Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers (U.S. Senate Committee on Banking, Housing, and Urban Affairs)

Hearing	Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers
Committee	U.S. Senate Committee on Banking, Housing, and Urban Affairs
Date	September 7, 2023

 

Hearing Takeaways:

• The U.S. Homeowners Insurance Market: The hearing focused on current challenges facing the U.S. homeowners insurance market, including higher prices, reductions in coverage, and insurance company withdrawals from markets. Committee Members and the hearing’s witnesses expressed interest in how these challenges impact insurance companies, insurance markets, and consumers.
  • Financial Viability and Competitions of Homeowners Insurance Companies: Committee Republicans and Mr. Theodrou expressed concerns over how insurance companies are currently paying out more in claims than they collect in in premiums. They noted how these companies are only achieving profitability through investment returns on their collected premiums. They cautioned that this dynamic may not be sustainable given the current inflationary market environment.
  • Impact of Climate Change: Committee Democrats, Mr. Heller, and Ms. Norris expressed concerns that the increasing prevalence and severity of natural disasters due to climate change is driving up homeowners insurance costs for U.S. consumers. They also stated that changing weather patterns due to climate change will cause natural disaster risk and exposure to extend to places that have not previously been prone to natural disasters.
  • Impact of Inflation: Full Committee Ranking Member Tim Scott (R-SC) and Mr. Theodorou also expressed concerns that the current inflationary environment may be contributing to homeowners insurance price increases. They noted how insurance companies must account for rising labor and material costs in setting their rates.
  • Impact on Vulnerable Communities: Committee Democrats, Mr. Heller, and Ms. Norris expressed particular concerns over how climate change and higher homeowners insurance rates are especially impacting vulnerable communities, including low-income Americans, senior citizens, and communities of color. Mr. Heller further noted how many mortgage lenders are forcing some Americans into insurance policies when they cannot afford their own property insurance premiums. He explained that this situation raises mortgage rates for these Americans and that this forced insurance coverage only provides protection for the mortgage lender (and not for the residents of the housing unit).
  • Impact on Americans with Poor Credit Scores: Mr. Heller criticized the fact that many insurance companies will charge higher homeowners insurance rates to homeowners in most states with poor credit scores, regardless of whether they have filed a claim. Sen. Thom Tillis (R-NC) and Mr. Theodorou argued however that this use of credit scores to set homeowners insurance rates is an actuarially sound practice.
  • Impact on Housing Affordability: Sen. Catherine Cortez Masto (D-NV), Mr. Heller, and Ms. Norris raised concerns that the increasing price of homeowners insurance is making housing unaffordable for many Americans. They specifically expressed concerns over how these high prices impact the ability of non-profit organizations to participate in government affordable housing programs. They lamented how these high prices make it financially unfeasible to offer affordable housing.
  • Impact on Multifamily Housing: Full Committee Chairman Sherrod Brown (R-OH) and Ms. Norris expressed concerns over the impact of high homeowners insurance rates on multifamily housing providers. Chairman Brown noted that it is difficult to determine when an insurer has stopped writing coverage for apartments in a community or a state because these insurance policies are each a contract between a property owner and their insurer. Ms. Norris remarked that housing developers and owners with large real estate portfolios have little bargaining power related to property and casualty insurance rates. She also testified that her organization previously had four insurers that offered property and casualty insurance policies and indicated that three of these insurers had left the market.
  • Impact on Manufactured Housing: Sen. Cortez Masto and Mr. Heller highlighted how manufacturing housing residents (who tend to be poorer and older) tend to pay more for lower quality homeowners insurance. Mr. Heller noted how homeowners policies for manufactured homes are actual cash value policies, which means that they depreciate the value of the home when claims are filed. He also stated that these manufactured homeowners insurance policies contain “weird” exclusions. He further highlighted how some manufactured homeowners cannot collect their full homeowners insurance claim if the homeowners do not rebuild their homes in the same pre-disaster location (which may be prohibited).
  • Impact on the Reinsurance Market: Full Committee Chairman Brown and Mr. Heller raised concerns that recent homeowners insurance market challenges have led reinsurance rates for insurance companies to spike. They noted how insurance companies will often pass along these higher reinsurance costs to customers in the form of higher premiums. Mr. Heller partially attributed these higher rates to the unregulated nature of the global reinsurance market.
  • California’s Homeowners Insurance Market: Committee Republicans and Mr. Theodorou criticized California’s insurance policies and argued that California’s overregulation of its insurance market is driving insurance companies to leave the state. Mr. Theodorou attributed California’s insurance problems to the state’s Proposition 103 and explained that this policy provides a 20 percent rebate to the state’s automobile insurers, creates an intervenor process where parties can advocate for insurance rate decreases, and requires the California Department of Insurance to make approval decisions on proposed rates within 60 days. He commented however that the California Department of Insurance has not adhered to this 60-day decision requirement. Mr. Heller noted that while some insurance companies are reducing their business within California, he stated that these insurance companies are not withdrawing from the market due to a lack of economic returns. He also noted how California insurance companies have received 95 percent of their requested rate increases. He stated that California’s insurance regulatory system is functional, provides robust consumer protections, and does permit public input.
  • Florida’s Homeowners Insurance Market: Committee Members, Mr. Heller, and Mr. Theodorou also highlighted how Florida has experienced high homeowners insurance rates. Full Committee Ranking Member Scott and Mr. Theodorou largely attributed these high insurance rates too excessive litigation. Mr. Theodorou expressed optimism however that Florida had adopted comprehensive tort reform and commented that this tort reform should help to address these high costs.
  • Movement Toward State Insurers of Last Resort: Full Committee Chairman Brown, Mr. Heller, and Mr. Theodorou expressed concerns over how many homeowners are forced to seek coverage from state insurers of last resort, which tend to provide minimal coverage polities at higher rates. Mr. Heller criticized rules that require state public insurers of last resort to charge customers more than the actuarially indicated rate.
• Additional Policy Topics and Proposals: The hearing considered additional policy topics and proposals related to federal oversight and regulation of homeowners insurance markets.
  • Federal Oversight of State Insurance Markets: Committee Republicans and Mr. Theodorou expressed concerns over policy proposals that would provide the federal government with a greater role in state insurance markets. They highlighted how the McCarran-Ferguson Act provides the U.S. with a state-based insurance structure and argued that this system has served U.S. consumers well. Committee Democrats, Mr. Heller, and Ms. Norris contended however that the federal government must have a more robust oversight role of state insurance markets given recent market failures. They specifically expressed support for the Biden administration’s efforts to have the U.S. Federal Insurance Office (FIO) collect new data from insurers. They stated that this information would help the federal government to better understand climate change-related financial risks and to assess the potential for major disruptions of private insurance coverage. Sen. Katie Britt (R-AL) and Mr. Theodorou argued however that this data collection effort would constitute a federal overreach and called these proposed data collection requirements duplicative of existing data collection efforts.
  • Establishment of a New Federal Reinsurance Program: Mr. Heller and Ms. Norris called on the U.S. to establish a federal reinsurance program to mitigate current challenges within the reinsurance space. Mr. Theodorou argued however that such a program would be counterproductive and asserted that existing federal insurance programs have proven to be policy failures.
  • The National Flood Insurance Program (NFIP): Committee Members and the hearing’s witnesses called on Congress to extend the NFIP’s authorization, which is set to lapse on September 20, 2023 absent Congressional action. Committee Republicans and Mr. Theodorou noted how most Americans do not purchase NFIP insurance, which results in adverse selection problem. Full Committee Ranking Member Tim Scott (R-SC) and Mr. Theodorou also raised concerns over how the NFIP often encourages homeowners to rebuild damaged properties in disaster prone areas.
  • The NFIP’s Risk Rating 2.0 Pricing Methodology: Sen. Robert Menendez (D-NJ), Sen. John Kennedy (R-LA), Mr. Heller, and Ms. Norris criticized the NFIP’s new Risk Rating 2.0 methodology. They stated that this new methodology is causing many NFIP policyholders to experience “massive” rate increases, which is leading many people to drop their NFIP coverage. However, Mr. Theodorou expressed support for this new methodology and noted how the methodology has led 20 percent of homes to experience decreases in their property insurance premiums. He also stated that this methodology has supported the growth of the private flood insurance market.
  • Proposal to Hold Polluters Responsible for Higher Insurance Costs: Sen. Chris Van Hollen (D-MD), Mr. Heller, and Ms. Hiller argued that polluters (rather than taxpayers) should be primarily responsible for covering higher insurance costs associated with climate change. Mr. Theodorou noted how the largest fossil fuel companies maintain their own captive insurance companies, which often fall outside the scope of traditional regulators. He commented that this dynamic might limit the effectiveness of a policy that held polluters responsible for covering these higher insurance costs.
  • Proposal to Permit Non-Profit Organizations to Participate in Risk Retention Groups: Mr. Heller expressed support for proposals to make risk retention groups available to non-profit organizations. He explained that risk retention groups are alternative mechanisms for insurance. He stated that this policy would reduce insurance affordability challenges for non-profit organizations.
  • Climate Change and Natural Disaster Mitigation Strategies: Committee Members and the hearing’s witnesses expressed support for government and insurance company policies that encourage homeowners to pursue climate change and natural disaster mitigations for their properties. They stated that these strategies will reduce overall insurance costs through minimizing natural disaster costs and highlighted how there are many existing federal and state programs that encourage the adoption of these measures. Sen. Catherine Cortez Masto (D-NV) highlighted how Nevada regulators offer expedited review for insurance companies that submit filings to add discounts for homeowners that take mitigation measures. Committee Democrats and Mr. Heller also stated that the adoption of protective land use strategies can support safer homes and communities, which will in turn reduce insurance costs.
  • State Laws Requiring Insurance Companies to Provide Notification When Leaving a Market: Sen. Jack Reed (D-RI) highlighted how his state of Rhode Island has passed a law that requires insurance companies to notify the state prior to their departure from a market. He commented that this notification provides Rhode Island with an opportunity to work with the insurance company on potential remedies so that the insurance company can continue to conduct business within the state.  Mr. Heller expressed support for this policy.

