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Private Market is Best Mechanism to Address Coastal Insurance Issues, NAMIC CEO Tells Congress

WASHINGTON (April 11, 2007) - The private insurance marketplace, not the federal government, is the best vehicle to address coastal insurance issues in the U.S. But the federal government can play a role in efforts to reduce affordability and availability problems in coastal regions. That's the message NAMIC President and CEO Chuck Chamness delivered to members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs today.

During the hearing An Examination of the Availability and Affordability of Property and Casualty Insurance in the Gulf Coast and Other Coastal Regions, Chamness discussed the developing insurance crisis along the U.S. coastal regions and legislative initiatives that could either help or, in some cases, worsen the situation.

Chuck Chamness (center), testifies at the April 11, 2007, Committee on Banking, Housing and Urban Affairs Hearing, "An examination of the availability and affordability of property and casualty insurance in the gulf coast and other coastal regions."

"It is widely acknowledged that property insurance has become more expensive and somewhat less available in coastal regions of the U.S.," Chamness said. "While government and the private sector can and should work together to address this problem, we should not delude ourselves into thinking that economic principles affecting the relationship between supply, demand, and price can be erased by government regulation and programs."

Chamness outlined three factors responsible for the problem:

• The exposure of densely concentrated, high-value property to elevated levels of catastrophe risk in certain coastal regions means property insurance there will be relatively expensive compared to regions that lack one or both of these attributes.
• As the population growth in these regions increases, the number of people and businesses faced with relatively high insurance costs will also increase.
• U.S. coastal regions have experienced increased population growth and commercial development at a time when the frequency and severity of catastrophic storms in these regions are increasing.

"Simply put, the availability and affordability of property insurance in coastal regions are mainly functions of risk," Chamness testified. "But other variables, including actions taken by government, can also affect the supply and cost of insurance."

Chamness explained that several recently proposed initiatives could actually hinder efforts to provide more affordable, available insurance. Florida lawmakers, for example, removed restrictions on the ability of the Citizens Property Insurance Corporation to compete with private insurers, while canceling rate increases that had been approved to reduce the disparity between the levels of risk assumed by Citizens and the relatively low premiums it charges. Also, lawmakers doubled the risk-bearing capacity of the Florida Hurricane Catastrophe Fund to $32 billion. Even though there is only $1 billion in the fund, it now has a legislative mandate to assume a level of catastrophe risk exposure more than 30 times that amount. "Thus, if even one major storm hits the state this year, all Florida insurance consumers will face huge assessments and significant tax increases," Chamness said.

A federal proposal to add wind hazard to the National Flood Insurance Program is cause for concern since the program would need to build a very large loss reserve very quickly to avoid the under-reserving problem already plaguing the NFIP. That program is more than $20 billion in debt.

Chamness explained that a federal catastrophe fund would be unnecessary, except in the event of a true mega-catastrophe.

Chamness pointed to the following federal initiatives that NAMIC supports to curtail problems of affordable and available insurance in coastal regions going forward:

• Creating incentives to encourage states to adopt and enforce strong, statewide building codes. Strong building codes and responsible land-use planning have been shown to greatly reduce the level of property damage and human suffering caused by natural disasters.
• Designing government initiatives to create mitigation grant programs to allow homeowners in high-risk areas to invest in risk-mitigation measures.
• Amending the federal tax code to allow insurers to set aside a portion of premium income in tax-exempt policyholder disaster protection funds.
• Reforming the National Flood Insurance Program to change the way premiums are set. Also, enacting stiffer penalties on financial institutions that fail to require flood insurance coverage for mortgages on properties in flood-prone areas or allow the policies to lapse.

"NAMIC realizes that those people who live and do business in coastal areas will face serious challenges in the years ahead," Chamness told the lawmakers. "We believe that the most effective mechanism for addressing these challenges is through the private insurance market. We also believe that Congress can play a constructive role by enacting some of the positive reforms mentioned above."

• Written testimony

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For further information, contact
Nancy Grover
(202) 628-1558 Tel
(202) 628-1601 Fax
ngrover@namic.org