But also note that the ability of citizens to pay claims depends on the ability

00:47:47 of the cap fund to pay its reinsurance obligations. There are certainly storm scenarios such as a

00:47:53 repeat of the 1926 Great Miami Hurricane, which have been estimated to cost well over $125 billion

00:48:01 to the market. There is a point at which an event becomes large enough to exhaust Florida's

00:48:08 entity's ability to issue bonds and collect assessments. And then what happens? Well,

00:48:12 and then Florida will face some very difficult choices, which could include raising assessment

00:48:17 caps or finding some other source of funding or taking other actions to try to meet obligations.

00:48:23 You kind of step into the unknown at that point, right? Yes, sir. I will note that that's an

00:48:28 extreme event, but it is something that has happened in the past. You say that this combination

00:48:34 of demographics, development and disasters poses a significant risk to our financial system.

00:48:40 What do you mean by risk to our financial system? Well, Senator, if you look at the combination,

00:48:50 as has been pointed out, of high growth and wealth accumulation in coastal areas, and you look at

00:48:58 just what we've observed in the climate, much less what's predicted in the future,

00:49:03 there is significant exposure along the coastline from Maine to Texas. In fact, my family's from New

00:49:10 Jersey and there is enormous development on the coast of New Jersey. And if we start to get

00:49:17 major hurricanes coming through those areas, the building codes are probably not up the same

00:49:22 standards they are in Florida. And we could be seeing some significant losses, as I believe

00:49:26 was pointed out in a recent- And how does that create risk to the financial system?

00:49:30 Well, because it's sort of a set of dominoes. You start with potentially claims issues with the

00:49:37 insurers being stressed and not able to pay claims. You have post-event rate increases,

00:49:43 as we've seen in Florida. You could have situations where people cannot secure insurance

00:49:49 because they can't afford it, then that affects their mortgage security and so on and so forth.

00:49:54 So there are a number of ways that this could affect the financial system, sir.

00:49:58 Cascading beyond the immediate insurance and becoming a national problem.

00:50:03 Well, I would just note, Senator, that in Florida, the real problem started

00:50:07 years after we got past Andrew. We got past paying the claims in Andrew and then the big

00:50:12 problems occurred later when we tried to renew the policies.

00:50:15 Do you have your testimony in front of you?

00:50:17 Yes, sir.

00:50:18 Could you turn to page nine where you have a graph?

00:50:20 Just a second, please.

00:50:26 I may need my glasses for this, Senator. Excuse me. Age-related issue. Yes, sir.

00:50:33 On page nine, you have a graph of the Florida Hurricane Catastrophe Fund,

00:50:39 and there's a bottom line that says total liquidity resources below

00:50:42 potential obligations, and then there's a number. Could you explain that line?

00:50:47 Yes. Well, basically, that represents the amount of debt, which in this case,

00:50:55 almost $7 billion, that they would have to issue in order to meet their claim obligations,

00:51:00 because that is not money that they have on hand from their fund balances,

00:51:03 pre-event bonding, et cetera.

00:51:05 Thank you. Ms. Sen, your testimony

00:51:15 basically describes the Florida risk being transferred to the federal government

00:51:19 through Demo Tech insurance, that taxpayers bear large unpriced exposure to climate risk

00:51:30 through insurance market fragility and that fragile insurers with inflated ratings

00:51:36 now dominate insurance markets in Florida. Is that correct?

00:51:40 That's right.

00:51:42 And you see in this, and I'm quoting you here, parallels in the 2008 financial crisis.

00:51:48 What parallels do you see?

00:51:50 So just like what happened during the financial crisis, there were rating agencies that gave out

00:51:58 high ratings to pools of mortgages backed by subprime loans. Here we have a situation where

00:52:04 rating agencies like Demo Tech are giving out inflated ratings to insurance companies.

00:52:10 The end result is sort of same. There is just too much risk and too many risky

00:52:14 mortgages being originated, in this case, backed by really low quality insurers

00:52:18 that are then entering the financial system. And the consequences of that has to be borne by,

00:52:24 of course, the homeowners, but also the mortgage owners, GSEs, the lenders,

00:52:29 and ultimately the federal and state governments.

00:52:31 You say, this will be my last question, the fragility of property insurers is an important

00:52:37 channel through which climate risk might threaten the stability of mortgage markets

00:52:42 and possibly the financial system. What do you mean when you refer to a risk to the financial system?

00:52:48 Well, as I was explaining, the GSEs, if there are large losses that the GSEs face,

00:52:54 then those losses have to be plugged by somebody, so the taxpayers.

00:52:59 That's one channel through which you've got risk to the financial system.

00:53:03 And the GSEs serve as a backstop in the mortgage market. They may not have the ability or

00:53:06 capacity to do so in such a scenario, which affects mortgage-backed security prices,

00:53:11 which are held by all sorts of financial institutions. So that starts affecting

00:53:15 all of these institutions. On the other hand, if you've got a bunch of insurers failing,

00:53:19 another channel is these insurers are one of the largest investors in many

00:53:24 asset classes, like corporate bonds, equities, and so on. And they may have to dump these

00:53:28 securities at inopportune times, and that affects the prices of these securities as well.

00:53:33 Senator Grassley.

00:53:35 Thank you, Mr. Chairman. Dr. Antoni, is there any evidence to support the notion

00:53:42 that climate change is the greatest threat to the insurance market?

00:53:46 No, Senator, there is not. And part of that has to do, again, with the fact that

00:53:52 when we look at the models that are used to predict climate change, we simply don't have

00:53:57 enough empirical data with which we can input into those models. And so as a result of that,

00:54:04 we have to have human assumptions on what we think is going to happen based essentially on a guess.

00:54:11 And as a result of that, these models really are not of any predictive value. And that's why these

00:54:17 models for the last 50 years have been predicting catastrophic outcomes, none of which have come

00:54:22 true. Okay. And also to you, Dr. Antoni, how has the Biden administration's economic leadership

00:54:30 failed to help our economy? And what can this committee do to get our economy back on track?

00:54:37 Senator, I would say the biggest failure in terms of the Biden administration on economic policy has

00:54:44 been constantly pushing for more and more spending, which this government and the American

00:54:49 people simply cannot afford. And as a result of that, we have today's not only inflation problem,

00:54:56 but today's cost of living crisis as well. And the increase in insurance premiums is part of that.