Hearing Witnesses:

1. Mr. Douglas Heller, Director of Insurance, Consumer Federation of America
2. Ms. Michelle Norris, Executive Vice President of External Affairs and Strategic Partnerships, National Church Residences
3. Mr. Jerry Theodorou, Policy Director, Finance, Insurance and Trade, The R Street Institute

Member Opening Statements:

Full Committee Chairman Sherrod Brown (R-OH):

• He discussed how homeowners have increasingly experienced “unpleasant” surprises during homeowners insurance policy renewal processes.
  • He highlighted how property insurers have entirely abandoned some markets, which leaves consumers with fewer homeowners insurance options that cost more and provide less coverage.
• He remarked that consumers are increasingly relying upon their homeowners insurance policies and mentioned how the National Oceanic and Atmospheric Administration (NOAA) indicates that the U.S. has experienced 15 weather disasters.
  • He indicated that each of these 15 weather disasters have resulted in losses exceeding $1 billion.
• He also mentioned how reinsurance provider Swiss Re had estimated that severe storms have resulted in $34 billion of insured losses during the first half of 2023, which is a record figure for a six-month period.
  • He predicted that this trend of higher insured losses will continue due to climate change.
• He highlighted how extreme weather events have impacted residents of Hawaii, Florida, and Vermont.
  • He mentioned how Hawaii’s recent wildfires have killed at least 115 people (with hundreds of more people missing) and have had projected losses of $6 billion. 
  • He also mentioned how losses from Hurricane Idalia (which hit Florida, Georgia, North Carolina, and South Carolina) can reach $20 billion.
  • He further mentioned how Vermont residents have suffered significant losses from floods during Summer of 2023.
• He remarked that higher property insurance rates can especially harm lower-income homeowners, landlords, and renters.
  • He commented that low-income residents and communities of color often are forced to live in the areas that are most vulnerable to natural disasters.
• He stated that changing weather patterns due to climate change will cause risk and exposure to extend to places that have not previously been prone to natural disasters.
  • He commented that this trend has led insurance companies to reevaluate risk concentration levels in both coastal and non-coastal areas.
• He discussed how property insurers are now restricting coverage or raising rates and deductibles and highlighted how some property insurers are no longer serving certain states and geographical areas.
  • He mentioned how U.S. Secretary of the Treasury Janet Yellen had described this situation as a “protection gap,” which can pose financial stability concerns for the entire financial system.
• He also highlighted how U.S. reinsurance rates (which refer to the cost of insurance purchased by insurance companies to limit their downsides) have reportedly increased by as much as 50 percent.
  • He partially attributed these increases in reinsurance rates to more frequent and severe natural disasters.
• He stated that higher reinsurance rates result in higher costs for property insurance companies, which these companies pass along to their customers in the form of higher premiums.
• He emphasized that these higher insurance premiums coincide with reductions and eliminations of property insurance coverage throughout the U.S. and highlighted how State Farm and Allstate have recently stopped offering new homeowners insurance policies in California. 
  • He indicated that State Farm and Allstate have cited the growing risk of catastrophe and increasing reinsurance rates as reasons for their withdrawal from the California insurance market.
• He also mentioned how 16 severe storms and hurricanes in Florida have caused more than $100 billion in damage and have led many insurers (including Farmers Insurance, Bankers Insurance, Centauri Insurance, and Lexington Insurance) to leave the state.
  • He added that AAA had recently announced that it would not renew some high exposure policies within Florida.
• He highlighted that while Florida has the highest average yearly homeowners insurance premiums in the country, he noted that 14 insurance companies have either left the state or have entered the receivership process.
• He remarked that the exodus of property insurers from state insurance markets has forced homeowners to seek coverage from state-mandated insurers of last resort.
  • He commented that these insurers of last report provide “bare bones” policies at typically higher rates.
• He noted how the growing problem of climate change has caused insurers of last resort to grow in recent years.
  • He highlighted how Florida’s insurer of last resort has become the state’s largest property insurer and how California’s insurer of last resort has experienced an over 100 percent increase in policies over the previous five years.
• He also mentioned how the National Multifamily Housing Council has reported that the multifamily sector is experiencing higher insurance rates, higher insurance deductibles, and insurance coverage limitations.
  • He added that many areas lack viable private market insurance coverage options for multifamily housing units.
• He further noted that it is difficult to determine when an insurer has stopped writing coverage for apartments in a community or a state because these insurance policies are each a contract between a property owner and their insurer.
• He stated that these higher insurance rates for multifamily housing units are passed along to residents in the form of higher rents.
  • He commented that this trend will reduce the availability of affordable housing options.

Full Committee Ranking Member Tim Scott (R-SC):

• He noted that while some policymakers attribute property insurance market problems to environmental and climate change factors, he asserted that these problems are often attributable to poor policies.
• He discussed how he had worked in the property and casualty insurance industry for over 20 years and noted how insurance companies seek to determine the probable maximum loss (PML) for the markets that they serve.
  • He commented that insurance companies that cannot cover the PML through their collected premiums will leave markets as these markets are not economically feasible.
• He contended that California’s insurance market is over-regulated, which makes it difficult for insurance companies to make profits from offering policies within the state.
  • He commented that insurance companies will leave states where they cannot make profits.
• He discussed how the NFIP helps to reduce insurance risks during extreme weather events.
  • He estimated that the NFIP derives about half of its premiums from the American South and noted how the NFIP will payout claims in regions that do not contribute to the NFIP.
• He stated that California’s regulatory environment is not just hostile to the property insurance market and commented that California’s policies are driving various industries from the state.
• He also highlighted how Florida’s property insurance market is facing significant challenges and noted that Florida represents about 79 percent of the U.S.’s homeowners insurance lawsuits.
  • He indicated however that Florida has just 9 percent of the U.S.’s homeowners insurance policies.
• He highlighted how Florida insurance companies have paid out $51 billion over the previous decade and indicated that 71 percent of these payouts have gone to attorney’s fees.
  • He called it concerning that attorneys are receiving the majority of these insurance payouts.
• He remarked that U.S. homeowners are struggling to afford property insurance and noted that the national average annual homeowners insurance premium is $1,700.
  • He indicated however that Florida’s average annual homeowners insurance premium is $6,000.
• He asserted that Florida’s high homeowners insurance costs are attributable to the state’s higher attorney’s fees and are attributable not to the rate sufficiency based on the PML of a natural disaster.

Witness Opening Statements:

Mr. Douglas Heller (Consumer Federation of America):

• He discussed how Americans had spent about $125 billion for homeowners insurance in 2022 and indicated that the price of homeowners insurance has risen 40 percent faster than inflation since 2017.
  • He highlighted how many Americans are paying more than $500 per month for just their basic homeowners insurance policies.
• He noted that while regions exposed to greater climate change-related risks are facing greater homeowners insurance affordability challenges, he stated that the high cost of homeowners insurance is a national problem.
  • He highlighted how Americans living in the Midwest are facing some of the highest homeowners insurance rates and indicated that these Americans often face tornado and hail risk.
• He also expressed concerns that the areas most vulnerable to climate change disasters are often communities of color and low-income neighborhoods.
• He further criticized the fact that property insurers will charge higher rates to homeowners in most states with poor credit scores, regardless of whether they have filed a claim.
  • He commented that this policy disproportionately harms lower income Americans, people of color, and rural Americans.
• He then discussed how insurance companies are withdrawing from certain communities and some states entirely.
  • He called this an “incredibly scary situation” because insurance coverage is a requirement for mortgages and homeowners desire insurance protection.
• He criticized insurance companies for leaving certain markets and states without warning after long claiming that these markets were insurable.
  • He called these withdrawals from markets egregious given how the insurance industry has long resisted calls to engage in climate change risk analysis.
• He discussed how many Americans are being forced into state insurers of last resort, which tend to sell high-priced policies with “bare bones” coverage.
  • He also noted how many Americans are being forced into high price insurance policies by their mortgage companies when they cannot make their mortgage payments.
• He further highlighted how the high cost of homeowners insurance is driving many Americans out of the homebuying market.
• He then raised concerns over how insurance companies are selling homeowners insurance policies with fewer rebuilding benefits, more exclusions, and higher deductibles and stated that these policies merely transfer risks to policyholders.
  • He lamented how these insurance companies have not worked with their policyholders and communities to reduce the risk of loss due to climate change-related disasters.
• He called the reality of worsening disasters “undeniable” and asserted that the U.S. must engage in a collaborative effort to combat climate change-related risks.
  • He commented that this effort will involve investments in safer homes and buildings and more well-defended and resilient communities.
• He contended that the U.S. will need to provide better data collection, expanded public support of infrastructure investments, and more grants for homeowners and building owners to harden their properties.
  • He asserted that property owners should be provided with access to coverage and relief on their premiums when they invest in loss mitigation.
• He also stated that policymakers must consider issues related to property development, affordable housing, and equity when working to adapt to climate change-related risks.
  • He commented that the failure of policymakers to address these issues will lead insurance companies to control these issues through their ratemaking and underwriting decisions.
• He then remarked that “exploding” prices in the global reinsurance market are driving U.S. homeowners insurance rates higher.
  • He highlighted how these prices have increased by 35 percent since January 2023 and noted how many property insurers cannot obtain reinsurance coverage.
• He asserted that the U.S. requires a meaningful public-private partnership to address these high reinsurance prices (which he described as a market failure).
• He recommended that the U.S. government provide a catastrophe reinsurance backstop and commented that this backstop would be similar to current federal insurance offered for terrorism risk.
  • He asserted that this reinsurance backstop would provide needed certainty to insurers on their PML for climate change-related risks.
• He lastly expressed his willingness to address the current insurance challenges in California and Florida during the Congressional question period.

Ms. Michelle Norris (National Church Residences):

• She remarked that multifamily housing stakeholders are concerned over recent insurance industry trends and how these trends impact affordable rental housing and the residents of these homes.
• She mentioned how multifamily housing stakeholders had recently established a task force to identify solutions to current insurance market challenges.
  • She indicated that these stakeholders include Stewards of Affordable Housing for the Future (SAHF), the National Affordable Housing Management Association (NAHMA), and the National Multifamily Housing Council (NHMC).
• She discussed how U.S. property insurance rates have increased for 22 consecutive quarters and highlighted how housing providers have reported annual premium increases ranging from 30 percent to 100 percent for affordable rental housing over the previous three years.
  • She testified that her organization, National Church Residences, had seen its property and casualty insurance costs increase by 400 percent over six years.
• She also mentioned how the U.S. is experiencing reduced property insurance coverage and commented that minimum deductibles on property-level policies have increased significantly.
  • She testified that National Church Residences had seen their minimum deductibles rise to $100,000.
• She noted that these high deductibles can conflict with financial requirements and stated that housing providers may need to take on additional policies and create layered coverages to avoid defaults on financing packages.
  • She commented that this need to take on more insurance coverage adds costs for housing providers.
• She remarked that housing developers and owners with large real estate portfolios (including National Church Residences), are limited in their ability to negotiate property and casualty insurance rates.
• She stated that increases in property and casualty insurance rates for housing developers and owners are impacting residents.
  • She elaborated that increased insurance costs result in increased rents in both market-rate and affordable housing communities.
• She also remarked that continued rising insurance costs may lead multifamily housing providers to reduce the benefits that they provide to their residents, cause deferred repairs, and threaten the long-term sustainability of communities.
• She further stated that high insurance costs are making housing more unaffordable and noted how these higher costs result in lower net-operating income to support debt or equity returns.
  • She commented that these barriers to borrowing and attracting investment will undermine efforts to finance the construction and preservation of current affordable housing communities.
• She remarked that three key issues are driving the volatility of the U.S. property and casualty insurance market: the unprecedented frequency of natural disasters, the impact of inflation on replacement value methodology, and insurance market capacity and policy limitations.
  • She mentioned how many insurers have ceased to underwrite multifamily casualty policies nationwide or in certain markets prone to natural disasters (such as Florida and Louisiana).
• She contended that the U.S. must work to address these current insurance problems and highlighted how the U.S. currently has a shortage of 7.3 million homes that are affordable to low-income people.
• She remarked that the U.S. Department of Housing and Urban Development (HUD) and other federal agencies can provide funding for affordable rental homes in the short-term.
  • She asserted that HUD and these federal agencies must rethink existing insurance requirements and provide increased flexibility and funding to property owners to account for “real-world” challenges.
• She also stated that the U.S. must make long-term investments in climate resilience and intervene in property and casualty insurance markets given current market failures.