00:55:01 In terms of what this committee and the Congress more broadly can do, they need to be, in my

00:55:06 opinion, sending the White House balanced budgets, regardless of how large of a budget the White

00:55:13 House is asking for. And Commissioner Mulroney, you heard me say that we had six poverty and

00:55:22 casualty companies pull out of Iowa. So from your experience, what can states do to increase market

00:55:30 competition and best serve policyholders? Thank you, Mr. Ranking Member. If I can, I'd like to

00:55:37 address something before that just quickly, this focus on the rating agencies. I would agree with

00:55:43 that if that were sort of the be all, end all. But the state insurance commissioners in each

00:55:48 50 states is tasked with the financial solvency of the insurance companies. We do not depend on

00:55:53 rating agencies for that. We are doing financial exams on them. We are doing financial analysis

00:55:58 every quarter on each one of them. So I would agree if that was the sort of be all, end all,

00:56:03 forgive that phrase. But it's not at all. And we don't depend very much at all on those rating

00:56:09 agencies from our standpoint. Okay. That said, to your question, what can we do, in my comments I

00:56:15 mentioned, I think the most important factor is having a robust competitive free market. In the

00:56:20 state of Oklahoma, we have over 100 companies licensed to write homeowners insurance in our

00:56:25 state. We had one company leave. You mentioned, I think, that you had a handful. We had one who

00:56:32 exited nine different states because it was a very, very small piece of their business. But I

00:56:36 think having a business-friendly environment and allowing folks to come in and offer their products

00:56:40 and offer consumers choices is the most best thing that you can do. I think secondly, I can't focus

00:56:48 enough on mitigation and resilience. The state of Oklahoma just passed two weeks ago, the governor

00:56:54 signed a bill that we pushed through to strengthen Oklahoma Homes Act. The governor signed that in

00:56:59 place. It will allow us to issue grants to Oklahomans as they're replacing their roofs or

00:57:03 they want to replace their roofs, you know, to upgrade to more resilient shingles, fasteners,

00:57:10 windproofing, that sort of thing. So homes in Oklahoma can withstand up to 130 mile an hour

00:57:15 wind. So there is mitigation. There are things that can be done. I think that as policy makers

00:57:19 and as a former policy maker, the things we can do is help incentivize that. I know that the Senate

00:57:24 has before them, I think it's Senate Bill 1953, very easy thing. Should be a no-brainer. It's a

00:57:30 tax parity act for disaster mitigation that will just allow state-based programs like ours

00:57:35 that other states are doing. Kentucky passed that this legislative session as well.

00:57:39 It will address the tax issue for those folks that receive those grants. Commissioner, this is my last

00:57:46 question. How have you worked with both political parties to reduce costs, remove red tape, and

00:57:52 create a stronger economic environment for Oklahomans? Well, I blew it with a lot of that

00:58:00 in that last answer. I would just respond with that, that we have worked with that piece of

00:58:06 legislation that passed. I will tell you that the National Council of Insurance Legislators, NCOIL,

00:58:12 if you didn't know, there's an association of state legislators who focus on insurance issues.

00:58:17 The chairman of that property and county committee is a Democrat from Oklahoma who has pushed through

00:58:22 is leading the way to make that a model act across the country. And so there's a bipartisan effort

00:58:29 there. I'll just tell you that when I was in the House, I worked on a substantial number of issues

00:58:34 with the Senate minority leader who was a Democrat attorney from Harvard, actually. And we did a lot

00:58:41 of good work on the insurance side of things. Insurance isn't a partisan issue. Mitigation and

00:58:45 resilience is not a partisan issue. For the majority, I'm done. Thank you, Ranking Member Grassley. I'm

00:58:54 going to take over the helm, but lest my head swell too big, I'm not going to take the chairman's seat.

00:58:58 I'm going to do it from here. And I'm up next. Ms. Wood, I wanted to dig into your question. I

00:59:03 really appreciate you being here and sharing your story. And tell me a little bit more. You thought

00:59:09 moving to Tallahassee, farther away from the coast where maybe the weather emergencies were less

00:59:14 extreme, you thought that would be the solution. And yet, why was that not the solution? You had

00:59:19 a bad experience with this insurer that was going to cut you off without even telling you and not

00:59:24 even sharing the information about your roof. You did find another insurer, but were there not

00:59:31 companies in the Tallahassee area, when you talked to them, that would offer affordable homeowners

00:59:37 insurance? And is that part of the reason why you've decided not to buy another home in Florida?

00:59:43 Thank you. When we knew that South Florida was kind of the epicenter of the weather disasters,

00:59:53 the insurance problem, and we thought Tallahassee would be safer, our daughter lives there,

00:59:58 and we started looking for homes, and we started talking to people about their insurance problems,

01:00:05 and they were basically repeating the same things that were happening down south at a lower level.

01:00:13 And we just a few weeks ago in Tallahassee had a freak thunderstorm come through,

01:00:21 knock out the power to 70,000, 80,000 people for several days, and it wasn't a hurricane.

01:00:28 It was a storm, a rainstorm. And then I started talking to people, how are you doing? What do

01:00:35 you see here? And they all say they are seeing increased weather events where they didn't see

01:00:42 where they didn't have that before. One of the things about your testimony that's important is,

01:00:47 you know, I'm a senior citizen now. You are too. You and your husband, you described the ability

01:00:53 of seniors to just kind of tolerate an unknown upside increase in a big cost item like insurance

01:01:00 is pretty darn limited. And so when you are worried about the unpredictability of upside,

01:01:07 that hits seniors particularly hard. Dr. Sen, I have a question for you. When we talk about

01:01:12 the impact of insurance on housing, we are often thinking about homeowners, but there is a

01:01:17 significant impact to multifamily properties as well. I reached out to the Virginia Housing

01:01:22 Agency, which is our housing financing agency that largely supports low and moderate income

01:01:29 rental properties, and I asked about what they are seeing on projects that their agency finances.

01:01:35 Across the 119 local jurisdictions on which they have sufficient data, 105 are averaging at least

01:01:42 double digit annual increases between 21 and 23, and nine average triple digit increases,

01:01:50 including two in the Hampton Roads area near the Atlantic Ocean, Virginia Beach, and Chesapeake.

01:01:55 If you are a nonprofit developer or public housing agency serving low and moderate income

01:02:00 families, and it is an important thing, these increases are really tough on the developer,

01:02:06 and then they get passed on to a tenant on limited means. Are the same dynamics in play

01:02:11 when we talk about multifamily insurance markets as in single family?

01:02:15 Yeah. So in Florida, similar set of insurers are sort of in both markets, and so I would expect

01:02:25 similar dynamics play out. However, unfortunately, we haven't been able to explore this in as much

01:02:32 depth, in part because the data on multifamily insurance is not granular enough for us to

01:02:38 look at it in any sort of systematic way. And that's why collecting these data, the FIO and

01:02:45 NAIC call, needs to focus across all segments of insurance and collect these data in a systematic

01:02:51 way so that we can look at them, because these issues are so much worse for people with low

01:02:57 income. In the low income segment, their premiums are the highest, and they've also sort of grown

01:03:02 the most in the past few years. I think also, sorry, if I could also respond to Mr. Mulready

01:03:08 on the point about regulators sort of looking at, and we shouldn't pay rating agencies,

01:03:14 is not something that we need to look at. I would just point out that in Florida,

01:03:17 if you look at the number of exams that the Demotex rated insurers, that by the way have a

01:03:22 20% insolvency rate relative to 0% for traditional insurers, they get examined at the same rate

01:03:29 as the traditional insurers like farmers and all states get examined, which is not something that

01:03:36 you would expect. If you're more risky, you would expect regulators to come look at them

01:03:39 much, much more frequently. And the risk-based capital requirements that we have currently,

01:03:45 which were designed in 1980s, they are just not sensitive enough to new risks like wildfire and

01:03:50 hurricanes and so on, and also not as well designed for under-diversified insurance companies,

01:03:56 because if so, all of these insurers were meeting the risk-based capital requirements. However,

01:04:01 at the same time, going insolvent at the rate of 20%. So those two things sort of

01:04:07 don't really go hand in hand. Thank you. Senator Johnson.

01:04:12 Thank you, Mr. Part-time Chair, but now we got the real guy back.

01:04:16 So first of all, I mean, I think the premise of this hearing is just completely off. And I think

01:04:25 the chart that the chairman talked to you about, Mr. Musilin, is indicative of that. So the Florida

01:04:32 Hurricane Catastrophic Fund or catastrophe fund has a shortfall for a year about $7 billion, right?

01:04:39 Okay. Yes, sir. So we've had testimony before this committee that we've already spent five to six

01:04:44 trillion dollars. That's $5,000 to $6,000 billion trying to mitigate climate change. We haven't made

01:04:50 a dent in it. You know, their estimates was going to cost tens of trillions of dollars every year

01:04:55 to heat to reach net zero. So again, this is not the solution for a real problem, which is

01:05:01 the broken insurance market. I have enough Wisconsin residents live on the Gulf Coast

01:05:05 in Florida to know after Hurricane Ian, we've got some real problems in Florida. But fixing climate

01:05:11 change isn't the solution. So there are other causes and that's what I really want to focus

01:05:16 on with you, Dr. Anatone. You talked about inflation. You talked about riots and lawlessness.

01:05:23 You talked about high cost of properties being located in these vulnerable areas. And then,

01:05:30 you know, Mr. or Commissioner Moretti talked about the harmful regulations, you know,

01:05:36 price caps. So can you off the top of your head, I know nobody's calculated this, but can you give

01:05:41 me some sense of what percentage of the total problem is each one of those elements? I mean,

01:05:47 how much of let's say it's $100 billion worth of problem here. How much of that is due to inflation?

01:05:55 How much to the lawlessness, the riots? How much to the high cost of properties? And then how much

01:06:01 has been just for market distortions of pricing caps and that type of thing? Senator, it's a very

01:06:07 good question. The only caveat I want to say in answering this is that much of the regulatory

01:06:12 costs actually get rolled into what we attribute to inflation. The reason for that is because

01:06:18 typically these regulatory costs, because it's something being done by government mandate,

01:06:23 those are essentially assumed away under a hedonic adjustment. So if we can just talk about

01:06:28 government action broadly and include both a failure to respond to criminal activity and

01:06:34 inflation and regulatory costs, that explains 90% approximately of the increase that we have seen

01:06:40 in insurance premiums over the last several years. But I want to zero more. What do you think

01:06:44 inflation is that component? Just straight inflation. I mean, again, I know it's government

01:06:49 action, but that government action, what percent of its inflation? Is it half? Is it a quarter?

01:06:54 Probably about three quarters, almost three quarters, Senator.

01:06:58 Mr. Moretti, could you confirm that? I just have a personal and timely example on the impact of

01:07:06 inflation. About six months ago, we had our roof replaced in Tulsa, Oklahoma. And 18 months prior,

01:07:13 I had a proposal to have the roof replaced. And in that 18 months, almost to the day, 18 months,

01:07:18 same roofer, same roof, same materials. That cost had increased exactly 30%, from $20,000 to $26,000

01:07:25 for a roof that strictly impact on material and labors. Okay, so that's overall, I mean,

01:07:30 Florida is a just different animal here, right? I mean, Florida's insurance market is completely

01:07:35 screwed up because of hurricanes, because of probably regulation, that type of thing.

01:07:39 Insurance, conceptually, is pretty simple. We all pay a little bit in to protect ourselves against

01:07:46 a catastrophic loss and with the marketplace, it moves around. If it's priced properly,

01:07:52 it discourages people from putting high cost properties in a very vulnerable area.

01:07:56 But it hasn't been priced properly, right? So I guess I'm kind of wondering,

01:08:00 for a Wisconsin resident with a Wisconsin house, how much are our insurance premiums being

01:08:07 boosted because of the distortions of the marketplace because of overregulation?

01:08:14 Now, in other words, are we paying the price for all these hurricanes in Florida because

01:08:19 the Florida insurance market is just screwed up? You have reinsurance companies that are losing

01:08:23 money. And by the way, you did talk about high losses. What is that? I mean, how big a loss was

01:08:31 this last year? And is that just loss premium versus payments or did this go into reserves?

01:08:38 Is that the whole point? You get premiums, you set up reserves, you have a loss. Generally,

01:08:43 the reserves ought to cover the loss, right? You shouldn't be taking them out of premiums.

01:08:47 Premiums ought to just be continuing to fill up those reserves.

01:08:49 Yes, thank you. And I hate to oversimplify it, but sometimes I do when speaking publicly back

01:08:56 in my state. And that is that it's not rocket science, it's math. It is premiums in and claims

01:09:02 paid out. And then what's the end result? Of course, there's investments, all things in there.

01:09:06 I'm oversimplifying it. But it is math. And so the insurance companies have the role of determining

01:09:13 what that math is going to be. What do those storms look like? I mean, in Oklahoma, we have

01:09:19 had a terrible spring. We have had 100 tornadoes this year. But the previous four years, we were

01:09:27 substantially below our average. So we've had a rough year. We've had two EF2s. And so the

01:09:34 companies will absorb that. Our role is to make sure they're financially solvent, they have risk

01:09:38 based capital that we monitor quarterly. And if they're investing in things that they shouldn't

01:09:43 be investing in or we have concerns, heck, if a company drops a certain percentage of their

01:09:49 surplus, they get a letter from me saying, what's your plan? You've dropped a bit here a little too

01:09:55 much in this past year. And so that's what we're monitoring to make sure they can be there to pay

01:09:59 their claims. And like I said, we've had one company leave, we've had no property and guilty

01:10:02 companies exit the market. But you've got to have that freedom and flexibility to price.