Mr. Jerry Theodorou (The R Street Institute):

• He discussed how consumers in states with ailing insurance markets are struggling to secure affordable homeowners insurance policies.
  • He commented that homeowners insurance availability and affordability concerns are particularly acute in California and Florida.
• He stated that symptoms of these struggles include insurer insolvencies, insurers ceasing to do business or pausing new business, rising premiums, and large natural disasters.
• He then disputed the assertions that the insurance industry’s capital had been depleted and noted how the primary insurance industry only had a slight underwriting loss in 2022.
  • He indicated however that the primary insurance industry’s investment income has offset this underwriting loss, which has led to a positive 4 percent return.
• He also described the U.S. insurance industry as “highly competitive” and highlighted how Ohio and South Carolina are among the most competitive states for insurance.
• He then noted how state residual markets provide insight into the competitiveness of insurance markets and explained that residual markets are state-mandated insurers of last resort when insurance is unavailable in the standard market.
  • He commented that the residual markets in California and Florida are “unhealthy symptoms” of the U.S.’s insurance industry’s problems.
• He discussed how insurance markets and loss exposures vary across states and noted how California is exposed to risks related to earthquakes, wildfires, mudslides, atmospheric rivers, and typhoons.
  • He highlighted however that California’s insurance premiums are fairly comparable to insurance premiums in less catastrophe-prone states (such as Tennessee and South Carolina), even though California’s risks, building costs, and repair costs are higher.
• He attributed California’s insurance problems to the state’s Proposition 103 and explained that this policy had made California the only state to introduce public intervenors, who can challenge rate increase requests above 7 percent.
  • He noted that while Proposition 103 requires the regulator to address rate change requests within 60 days, he stated that this 60-day review must be waived before action is taken by the regulator, which results in significant delays often exceeding one-year.
• He asserted that Proposition 103 limits Californian insurers from charging risk-adjusted rates, which has led nearly 20 insurers to pause new business and not renew policies within the state.
  • He described Proposition 103 as a form of price control and commented that price controls do not work according to academic literature.
• He also criticized California for prohibiting insurers from considering reinsurance costs and recent climate patterns as part of risk modeling.
• He then remarked that excessive litigation has primarily driven Florida’s insurance market problems and noted how Florida is home to 79 percent of the U.S.’s litigation involving homeowners insurance.
  • He indicated that Florida only has 9 percent of the U.S.’s homeowners insurance policies.
• He expressed optimism however that California’s legislature had recently held productive and bipartisan information hearings on climate change models and that Florida had adopted comprehensive tort reform.
  • He added that several insurance companies had recently announced plans to enter the Florida market.
• He called on California to build upon this recent work to reform its insurance system and called on Florida to continue its tort reforms.

Congressional Question Period:

Full Committee Chairman Sherrod Brown (R-OH):

• Chairman Brown stated that there have been many news reports detailing “skyrocketing” homeowners insurance rates with less coverage and higher deductibles. He added that many of these news reports indicate that some people cannot even find homeowners insurance policies for purchase. He asked Mr. Heller to explain why so many Americans are currently unable to afford or obtain homeowners insurance policies.
  • Mr. Heller first remarked that climate change is “severely” exacerbating the cost of risk transfer because it is increasing the severity and risk of disasters. He highlighted how the U.S. had already experienced 15 weather events with damages exceeding $1 billion. He noted how Swiss Re had reported that the U.S.’s most severe weather events had occurred in Texas and commented that the impacts of climate change are not confined to California and Florida. He also stated that the unregulated nature of the global reinsurance market is contributing to the growing cost of homeowners insurance policies. He noted how “drastically” increased reinsurance premiums in recent years have resulted in a record high rate online index from Marsh McLennan. He then asserted that the federal government has failed to adequately oversee state insurance markets. He criticized rules that require state public insurers of last resort to charge customers more than the actuarially indicated rate. He lastly lamented the fact that Americans with poor credit histories are being charged higher insurance premiums, even without filing claims.
• Chairman Brown expressed hope that the Committee could reach bipartisan agreement regarding the existence, severity, and costs of climate change. He then discussed how some argue that state-level consumer protections are leading some insurers to not write homeowners insurance policies in certain states. He noted however that multifamily property owners typically purchase insurance coverage that is not subject to the same consumer protections and oversight as conventional homeowners insurance coverage. He asked Ms. Norris to explain how multifamily property insurance policy coverage differs from traditional homeowners insurance policy coverage. He also asked Ms. Norris to indicate whether fewer insurers are offering multifamily property insurance coverage across the U.S.
  • Ms. Norris first expressed agreement with the previous comments on the impact of climate change on the U.S. property insurance market. She testified that National Church Residences’s three highest insurance claims in its history have occurred within the previous two years. She indicated that these claims had been the result of Hurricane Ida in August 2021, Hurricane Ian in Fall 2022, and Winter Storm Elliot in December 2022. She then called it a challenging time to provide affordable housing. She discussed how National Church Residences works with insurers that span multiple states and testified that her organization is observing a decrease in the availability of insurance options. She mentioned how National Church Residences previously had four insurers that offered property and casualty insurance policies and indicated that three of these insurers have left the market. She commented that National Church Residences now has no ability to negotiate its property insurance premiums.
• Chairman Brown then thanked Mr. Heller for raising concerns regarding the challenges that non-profit organizations face in finding affordable property insurance coverage. He expressed interest in working to address this issue. He then stated higher insurance rates and reductions in insurance coverage do not reduce risks and instead transfers risks from insurers to homeowners. He asked Mr. Heller to identify actions that the U.S. can take to reduce risks to properties so that the U.S. can bring down insurance costs and improve the safety of properties.
  • Mr. Heller highlighted how the U.S. Federal Emergency Management Agency’s (FEMA) Building Resilient Infrastructure and Communities (BRIC) program supports efforts to reduce overall risks to U.S. properties. He mentioned how newly available data identifies areas that are prime candidates for federal infrastructure resiliency investments. He contended that the U.S. must proactively invest in improving the resiliency of U.S. infrastructure and properties. He expressed support for current legislative proposals to provide tax-free grants to homeowners for home hardening projects. He mentioned how the California Earthquake Authority wants to distribute funding for such home hardening projects and commented that the taxable nature of this funding makes people reluctant to accept the funding. He asserted that making proactive investments to strengthen homes will limit future damage to homes caused by natural disasters, which will ultimately save the U.S. government money.
• Chairman Brown acknowledged that his question period time had expired. He expressed his interest in improving the ability of non-profit organizations to access federal resources for natural disaster mitigation.

Full Committee Ranking Member Tim Scott (R-SC):