01:10:06 One quick comment, closing comment is this hearing ought to be called riskier business,

01:10:11 how massive deficit spending which caused inflation is challenging the insurance markets. Would you

01:10:16 kind of agree with that, Mr. Antoni? I could not agree more, Senator.

01:10:20 Thank you. Senator Markley.

01:10:21 Thank you, Mr. Chair. And thank you all for bringing your expertise to bear. And the conversation

01:10:30 is essentially focused on the challenge of flooding, hurricanes, so on and so forth. But

01:10:37 let's go west for a moment. Let's go to New Mexico and California and Oregon and Washington,

01:10:44 Idaho, Montana, Colorado, where wildfires are the real challenge. And we have a much longer,

01:10:52 hotter fire season. We have more lightning strikes. As the climate has changed, the result

01:10:57 has been much more devastating wildfires. So we are seeing folks go, "Hmm, our insurance rates are

01:11:07 really going up." And, or, "I can't get insurance at all." I just held a group of town halls,

01:11:15 nine town halls in Eastern Oregon. And town hall after town hall, people came forward to say,

01:11:21 "Hey, I came to say I got a problem. My insurance company either has greatly raised the rate or

01:11:28 said they're not insuring anymore. What am I going to do?" Well, so, Dr. Sen, has any of your work

01:11:36 focused on the challenge of the Western insurance markets and the growing destruction from climate

01:11:44 change-induced wildfires? Yes, I mean, I do look at the homeowner's insurance market

01:11:53 more broadly as well, not just the Florida experience.

01:11:56 And so you're aware of this growing challenge. And here's the rub, which is if your company says

01:12:09 they won't insure you, then you have a mortgage. And the mortgage company requires that you have

01:12:16 insurance. And if you can't find a private insurer, they will put an insurance policy on your

01:12:22 property. And the insurance, the mortgage company actually gets a kickback on these arrangements.

01:12:29 So they have an incentive to go to a very high-priced policy. And that may be totally

01:12:35 unaffordable to any ordinary family. So if you were at one of my town halls and a citizen was

01:12:43 saying, "I've got this problem because if I can't find an insurance company, I'm going to lose my

01:12:47 house because I won't meet the terms of the mortgage," what would be the right policy response

01:12:55 to that challenge? Right. What you're describing is something that we obviously are already seeing

01:13:03 homeowners get forced-placed insurance. They have to go to insurers of last resort. And in all these

01:13:09 situations, they're basically paying a lot of money for the coverage that they're getting.

01:13:15 Ultimately, what the solution is, is something that is obviously the main question that we are

01:13:23 here to answer. But I would say that it is extremely hard to really figure out what the

01:13:29 solution is, in part because we are not in a position right now to even answer some basic

01:13:36 facts about how big the problem is, what exactly the numbers look like. For instance, we do not

01:13:41 know basic facts about how much coverage people have in different places, how much they're paying.

01:13:45 And when I say we don't know, we don't know this at a granular enough level because the data does

01:13:50 not exist. And the first step towards designing any policy would for us to know exactly how bad

01:13:57 the problem is. And then we sort of come up with a solution for that and start to evaluate these

01:14:02 different policy responses. Right now, we're sort of trying to make policy blindfolded.

01:14:06 So in looking at the materials, I saw that Citizens Property Insurance Company, I gather

01:14:13 that's Louisiana and Florida, that have a completely state-backed program. Well, all right.

01:14:22 So if the state becomes the insurer of last resort and they now suffer the same losses

01:14:29 that a regular private insurance company is suffering, now the folks in the state

01:14:34 are carrying massive debt. So that is not -- doesn't seem like a great solution.

01:14:38 That's definitely a problem, right? I mean, you do -- the problem is, of course, that whether the

01:14:46 state then has the fiscal capacity to actually withstand a big loss, like a big hurricane season,

01:14:51 which is a concern that was raised about citizens. And in such a scenario, then in a world where

01:14:57 they do not have enough tax revenue, then you do -- they would have to sort of go into financial

01:15:03 markets, try to borrow money, which could be very costly and so on. So it's -- fiscally,

01:15:08 it's going to be very challenging for many cities and many municipalities and counties and so on.

01:15:13 Yes. Well, let me close with this question. And perhaps, Mr. Musselin, I'll direct this to you.

01:15:20 Is it responsible for Congress to say, we're going to ignore the enormous damage that climate

01:15:28 change is doing across our country through fires, through smoke, through ice storms,

01:15:34 through flash floods, through hurricanes, and we'll just somehow back up the insurance market

01:15:46 if we are looking ahead 20 or 30 years? Shouldn't we be undertaking the core challenge

01:15:53 of the overheating of this planet from carbon dioxide and methane?

01:15:57 Well, Senator, one thing, I would never want to comment on what Congress should or shouldn't be

01:16:02 doing. That's certainly not my job. But I certainly think that we, in many cases, look

01:16:08 decades into the future, as we do with, say, the Social Security Trust Funds or many other things.

01:16:13 And this is an issue which has the potential to cause significant losses to our economy and our

01:16:22 system. And I think it would be responsible for everyone to start stress testing the system,

01:16:29 to consider the possibilities. It doesn't have to be a certainty. We don't know the future for

01:16:34 certain. But the possible exposure to damage up and down the East Coast and what that could mean

01:16:40 for -- And the West Coast.

01:16:42 I'm sorry, sir. I was referring to East Coast because I was stuck in Florida. But yes,

01:16:45 the West Coast and across the country, sir. I should note. Apologies.

01:16:48 But yes, we should be considering that and including wildfires. And certainly,

01:16:53 we've even seen issues like the tragic fires in Maui, where things like the electrical grid

01:16:58 can contribute to fires. And maybe we can kill two birds with one stone by hardening the grid

01:17:04 against weather and also building it out for renewable power. So there's a lot of opportunities

01:17:09 for us to do both.

01:17:11 See, my colleague, Senator Romney, is here and my time's out. But I really appreciate

01:17:15 you all's contribution. And I'll just say, from my perspective, it's hugely irresponsible

01:17:22 for us to just say we can try to fix the insurance market and fail to address the

01:17:26 underlying causes that will get worse with every succeeding decade far into the future.

01:17:31 Senator Romney.

01:17:34 My colleague, Mr. Berkley, I wish there were something we could do

01:17:38 that would reduce the climate change we're seeing and the warming of the planet.

01:17:43 But I've seen absolutely nothing proposed by anyone that reduces CO2 emissions, methane gases,

01:17:50 and the heating of the planet. Climate change is going to happen because of the development in

01:17:54 China and Indonesia and Brazil. And the only thing that actually makes any measurable impact at all

01:18:01 is putting a price on carbon. And no one seems to be willing to consider doing that. Everything

01:18:05 else that's being talked about on the climate front –

01:18:07 I have two bills.

01:18:08 I know. You and I are. But you guys had reconciliation. You could have done it all

01:18:12 by yourselves, and you didn't. So the idea that somehow we're going to fix climate and solve the

01:18:18 insurance problem is pie in the sky. That's avoiding the reality that we can't fix climate

01:18:23 because it's a global issue, not an American issue. Anyway, let me turn back to insurance.

01:18:28 I'm not going to count that as part of my time. Let's see. I'm going to ask you,

01:18:34 ladies and gentlemen, about what we ought to do to try and help people be able to afford insurance.

01:18:39 And I listen to the causes, inflation being the largest single one, and of course,

01:18:45 seniors are on fixed income, so inflation is a huge problem, as Ms. Wood has indicated.

01:18:50 Building in high-risk areas is a big part of the problem. And then there's climate.

01:18:56 We're not going to be able to fix global climate, not in any time I'm aware of.

01:19:01 So – and according to Mr. Antonini, so far, at least with regards to hurricanes and so forth,

01:19:08 there's no evidence that climate is causing more hurricanes, although I think it's fair

01:19:12 in the American West, where I come from, more fires, drought is climate-related,

01:19:18 and so that's just a reality. So the question is, what actions can we take?

01:19:23 Fiscal reform, yes, to try and deal with inflation, except I want to note something,

01:19:29 Mr. Antonini, because you're esteemed at the Heritage Foundation. 72 percent of federal spending

01:19:36 is not part of the budget we vote on. So we talk about Biden wants to spend all this – 72 percent

01:19:42 we don't vote on. We only vote on 28 percent. Half of that is the military. We Republicans

01:19:47 want more military spending, not less. So that means the other 14 percent, which is the Democrats

01:19:54 want to expand, there's no way we can reduce the 14 percent enough to have any impact on the massive

01:20:00 deficits we're seeing. So there's going to have to be a broader analysis of what we have to do to

01:20:06 rein in our fiscal challenges. I just want to underscore that. I would say a second thing we

01:20:12 can do besides fiscal reform and dealing with inflation is stopping subsidizing high-risk areas,

01:20:19 basically subsidizing people to build expensive places along the coast and in places that are

01:20:24 at risk of wildfire. And we subsidize that, and that creates huge financial risk to the system.

01:20:31 And finally, mitigation of one kind or another. That's the other thing we can do, is all sorts

01:20:36 of mitigation – forestry management, having people move in places that are not high-risk.

01:20:44 But if you want to live in a big house on the coast, you're going to have to spend a lot of money

01:20:49 to insure it or take huge risk. That's just the reality. So those are the three I come up with.

01:20:54 Stop the subsidy, mitigation, and fiscal reform. What else am I missing? Mr. Musilin,

01:21:00 and I'm just going to go down the line for those that are sort of in this area to give me your

01:21:04 perspectives. Well, thank you, Senator. And I'd agree with all those things. And I'd also add

01:21:09 that we need to start thinking about future-proofing our building codes and land-use policies.

01:21:13 The sea levels are rising. There's – if you're going to build a house that's supposed to last

01:21:18 75 years, you ought to be thinking about the climate in 75 years when you, you know, give

01:21:22 somebody a permit to build there. So I'd say that's important. I'd also say that, you know,

01:21:27 large disasters also drive inflation because it puts more pressure and demand on labor and

01:21:33 materials. More disasters mean supplies that could have been used to build new homes for

01:21:37 Americans are diverted to rebuild homes in the past. So certainly doing things to reduce the

01:21:42 vulnerability of properties and improve the – their resilience is important. And I do think,

01:21:48 sir, that there are things we can do about climate change with respect over periods of

01:21:52 decades that can make a difference in the long run. Thank you. Thank you. Yes. Sen?

01:21:57 Sure. So before that, the point about this – one point about inflation that we are missing,

01:22:03 which is – without doubt, it is a contributing factor. But the U.S. has had inflation in the

01:22:09 past without such an acute crisis in insurance markets. So whether that is the biggest cause

01:22:14 or not is up for debate. I don't think we have reached a conclusion on inflation being the

01:22:20 biggest contributor of rising insurance costs. It's just a big one. You'd agree it's a big one?

01:22:24 I agree it's a big one, but I wouldn't – Good enough.

01:22:26 I wouldn't say it's the biggest one. In terms of policy solutions, I completely agree with you on

01:22:31 we need to stop subsidizing building in high-risk areas. That's definitely one of the things that

01:22:36 is – definitely we need to do that. Mitigation, another point that you bring up. And on that,

01:22:42 I would say not only do we need to harden our homes, but we also need to harden our financial

01:22:46 institutions, our banks, and our insurance companies in order to make them withstand

01:22:52 really large climate shocks that are for sure coming their way.

01:22:55 Thank you. Ms. Wood, I'm going to let you pass on this just because that's not your area of

01:22:58 expertise. Your experience was something which focused our thinking today. Mr. Mulready?

01:23:03 Thank you, Senator. I would say amen to your comments, but I'll give you three quick things.

01:23:08 Number one, FEMA has a survey out that states that every $1 spent in mitigation saves $6 in

01:23:17 lost claims. It pays off. Number two, unfortunately, a lot of communities have to have a disaster

01:23:23 happen. In Moore, Oklahoma, back a dozen years ago, an EF-5 hit. It was just totally devastating.

01:23:28 After that, the city of Moore changed their zoning. They changed their building zoning codes.

01:23:33 And then third, the city of Tulsa, back in the '80s, had horrible flooding happened. And so,

01:23:38 they invested over decades, decades, infrastructure to prevent flooding. Now,

01:23:42 we're one of only two communities in the country that are class one NFIP rated.

01:23:46 Thank you. Mr. Antoni?

01:23:48 Senator, regarding the wildfires out west, I think California is a really good example of this. They

01:23:53 have a combination, a deadly combination of terrible forest management where they prohibit

01:23:58 things like controlled burns to get rid of underbrush, and then also not investing enough

01:24:02 in public utility infrastructure so that they have power lines that are throwing sparks, for example,

01:24:09 in starting these wildfires. Regarding your comments on the budget, you're absolutely right.