• Ranking Member Scott expressed concerns over how property insurers are currently paying out more in claims than they collect in premiums. He noted that property insurers can make up for these losses through effectively investing their collected premiums. He cautioned however that an inflationary market environment (such as the U.S.’s current market environment) makes it more difficult for property insurers to obtain sufficient investment returns to offset their claims losses.
  • Mr. Theodorou expressed agreement with Ranking Member Scott’s assessment of the challenges faced by property insurers.
• Ranking Member Scott then noted that while only 1 percent of the NFIP’s losses are repetitive losses, he indicated that these repetitive losses account for about 30 percent of the NFIP’s payouts. He commented that continued construction in natural disaster-prone areas will likely result in greater insurance payouts.
  • Mr. Theodorou expressed agreement with Ranking Member Scott’s comment. He noted how the NFIP is currently attempting to discourage repetitive loss properties through increasing the insurance rates for these properties by 25 percent. He stated that proper insurance pricing signals will lead residents of natural disaster-prone areas to pursue mitigation measures and increase the resiliency of their properties.
• Ranking Member Scott commented that local communities are sometimes better equipped than the federal government to decide whether to rebuild properties in locations that have been prone to multiple natural disasters.
  • Mr. Theodorou expressed agreement with Ranking Member Scott’s comment. He remarked that the federal government has exhibited a poor record in managing insurance programs and cited the NFIP and the federal crop insurance program as poorly run insurance programs. He described the insurance industry as “tremendously complex” and asserted that the federal government should not enter the insurance space.
• Ranking Member Scott highlighted how the McCarran-Ferguson Act provides the U.S. with a state-based insurance structure. He stated that this law’s structure has produced highly competitive and fair insurance markets across the U.S. He also asserted that this law serves a global model for insurance regulation. He asked Mr. Theodorou to indicate whether he agrees with these views on the McCarran-Ferguson Act.
  • Mr. Theodorou expressed agreement with Ranking Member Scott’s praise for the McCarran-Ferguson Act. He stated that previous policy efforts to create federal insurance backstops and to provide government-subsidized reinsurance have been unsuccessful. He asserted that federal policymakers should not pursue these types of policies moving forward.
• Ranking Member Scott then expressed concerns over policies that would have federal taxpayers subsidize state insurance challenges.
  • Mr. Theodorou expressed agreement with Ranking Member Scott’s concerns.
• Ranking Member Scott then asked Mr. Theodorou to explain why insurance markets operate at a lag behind the rest of the U.S. economy and why the U.S. is currently observing increased insurance prices. He commented that recent inflation has caused insurance rates to increase and that this higher inflation is becoming embedded in insurance company business models.
  • Mr. Theodorou highlighted how inflation has driven up building costs and building material costs. He noted how a loss can occur at the end of a policy’s term and the rebuilding may take several years to complete. He commented that this gap in time between the loss and the rebuilding period explains why it may take time for insurance rates to adequately reflect the true cost of the policy. He stated that there are three main drivers of current insurance market strains: economic inflation, reinsurance costs, and natural catastrophes.

Sen. Jack Reed (D-RI):

• Sen. Reed noted how the NFIP’s authorization is set to lapse on September 30, 2023 absent Congressional action. He asked Mr. Heller to discuss what would happen if Congress were to allow the NFIP’s authorization to lapse.
  • Mr. Heller discussed how Americans are facing “unprecedented” natural catastrophes and asserted that the U.S. needs to provide flood insurance coverage. He stated that the private market has failed to provide flood insurance for homeowners and does not include flood insurance as part of standard homeowners insurance policies. He asserted that this lack of private market flood insurance coverage necessitates a federal backstop for flood insurance coverage. He noted how only 12 percent of Americans purchase flood insurance and described the U.S. as “desperately” uninsured or underinsured for flood risk. He acknowledged that while the NFIP has not been successful, he argued that the NFIP remains very necessary. He stated that a federal flood reinsurance program would be beneficial because it would better enable private homeowners insurance policies to cover flood risks. He asserted that the NFIP remains necessary during the interim period.
• Sen. Reed then expressed interest in working to mitigate the impacts of natural disasters. He mentioned how his state of Rhode Island is working with the U.S. Natural Resources Conservation Service (NCRS) and the U.S. Army Corps of Engineers (USACE) to purchase homes in flood prone areas and to restore floodplains. He asserted that the U.S. should work preemptively to boost the natural disaster resiliency of homes.
  • Mr. Heller expressed agreement with Sen. Reed’s comments. He remarked that the U.S.’s top priority should be reducing natural disaster risk and commented that the U.S. possesses the requisite knowledge and data to accomplish this. He expressed frustration that the U.S. is currently more focused on transferring natural disaster risk than on reducing said risk.
• Sen. Reed then noted how many insurance companies are choosing to exit certain markets. He mentioned how Rhode Island has passed a law that requires insurance companies to notify the state prior to their departure from a market. He commented that this notification provides Rhode Island with an opportunity to work with the insurance company on potential remedies so that the insurance company can continue to engage in business within the state. He asked Mr. Heller to indicate whether other states should consider emulating this Rhode Island law.
  • Mr. Heller expressed support for Rhode Island’s law requiring insurance companies to notify the state prior to their departure from a market. He stated that there must exist a transition process for when insurance companies decide to no longer service a given geography.

Sen. Mike Rounds (R-SD):

• Sen. Rounds mentioned how he had first become a licensed homeowners insurance agent in 1978 and indicated that he had carried this license until 2015 when he had joined the U.S. Senate. He stated that he does not recall ever seeing a homeowners insurance policy that contained flood insurance as part of its original perils. He asked Mr. Theodorou to indicate whether he was aware of any homeowners insurance policies that have ever included flood insurance coverage.
  • Mr. Theodorou answered no. He remarked that flood insurance coverage has been excluded from homeowners insurance policies for several decades. He noted how the HO-3 insurance form (which he indicated is the most common homeowners insurance form) excludes flood insurance coverage. He stated that the NFIP has been the principal provider of flood insurance coverage. He noted however that the private flood insurance market is growing. He highlighted 77 private companies are currently writing 31 percent of flood insurance business (compared to just 12.6 percent just a few years ago). He partially attributed this growth in the private flood insurance market to the introduction of a new rating methodology.
• Sen. Rounds noted how the NFIP serves as a federal backstop for flood insurance and expressed support for renewing the Program. He commented that the NFIP is very important, especially in areas with high flood risks. He stated however that most Americans elect not to purchase flood insurance because they believe that they are not in a flood-prone area. He also noted how many mortgage lenders do not require borrowers to purchase flood insurance policies, which can lead many Americans to not purchase flood insurance coverage. He asked Mr. Theodorou to confirm that this dynamic results in the U.S. flood insurance market being largely composed of people that think that they are at risk of experiencing a flood and people that are required to purchase flood insurance due to perceived flood risk.
  • Mr. Theodorou expressed agreement with Sen. Rounds’s assessment of the composition of the U.S. flood insurance market. He stated that this dynamic results in adverse selection (in which flood insurance policies are mainly written for areas with high flood risks) and low penetration of flood insurance. He noted that there are 70 million homes in the U.S. and indicated that only 5 million of these homes have flood insurance policies. He noted however that over 80 percent of U.S. homes are estimated to face flood risks. He highlighted how atmospheric rivers can cause homes to experience flooding in areas that are located far away from bodies of water. He remarked that the U.S. thus has ample flood exposure and lacks sufficient flood insurance coverage. He reiterated that the current flood insurance market suffers from adverse selection.
• Sen. Rounds mentioned how his previous insurance agencies had represented “dozens” of insurance companies that offered homeowners insurance policies. He noted how these insurance companies had wanted to write many homeowners insurance policies because these companies would make a profit if they controlled a larger share of the insurance market. He asked Mr. Theodorou to confirm that most insurance carriers would desire to write for a particular line of insurance coverage if they believe that the line of insurance coverage is profitable.
  • Mr. Theodorou answered affirmatively. He stated that many insurance companies are exiting the California insurance market because they no longer view this market as profitable.
• Sen. Rounds stated that many insurance carriers are viewing climate change and rate increase restrictions as impediments to profitability, which is causing them to leave certain markets. He commented however that some believe that taxpayers should intervene in these situations to keep insurance rates low in these markets. He asked Mr. Theodorou to indicate whether this assessment of the current insurance market situation is fair.
  • Mr. Theodorou answered affirmatively. He stated that taxpayer intervention in these situations would socialize risks and unnecessarily penalize people.