01:24:16 At this point, non-discretionary spending and gross interest on the debt exceed tax revenue.

01:24:22 And tax revenue as a percentage of the economy right now is near an all-time high. So,

01:24:27 you're not going to actually get much more in terms of revenue out of this economy. And so,

01:24:31 that leaves you with essentially two options, both of which you should do. The first is the

01:24:37 economy needs to grow a heck of a lot faster than it is right now. And then the other thing is that

01:24:41 you need to address even non-discretionary parts of the budget.

01:24:46 Thanks, Senator Romney. Senator Van Hollen?

01:24:49 Thank you, Mr. Chairman. Thank all of you for your testimony today.

01:24:56 You know, there are a lot of folks out there who still deny that climate change is real and the

01:25:03 impacts and the human component. I've always believed that when skeptics began to feel the

01:25:11 impact in their pocketbooks, it would become more real. And that is unfortunately what we are seeing.

01:25:20 And today's hearing is an example when homeowners find that either they cannot get homeowners'

01:25:28 insurance or it becomes so expensive they can't afford it. Then we're seeing the real pocketbook

01:25:34 impacts. And, Ms. Wood, thank you for your testimony. I listened in via C-SPAN, and I think

01:25:40 that really brings things home to what more and more Americans will be experiencing.

01:25:48 You know, Swiss Re has done a number of studies on this. And, yes, of course, there are a number

01:25:55 of components to increasing insurance premiums. No one denies that there aren't different pieces.

01:26:00 But according to Swiss Re, climate impacts and the growing risks from climate

01:26:08 is the predominant factor in what they predict will be increasing costs due to

01:26:17 climate risks. And I do know in my state of Maryland that in areas that are particularly

01:26:23 vulnerable, we've seen property insurance rates going up in the Ocean City area and others.

01:26:30 One way to address this, and I think it was discussed in a different matter, is the need to

01:26:36 get the data and to get consensus on where the risks lie, which is why last year, Senator White

01:26:45 House, Senator Warren and I sent a letter to the Treasury Department, to the Federal Insurance

01:26:53 Office, urging them to collect information from different states. I'm a supporter of a state-based

01:27:01 insurance system for property and casualty insurance. But I do think it would benefit all of

01:27:08 us to have a sort of national yardstick against which we can measure what's happening. So, Dr.

01:27:17 Sen, could you talk a little bit about the benefit of having a common source of insurance data

01:27:24 through the FIO and how that could benefit state regulators and benefit all of us?

01:27:30 Yeah, absolutely. Thanks for bringing that up. That's just the first order of importance, I

01:27:37 think, because we don't even know the basic facts about this problem at a granular enough level. The

01:27:44 risks here are local, and so we need to know what's going on zip code by zip code, census

01:27:49 tract by census tract. And for regulators to be able to figure out exactly how much risk is sitting

01:27:54 with each of these insurance companies, they need to know how much policies they're writing, what's

01:27:59 the type of coverage they're selling, what are the cancellations looking like in different zip

01:28:04 codes. Only then can they figure out exactly how exposed these different insurers are, and then

01:28:10 they can start designing policy about whether the risk-based capital ratios look all right or not,

01:28:15 or should we put a surcharge on wildfires or hurricanes and so on. And we do need a comprehensive

01:28:20 picture. We just can't have a particular state regulator look at the risks in that state,

01:28:25 because of course the insurer is selling insurance all over the country, and we need to get a

01:28:31 comprehensive picture of all of that. No, I appreciate that. I gather that the Treasury

01:28:36 Department's getting some resistance from some state insurance regulators. I hope we can

01:28:41 overcome that, because I'm not sure why anyone would want to deny, you know, the American people

01:28:48 the benefit of the facts here. If I could ask you, Mr. Musilin, with respect to some of the

01:28:59 sort of measures we should be taking, I mean, obviously we want to collect the information here

01:29:04 in the Budget Committee, but what kind of measures should we be taking now to address and mitigate

01:29:11 some of these issues, and what are the consequences of failing to do so? Well, as I said, I think the

01:29:18 biggest thing we need to do is future-proofing our building code and land use policies, as I said

01:29:22 before. You know, we have to recognize that we're going to be facing extreme weather in places that

01:29:28 we haven't experienced it before, and we've got to certainly address that. I also think it's

01:29:34 important to address climate change. I will just note that sometimes climate change itself can

01:29:40 contribute to the inflation we've been talking about. For example, there were beetle infestations

01:29:46 and droughts and fires in Canada, which decimated some of the lumber crop and led to a forest and

01:29:53 led to a five-fold increase in the cost of lumber a few years ago. So some of this, you know, claims

01:29:59 inflation is actually related to climate change, and I think we need to address that, and we also

01:30:04 need to recognize that we have to build smarter and protect our people better to make sure that,

01:30:10 you know, they've got affordable insurance and they can fix up their houses when there's a

01:30:13 disaster. Appreciate that. Mr. Mulrady, I saw you wanted to comment on that first question. Thank

01:30:19 you, Senator. I just wanted to follow up on your comment about FIO and the collection of data.

01:30:24 If you didn't know, the NEIC, National Association of Insurance Commissioners, is in the midst of a

01:30:29 data collection right now that will collect that data for at least 80 percent of the homeowners

01:30:34 market, and we have an agreement with FIO to be sharing that data with them. They originally came

01:30:39 to us. I got a letter from FIO, and they were requesting data that we did not actually collect

01:30:45 at the zip code level, and they had a very stringent timeline for that. So my response,

01:30:51 what wasn't no, was just, look, we can't meet that timeline. We don't collect that today. We

01:30:55 can in the future. But from that is where this has grown, the data called by the NEIC. So I

01:31:00 appreciate. I saw that there had been now this effort on behalf of the state. So has this now

01:31:06 been worked out? Are there any states that are objecting to your knowledge at this point in time

01:31:10 in terms of sharing data? I don't know about specific states. We will be collecting data

01:31:16 that will represent at least 80 percent of the market share. Okay. Thank you. Thank you. Thank

01:31:21 you for that, by the way. We're watching the data call, and we're grateful to the NEIC for that

01:31:27 effort. Senator Koehn had another question or two. Just a follow-up comment, and it's really on that

01:31:31 point. I think we often assume that rates charged homeowners by homeowners insurance is based upon

01:31:38 some rational algorithm using actuarial data, but that is not always true. My legal career,

01:31:47 the highlight of it was a lawsuit that I brought against the Nationwide Insurance Company for

01:31:52 redlining minority neighborhoods all over the United States in 1998. Led to the largest civil

01:31:57 rights jury verdict in the history of the United States at that time. And we were able to gather

01:32:02 data that through the discovery process that our insurance regulators didn't have, other states'

01:32:07 insurance regulators didn't have, and it demonstrated that part of the entire set of

01:32:14 where we put agents, where we sell policies, how we price policies was based on the racial

01:32:18 composition of neighborhoods using zip code plus four data that essentially labeled every

01:32:25 neighborhood in the United States in categories that were either we want to do business here or

01:32:30 we don't. And so the notion that this is all, you know, actuarial and math and it's based upon

01:32:35 claims experience and investment income, those are factors. But until you get the data, you can't be

01:32:41 confident that there are not other factors at work that, you know, might explain why, you know, Ms.

01:32:46 Wood, this whole thing about not even being told that your policy was being canceled and being

01:32:50 told you're roof flunked, but they're not going to give you the information about your roof and

01:32:54 the next company that analyzes it says your roof is just fine. You really can't assume that the

01:33:01 system is being fairly operated in accord with actuarial data until you get the data. And I

01:33:09 applaud the NEIC's effort and Dr. Zenn, your testimony and your answers to questions, you

01:33:14 say we need to know a lot more to understand what's going on. I do believe these increases

01:33:20 in places like Florida, coastal communities in Virginia, extreme weather events are playing a

01:33:26 role, but there may be other factors that we need to dig into deeper if we're going to try to find

01:33:31 the right relief so that homeowners like Ms. Wood and others don't face the kind of problems

01:33:36 they're experiencing. Thank you. >> Thanks very much. I appreciate the conversation

01:33:42 we've had here. I appreciate all of the witnesses. I would like to ask two questions for the record,

01:33:49 which will give you a chance to deliberate a minute and put your thoughts in writing.

01:33:56 The first is for Dr. Zenn. Here's your statement. Our analysis shows that a vast majority

01:34:08 of the Demo Tech insurers would not meet GSE eligibility if subjected to traditional rating

01:34:21 agencies methodologies. Would you be willing to elaborate on that in a paragraph or two so that

01:34:28 I can better understand specifically what the methodological differences are that you're

01:34:35 referring to and why they're allowed to exist? >> Absolutely.

01:34:41 >> Thank you. I appreciate that. And Mr. Masoulin, to your statement, the risks that threaten

01:34:53 the U.S. coastal home insurance industry are potentially devastating.

01:35:02 Could you elaborate on what the elements are of that risk or of those risks, you use the plural,

01:35:13 specifically including what role you think inflation plays?

01:35:22 >> Yep. >> And elaborating a bit further on what

01:35:27 you mean by potentially devastating. You are an actuary, are you not?

01:35:32 >> Yes, sir, I am. >> Yeah. Actuaries are not known for hyperbole.

01:35:36 >> No, but one of the lessons we need to learn, though, sir, is the difference between

01:35:42 potentially the correct answer and the right answer. And often those two are somewhat different,

01:35:48 and I'll strive to give you a mixture of both. >> I'm not challenging your testimony here. I'm

01:35:53 just asking for further elaboration on the point. >> No, I understand that. And I take it --

01:35:57 >> What do you mean by devastating? Who gets devastated? How? Elaborate on that.

01:36:01 And what are these risks and specifically what role does inflation play? Because we are,

01:36:05 you know, watching this very carefully, and we're seeing people who are truly expert

01:36:11 in the insurance market, including major insurers themselves, very clearly say that the problem here

01:36:17 is climate change and the uncertainty of weather events and harms that they're not able to

01:36:24 anticipate or predict for. So we've obviously heard other views here from entities that are

01:36:31 funded by the fossil fuel industry, and it would just be helpful to know what your views are more

01:36:35 specifically to that. >> Yes, sir, and I'll be happy to -- if I might, just one quick comment

01:36:39 that, you know, regardless of whether we think we know what the future holds or not, it's a well

01:36:45 established practice in economics that uncertainty has a positive cost. And the more uncertain we are

01:36:52 about things, the higher the cost is. And I think that's a significant factor here at play, too,

01:36:58 and I'll make sure I include that in my comment. >> That was six inch hell stones, too. We may be

01:37:02 setting new records. >> Mr. Chair, one other thing. My innate sense of fairness makes me

01:37:08 add an addendum to the comment that I last made about insurance rates not being purely actuarial

01:37:15 in nature. I talked about the suit against Nationwide. After we successfully sued them,

01:37:20 they dropped all the use of the non-actuarial data. They endeavored to do better, and years later,

01:37:28 they said, you know what, we actually not only did good, but by doing good, we did well,

01:37:33 because minority neighborhoods turned out to be really good places to sell insurance,

01:37:38 and the homeowners to whom we sold insurance turned out to be really loyal customers.

01:37:42 So I didn't want to leave it hanging in midair with just the lawsuit against Nationwide. I also

01:37:47 wanted to indicate that when we got information and put it out there, they took corrective action,

01:37:52 and the corrective action ended up, you know, working out well for all concerned.

01:37:57 >> Senator Lujan has appeared with seconds before the gavel, so let me respect his arrival by

01:38:04 allowing him to ask his questions. I will just allow him a minute to get himself settled in his

01:38:13 seat here and thank him for attending. I want to thank all of you for attending. I think

01:38:21 the personal experience of Ms. Wood was really important, because, you know, behind the statistics

01:38:30 and the warnings and the threats and the risks and the potentially devastating consequences that

01:38:36 are described by our expert witnesses are individual homeowners who are often swept

01:38:43 around in the maelstrom of this insurance mess, not knowing where to turn, being shuffled around

01:38:50 among insurance companies, not getting straight answers, and it is a hell of a tough time to be

01:38:57 a consumer, and I want to thank you for putting such a good human face on that part of this

01:39:03 problem. Senator Lujan. Our closing questions. >> Mr. Chairman, thank you so very much for this

01:39:09 hearing. Thank you all for being here today as well. I very much appreciate that. Now,

01:39:17 two years ago, we had the most destructive fire in our state's history in New Mexico.