Sen. Robert Menendez (D-NJ):

• Sen. Menendez asked Mr. Theodorou to discuss what happens in situations where private insurers charge unaffordable insurance rates. He stated that these unaffordable insurance rates may cause people to forgo property and flood insurance coverage. He commented that the federal government will often bear the costs in these cases through providing relief to states to respond to natural disasters. He asked Mr. Theodorou to indicate whether it would be preferable for these areas to be provided with insurance support so that the federal government does not later become financially responsible for natural disaster events.
  • Mr. Theodorou remarked that insurance affordability issues can be addressed through means testing insurance support programs. He stated that the new risk rating methodology has led 20 percent of homes to experience decreases in their property insurance premiums.
• Sen. Menendez interjected to comment that an “enormous” number of people have left the NFIP as a result of the NFIP’s new Risk Rating 2.0 methodology. He then remarked that decades of inaction (particularly on climate change) have caused financial problems for U.S. insurance companies and have impeded the insurance industry’s ability to offer affordable products. He stated that policymakers must correct for market failures within the insurance market when there exists a compelling public policy reason to intervene. He asserted that policymakers must intervene to ensure that U.S. families can afford necessary insurance coverage and to prevent collapses in local housing markets. He commented that all regions of the U.S. now face natural disaster risks. He mentioned how many senior communities within his state of New Jersey (including Brick Township, South River, and Elizabeth) have historically faced flooding issues and emphasized that these communities are not wealthy. He asked Ms. Norris to project the financial consequences for seniors if homeowners and flood insurance policies were to become unavailable or prohibitively expensive.
  • Ms. Norris remarked that the inability of National Church Residences to obtain homeowners and flood insurance policy coverage would impose significant risk on both the organization and its residents. She stated that the inability of National Church Residences to obtain homeowners and flood insurance policy coverage would leave its buildings and residents completely exposed to natural disaster risks. She testified that National Church Residences has experienced its three highest insurance claims within the previous two years. She stated that if National Church Residences had not possessed insurance on its apartments, then the apartments could not have been reoccupied.
• Sen. Menendez mentioned how he had introduced the bipartisan National Flood Insurance Program Reauthorization and Reform Act of 2023. He stated that this bill would ensure that flood insurance rates remain affordable and provide “generational” investments in flood mitigation and risk mapping to address long-term flooding challenges. He mentioned how New Jersey had experienced Hurricane Sandy in 2012 and commented that this was the most destructive weather event in the state’s history. He recounted that many New Jersey residents had subsequently faced significant challenges getting paid on their claims for Hurricane Sandy-related damages. He stated that insurance companies had manipulated engineering reports and exploited obscure “loopholes” to provide reduced payment offers to New Jersey’s insurance policyholders. He mentioned how he had worked to have FEMA establish the Sandy Claims Review Process (SCRP), which had led to an additional $260 million being paid out to families that had previously been denied their Hurricane Sandy-related insurance claims. He stated however that insurance companies appear to have subsequently reverted back to their tendency to unjustly deny policyholder claims. He asked Mr. Heller to discuss how Florida homeowners insurance policyholders are being treated in the aftermath of Hurricane Ian.
  • Mr. Heller remarked that many Florida homeowners insurance policyholders have had negative experiences following Hurricane Ian. He stated that many homeowners insurance companies had changed the claims values from their own adjusters and asserted that the U.S. must prosecute these insurance companies that had engaged in fraudulent activities. He expressed frustration with regulators for failing to take prompt action against unscrupulous property insurance companies that are attempting to shirk their responsibilities to homeowners insurance policyholders during a vulnerable period.
• Sen. Menendez commented that his bill would prevent insurance companies from engaging in fraudulent activities. He then asked Mr. Heller to indicate whether the NFIP must submit proposed rate changes to a regulator for approval.
  • Mr. Heller noted how there is a ratemaking process for the NFIP. He lamented however that the NFIP’s new Risk Rating 2.0 methodology is causing many NFIP policyholders to experience “massive” rate increases. He stated that the U.S. must ensure that the NFIP’s rates are fair. He expressed support for means testing the program to ensure that the NFIP’s rates are affordable. He remarked however that the NFIP is experiencing significant problems.
• Sen. Menendez noted how the NFIP has lost 150,000 policyholders and indicated that FEMA estimates that the NFIP will lose one million policyholders by the end of the decade due to flood insurance premium increases. He commented that this situation is not sustainable.

Sen. Thom Tillis (R-NC):

• Sen. Tillis highlighted how property insurers have paid out $1.02 for every $1 they have received in premiums. He noted however that property insurers can invest the premiums that they collect and that the investment returns from these premiums can ensure that the insurers achieve solvency. He asked Mr. Theodorou to indicate whether property insurers are making significant profits and can be described as greedy.
  • Mr. Theodorou answered no to both questions. He noted how the profit margin for U.S. insurers was 4 percent in 2022 and how the average profit margin for U.S. insurers has been 6.5 percent. He indicated however that publicly traded companies tend to have profit margins between 14 percent and 15 percent. He concluded that the U.S. insurance industry has much smaller profit margins relative to other industries.
• Sen. Tillis then commented that there have been suggestions that there exists a dearth of regulations at both the state and federal levels to address the problems within the U.S. insurance industry. He asked Mr. Theodorou to indicate whether there exist significant gaps in insurance regulation. He also asked Mr. Theodorou to indicate whether the U.S. should take additional regulatory measures to address the problems within the U.S. insurance industry.
  • Mr. Theodorou remarked that proposals to create a new federal insurance backstop would be counterproductive. He asserted that the primary insurance and reinsurance markets are not currently collapsing. He stated that the primary insurance and reinsurance industries are designed to respond to catastrophes. He acknowledged that while these industries face cyclical pressures and challenges with inflation and interest rates, he highlighted how there are mutual insurance companies that have been in continuous existence for over 200 years. He commented that this long existence of mutual insurance companies demonstrates the resilience of the insurance industry.
• Sen. Tillis asked Mr. Theodorou to indicate whether any corporate management teams view shrinking their market sizes as part of a growth strategy.
  • Mr. Theodorou commented that corporate management teams would only seek to shrink their market sizes in states that are unprofitable.
• Sen. Tillis remarked that major insurance companies are exiting California and Florida because these companies view those states as unprofitable. He stated that Congress should examine state-level policy decisions that are causing insurers to exit state markets. He asserted however that increased federal regulation of the insurance industry would not address these state-level insurance market problems. He stated that Congress should instead work to fix the root causes that are causing insurance to become unaffordable. He noted how many Americans are looking for affordable property insurance coverage and would prefer to move from their properties if possible. He highlighted how 53 tropical cyclones have impacted his state of North Carolina over the previous 20 years. He contended that states are better equipped than the federal government to address the problems in insurance markets. He commented however that the federal government will still need to provide a backstop for flood insurance risk. He asserted that governments should not compel private sector businesses to serve markets that cannot be sustained due to constraints on risk rating. He then asked Mr. Heller to confirm that he had stated that an individual’s credit rating alone could raise an individual’s insurance premium by as much as 80 percent.
  • Mr. Heller confirmed that he had made this statement. He noted how insurance premiums for people with low credit ratings and no claims history have jumped as high as 100 percent.
• Sen. Tillis asked Mr. Theodorou to explain why credit risk ratings should be included as part of the actuarial process for setting insurance premiums.
  • Mr. Theodorou noted how credit scores have been found to be correlated with insurance losses. He stated however that the U.S. insurance industry does not overprice insurance policies based on credit scores and commented that such overpricing would cause competitors to enter the market to take advantage of the market inefficiencies.
• Sen. Tillis asked Mr. Theodorou to confirm that credit risk ratings would not be factored into the actuarial process for insurance policies if credit risk ratings were not relatively correlated to insurance risks.
  • Mr. Theodorou answered affirmatively.

Sen. John Fetterman (D-PA):

• Sen. Fetterman asked Mr. Heller to discuss what happens when a working family in his commonwealth of Pennsylvania cannot obtain property insurance coverage.
  • Mr. Heller remarked that the inability of families to obtain property insurance coverage would prevent families from owning homes or receiving protection during disaster situations. He elaborated that these families would lack loss of use protection if their homes were to be destroyed. He then discussed how mortgage lenders are forcing some Americans into insurance policies when these Americans cannot afford own their property insurance premiums. He explained that this situation raises mortgage rates for these Americans and that this forced insurance coverage only provides protection for the mortgage lender (and not for the residents of the housing unit). He stated that these situations leave Americans unprotected in the event of disasters.
• Sen. Fetterman asked Mr. Heller to indicate whether there exists any rationale for penalizing new buildings based on their zip codes.
  • Mr. Heller remarked that the U.S. has a “troubling” history of redlining and commented that redlining remains a persistent problem within the homeowners insurance market. He asserted that the U.S. should provide property insurance coverage to safely built homes and buildings to encourage future production of safely built homes and buildings. He stated that the use of zip codes to set homeowners insurance rates reduces access to affordable housing options and criticized the use of zip codes in setting homeowners insurance prices.
• Sen. Fetterman then asked Mr. Heller to discuss the financial benefit of proactive land use and planning.
  • Mr. Heller remarked that proactive land use and planning will reduce the cost of risk, which will reduce the cost of insurance. He elaborated that proactive land use and planning will result in safer homes and communities. He highlighted how Pennsylvania has worked to make proactive investments in home safety. He warned that the failure to make these proactive investments can result in more costly natural disaster damage, which taxpayers may be forced to cover. He remarked that these proactive investments can lead to both increased protection for residents and reduced risks for insurers (which can ultimately lead to lower insurance premiums for consumers).

Sen. J.D. Vance (R-OH):

• Sen. Vance expressed concerns that California’s overregulation of its insurance industry is preventing the industry from properly functioning. He asked Mr. Theodorou to explain California’s Proposition 103 and how it had impacted California’s regulatory system for insurance.
  • Mr. Theodorou noted how California voters had approved Proposition 103 in 1988. He indicated that Proposition 103 provides a 20 percent rebate to the state’s automobile insurers, creates an intervenor process where parties can advocate for insurance rate decreases, and requires the California Department of Insurance to make approval decisions on proposed rates within 60 days. He commented however that the California Department of Insurance has not adhered to this 60-day decision requirement.
• Sen. Vance asked Mr. Theodorou to indicate whether the insurance regulatory regime that comes from Proposition 103 is focused on previous accident and casualty loss (as opposed to forward modeling for future risk).
  • Mr. Theodorou noted how California’s insurance statutes prevent insurers from using recent catastrophe experiences in their risk modeling and from incorporating reinsurance costs into their ratemaking.
• Sen. Vance then noted how some argue that insurance rates are high in California due to the threat of climate change. He commented that states located closer to oceans would theoretically be more vulnerable to climate change-related disasters. He asked Mr. Heller to explain how California’s high insurance rates can be attributed to climate change-related risks when the state has backward looking risk modeling. He commented that climate change’s purported risks are supposed to be greater in the future than in the past. He also highlighted how California has rising casualty insurance rates across a broad swath of categories, including automobile insurance. He commented that climate change-related risk should impact automobile insurance rates less than property insurance rates. He asked Mr. Heller to comment on this dynamic.
  • Mr. Heller highlighted how California has been one of the most profitable homeowners insurance markets in the U.S. since 2019. He described the California homeowners insurance market as “vastly” more profitable than the national homeowners insurance market. He noted that while some insurance companies are reducing their business within California, he stated that these insurance companies are not withdrawing from the market due to a lack of economic returns. He also noted how California insurance companies have received 95 percent of their requested rate increases. He stated that California’s insurance regulatory system is functional and does permit public input.
• Sen. Vance asked Mr. Heller to indicate whether insurance companies in California have achieved strong profitability because the companies have left the riskiest markets and focused on less risky markets. 
  • Mr. Heller answered no. He stated that insurance companies in California have achieved profitability because the companies have been granted sufficient rates from the state and California has invested over $2 billion in wildfire prevention efforts. He further asserted that California’s regulatory protections for consumers have ensured that these insurance rate increases are appropriate. He then discussed how reinsurance market costs are experiencing 30-year highs and noted how California does permit insurance companies to purchase reinsurance. He stated however that insurance companies in California cannot pass through the excess reinsurance costs above what is actuarially indicated onto their consumers. He noted how some states (including Florida, Louisiana, and Colorado) do permit insurance companies to pass through the excess reinsurance costs above what is actuarially indicated onto their consumers. He stated that these states are experiencing higher insurance premiums and that insurers are withdrawing from these markets. He remarked that while the passthrough of reinsurance costs to consumers simply enables insurance companies to reduce their exposure to reinsurance markets and does not protect consumers from insurer withdrawal.
• Sen. Vance asked Mr. Heller to briefly explain why some argue that California’s insurance market problems are largely attributable to climate change. He reiterated that automobile insurance rates should be less susceptible to climate change-related risks relative to property insurance rates and noted that automobile insurance rates are still rising in California.
  • Mr. Heller first commented that climate change does have some impact on automobile insurance rates. He then disputed Sen. Vance’s previous assertion that climate change-related risks primarily impact coastal states and stated that climate change is impacting insurance rates in Midwestern states.
• Sen. Vance interjected to comment that while the impact of climate change may be universal, he asserted that California likely faces greater climate change-related risks relative to more inland states.
  • Mr. Heller stated that California’s automobile insurance market is not very different from the automobile insurance markets in other states. He remarked however that California’s insurance consumer protections limited the state’s automobile insurance companies from receiving windfall revenues during the COVID-19 pandemic. He elaborated that many automobile insurance companies had experienced revenue windfalls during this period because their rates had been based on 2019 driving patterns while driving activity had fallen significantly. He stated that subsequent car repair costs have exerted inflationary pressure on automobile insurance rates. He contended that the post-COVID-19 pandemic environment is more responsible for current automobile insurance affordability challenges than climate change. He asserted however that California’s automobile insurance problems are not unique to the state and that California’s insurance regulation is not driving these higher automobile insurance costs.

Sen. Elizabeth Warren (D-MA):