01:39:23 The Hermits Peak Canyon fire tore through my state. This year, southeastern New Mexico is

01:39:32 currently the only region in the nation experiencing exceptional drought, according to the

01:39:39 U.S. Drought Monitor, and the National Interagency Fire Center reports above normal wildfire potential

01:39:46 in wide swaths of New Mexico for most of the summer. I think everyone's been watching the news,

01:39:53 has seen the heat that's going to hit the southwest over the next few days. Now, the potential for

01:39:59 another massive wildfire is real. These climate-driven extreme weather conditions are changing

01:40:05 the way New Mexican businesses operate. Electric co-ops are just one example. Co-ops are struggling

01:40:13 to obtain wildfire insurance because of the chance their equipment is faulted for a major fire,

01:40:19 because their lines have to connect communities, and in places like where I live, the shortest path

01:40:28 and the path where they're located is often in some of these areas where there's a lot of trees

01:40:34 and higher elevations as well. While co-ops and utilities are dealing with frequent extreme

01:40:40 weather, they're also hard at work at the daunting task of clearing some of these easements as well,

01:40:47 because it doesn't take much when it gets dry for something to tip over, and once that happens and

01:40:53 it clips one of those lines, then we lose everything. In the Hermann's Peak-Calf Canyon fire region,

01:41:00 the bipartisan infrastructure law is providing money to the local co-op through the grid resilience and

01:41:06 innovation partnership program. The co-op will deploy modern grid technologies that both

01:41:12 mitigate wildfire risk and help recover from power outages. Now, Mr. Muselin, is that correct?

01:41:19 Close enough, sir. Muselin? Muselin. Muselin, thank you. What can Congress do to support the

01:41:26 rural co-ops and other critical infrastructure adapting to climate? Well, thank you for that

01:41:33 question, and I think there's no doubt that there's enormous opportunities in rural infrastructure and

01:41:41 power grids to do both hardening those grids to support, or sorry, to prevent tragedies like the

01:41:48 fires we've seen, and also to support growth in rural communities and to prepare the grid for the

01:41:57 increase in renewable power, which is inevitably going to occur in the next several decades. So,

01:42:03 we can actually spend the same dollar multiple times and accomplish multiple benefits by

01:42:09 investing in grid hardening and also, you know, more a renewables-friendly grid at the same time.

01:42:16 I appreciate that. Now, when a major wildfire strikes, it destroys both homes and

01:42:22 critical infrastructure. If these basic services aren't quickly rebuilt, homeowners may be forced

01:42:29 to leave their communities, and in a small town, in a small community, even a few people leaving

01:42:36 completely erodes the tax base. It erodes the small business that may be in that community

01:42:42 that everyone depends on. An eroded tax base undermines public services like emergency response

01:42:48 and schools. This can decimate a town. Dr. Sen, if folks who want to rebuild can't get insurance,

01:42:58 will these communities struggle to thrive? Yeah, absolutely. Insurance is sort of required if you

01:43:07 want to maintain a mortgage, and so in the absence of finding insurance, folks would have to either

01:43:13 be forced placed by lenders or they would have to resort to insurers of last resort, so the residual

01:43:19 markets, and in all of these cases, the costs for the coverage that is being sold is extremely high,

01:43:25 and so there is an immediate financial implication for the household exactly when they're also going

01:43:29 through the devastation of having their home destroyed. On top of that, the other challenge

01:43:35 is to not have enough insurance going forward for future shocks, and if you do not have adequate

01:43:42 coverage for all of the future shocks that might be coming, then it makes you all that much more

01:43:48 vulnerable for, you know, the next fire. I appreciate that. Now, the Hermits Peak Cap Canyon fire was a

01:43:55 prescribed burn that got out of control. It was started by the federal government. Now, because

01:44:00 of this, the federal government has a responsibility to the people of New Mexico to clean up and

01:44:05 rebuild our communities. Disaster costs keep rising, or as disaster costs keep rising, FEMA's

01:44:13 reporting that its disaster fund could run out this summer and require additional congressional

01:44:18 appropriations. Yes or no, are rebuilding efforts at FEMA strained by the cost of disasters around

01:44:26 the country? Ray? Yes, you know, to the extent that FEMA has finite resources, more disasters

01:44:34 mean more stress on FEMA, but I'm not really able to comment on what this may mean for the fiscal

01:44:39 situation under the budget because I'm not familiar with that. I appreciate that, and Mr.

01:44:45 Chairman, when I sat on the Public Regulation Commission in New Mexico, it was a hodgepodge

01:44:52 of agencies. We were essentially the Public Utility Commission, but New Mexico had insurance

01:44:58 underneath it. The superintendent of insurance worked for the commission. We had oversight over

01:45:03 them. I just certainly hope that through our experiences throughout the decades and even now

01:45:10 as we're seeing what's happening in this particular space, that we have folks that are willing to

01:45:16 police themselves, that if a company's not a good company, that some rogue commissioner doesn't try

01:45:24 to relocate them into a jurisdiction that may allow them to get licensed there, and then that

01:45:29 company preys on other companies or other families and things of that nature, which only compounds

01:45:34 the problem we have today. That was happening when I was elected to that particular body,

01:45:41 and it's just not right. So with all the challenges that we have across the country,

01:45:46 I certainly hope that there's a way for state by state to get this right. If not, Mr. Chairman,

01:45:53 we all need to have a serious conversation about what's going to happen at the federal level

01:45:58 to make sure that we're going to be doing some things in a different way for the good of all

01:46:02 the people that we that we represent all across America. So thank you very much for the time,

01:46:08 and thank you for letting me go over my time. Thanks, Senator Lujan. Thank you to all of the

01:46:12 witnesses. Mr. Muslin, sorry I said Musulin before, Muslin, if you don't mind me adding an edit to the

01:46:22 QFR request to you, it would be also to elaborate a little bit on your description of the cycle

01:46:29 between climate causing inflation and inflation itself. We've certainly heard a lot of testimony

01:46:37 about that in the agriculture area here with respect to shipping delays in the Panama Canal

01:46:44 and through a whole lot of other vectors, so I would appreciate that. Anybody else with questions

01:46:52 for the record, they'll be due by noon tomorrow by email or with a signed hard copy delivered to

01:47:00 the committee clerk. We would ask that QFRs be responded to within seven days of receipt,

01:47:06 and with that the hearing is adjourned. Okay. If I could, just one minute on Senator Lujan's

01:47:16 comments on FEMA, and at the risk of, as my mom would say, sounding like a broken record,

01:47:22 I've met with FEMA numerous times this year in the state of Oklahoma with some of our disasters.

01:47:26 FEMA Administrator Criswell came to Sulphur and I toured that with her, and she did a wonderful

01:47:32 job, by the way, but FEMA's own survey from a few years ago, again, shows a six to one return on

01:47:40 dollars invested in mitigation. FEMA comes in to our communities, they've been in numerous of them

01:47:44 this spring, and they help out with the individual assistance and as well as SBA loans, but some of

01:47:49 that money was put towards mitigation. I think that would be extremely helpful. Thank you. I

01:47:53 think that's a good point to end on. Thanks very much, everyone. Hearing is adjourned.

01:48:01 [End of session]

The Senate Budget Committee Holds A Hearing On Climate Change And Its Impact On Insurance Markets

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