• Sen. Warren remarked that climate change is increasing the severity and frequency of natural disasters, which is harming the U.S. insurance market. She stated that the inability of Americans to obtain insurance will exacerbate climate change’s harms and have economy-wide consequences. She mentioned how President Biden had issued a 2021 Executive Order (EO) directing the FIO to examine the impact of climate change on the U.S. private insurance industry. She noted how the FIO had proposed to collect new data from insurers that would help the federal government to better understand climate change-related financial risks and to assess the potential for major disruptions of private insurance coverage across the U.S. She asked Mr. Heller to indicate whether the data that FIO is proposing to collect would help identify the threats to consumers and the U.S. economy posed by climate change.
  • Mr. Heller answered affirmatively. He remarked that the U.S. needs to understand where the U.S. insurance industry is more exposed to climate change-related risks, where insurance coverage offerings are shrinking, and how insurance risk transfers are changing over time. He stated that the persistent inability of the U.S. to obtain climate change-related risk data has impeded the U.S.’s responsiveness to changes in the insurance market.
• Sen. Warren remarked that collecting insurer data would better enable the U.S. to assess climate change-related risks. She expressed frustration with the U.S.’s failure to collect this data and criticized insurance companies and state regulators for opposing this data collection request. She noted how insurance companies and state regulators have argued that collecting this data would be unnecessary, ill-advised, and burdensome. She also noted how insurance companies and state regulators have claimed that collecting this data would threaten existing efforts from insurance companies to mitigate climate change threats for policyholders. She further noted how insurance companies and state regulators have accused the Biden administration of “strong-arming” them to adopt climate change-related risk mitigation strategies, which can lead to higher compliance costs for insurance companies and higher premiums for consumers. She contended that insurance companies and regulators are actively working to hide information about insurance premiums, claims, profits, and coverage. She stated that the absence of this information prevents consumers from determining whether higher premiums are justified or are simply being charged to increase an insurance company’s profitability. She asked Mr. Heller to address why insurance companies are resisting calls to provide climate change-related risk data to the FIO.
  • Mr. Heller remarked that insurance companies do not want the public or policymakers to understand the true nature of climate change-related risk in the insurance market. He stated that this information asymmetry provides insurance companies with a negotiating advantage in their interactions with state regulators. He remarked that FIO had requested the collection of climate change-related risk data from insurance companies so that they can determine what is driving higher insurance rates. He stated that this data collection could reveal efforts from insurance companies to achieve greater profitability at the expense of policyholders, which leads these insurance companies to oppose efforts to make this data publicly available.
• Sen. Warren asked Ms. Norris to indicate whether the U.S. needs to collect climate change-related risk data from insurance companies to enable informed policymaking and to provide oversight of these companies.
  • Ms. Norris answered affirmatively. She noted how insurance companies are leveraging large datasets to evaluate risks and to set premiums. She called for greater transparency in this space.
• Sen. Warren expressed agreement with Ms. Norris’s calls for greater transparency in the insurance market. She criticized insurance companies for supporting the financing of fossil fuel production and then for profiting from the sale of insurance policies that protect against the impacts of fossil fuel use. She stated that insurance companies are now seeking to exploit climate change through either demanding higher premiums or exiting entire markets. She called on the U.S. to collect climate change-related risk data from insurance companies.

Sen. John Kennedy (R-LA):

• Sen. Kennedy called the NFIP’s Risk Rating 2.0 methodology “woefully inadequate.” He asked the witnesses to indicate whether they agree with his view about this methodology.
  • Mr. Heller answered affirmatively.
  • Ms. Norris answered affirmatively.
  • Mr. Theodorou expressed disagreement with Sen. Kennedy’s characterization of the NFIP’s Risk Rating 2.0 methodology as being “woefully inadequate”.
• Sen. Kennedy asked Mr. Heller to indicate whether the U.S. should allow for the NFIP to expire.
  • Mr. Heller answered no. He remarked that the U.S. needs to have a federal backstop for flood insurance.
• Sen. Kennedy commented that Congress is unlikely to develop a better solution for flood insurance than the NFIP before the NFIP’s impending expiration.
  • Mr. Heller expressed agreement with Sen. Kennedy’s comment.
• Sen. Kennedy interjected to ask Ms. Norris and Mr. Theodorou to indicate whether Congress should allow for the NFIP to expire.
  • Ms. Norris answered no. She stated that the U.S. needs to continue to fund the NFIP and pursue reforms to the NFIP as needed.
  • Mr. Theodorou remarked that Congress should pass a long-term reauthorization of the NFIP to provide certainty to the insurance market. He suggested that Congress consider a five-year or ten-year reauthorization of the NFIP.
• Sen. Kennedy asked Ms. Norris to indicate whether many of the U.S.’s flood, property, and casualty insurance cost problems would be solved if the world were to achieve carbon neutrality by 2050.
  • Ms. Norris indicated that she is not a scientist and stated that achieving carbon neutrality by 2050 would be beneficial if possible.
• Sen. Kennedy interjected to comment that it does not appear as if Ms. Norris wants to answer his question. He asked Mr. Heller and Mr. Theodorou to indicate whether many of the U.S.’s flood, property, and casualty insurance cost problems would be solved if the world were to achieve carbon neutrality by 2050.
  • Mr. Heller remarked that achieving carbon neutrality by 2050 would not solve the U.S.’s current property insurance challenges. He stated however that achieving carbon neutrality would be beneficial for the long-term health of the U.S.’s insurance markets and asserted that the U.S. must take actions in the near-term to achieve long-term carbon neutrality.
  • Mr. Theodorou remarked that achieving long-term carbon neutrality would support U.S. efforts to address pollution and emissions. He commented however that achieving carbon neutrality would not have as great of an impact on the U.S.’s current insurance cost problems.
• Sen. Kennedy asked Mr. Theodorou to provide three recommendations for addressing the problems within the U.S. property and casualty insurance market.
  • Mr. Theodorou called for the California legislature to repeal Proposition 103, for Florida to continue its recent tort reforms, and for the U.S. to educate the public on how insurance works.
• Sen. Kennedy interjected to ask Mr. Heller and Ms. Norris to provide recommendations for addressing the problems within the U.S. property and casualty insurance market.
  • Mr. Heller remarked that the U.S. should make resiliency investments in home and community infrastructure, establish a federal reinsurance program, have state regulators more rigorously examine insurance data, and ensure access to insurance for low- and moderate-income Americans. He specifically stated that the U.S. should not charge Americans higher homeowners insurance rates based on their credit histories.
  • Ms. Norris called on the U.S. to support resilience investments for communities and buildings and create a federal reinsurance program.
• Note: Sen. Kennedy’s question period time expired here.

Sen. Chris Van Hollen (D-MD):

• Sen. Van Hollen first thanked Ms. Norris for highlighting how high property insurance rates impact senior citizens and low-income Americans and the importance of mitigation and resilience measures to address these issues. He then mentioned how the Washington Post had recently reported on how homeowners insurance providers are eliminating natural disaster coverage from their policies while the threat of climate change is growing. He noted how Mr. Theodorou had argued that California’s insurance price caps have exacerbated the state’s insurance affordability challenges because it makes it unprofitable for insurance companies to service the state.
  • Mr. Theodorou noted how California’s Proposition 103 caps insurance premium increases at 7 percent.
• Sen. Van Hollen asked Mr. Theodorou to confirm that removing California’s cap on insurance premium increases would result in higher insurance premiums for the state’s homeowners (including low-income homeowners).
  • Mr. Theodorou confirmed that removing California’s cap on insurance premium increases would result in higher insurance premiums for the state’s homeowners. He also remarked that states should not encourage people to build homes and reside in areas prone to natural disasters. He noted how there had occurred a 39 percent increase in building activity in California forest areas (which have significant wildfire exposure). He also raised concerns over the recent migration patterns towards Fort Myers, Florida (which is prone to natural disasters).
• Sen. Van Hollen then noted how Mr. Heller and Ms. Norris had proposed that the U.S. government provide financial support for improving the resilience of homes and infrastructure and establish new federal insurance backstops similar to the Terrorism Risk Insurance Act (TRIA) and the NFIP. He asked Mr. Heller to confirm this characterization of his views.
  • Mr. Heller suggested that the NFIP could be converted into a federal reinsurance backstop. He then disputed Mr. Theodorou’s previous statement that California caps insurance premium increases at 7 percent. He noted how the average insurance premium increase in California has been 12.5 percent over the previous two years. He stated that insurance companies seeking to raise their premiums in California must justify their proposed premium increases if the increases exceed a certain threshold. He described this policy as “a good consumer protection.”
• Sen. Van Hollen then expressed support for proposals to have the U.S. collect more climate change-related risk data from insurance companies and mentioned how he had joined Sen. Elizabeth Warren’s (D-MA) letter on the topic. He stated that climate change is increasing the intensities and frequencies of natural disasters, which has costs. He remarked that policymakers must determine who will pay the costs of climate change. He argued that contributors to climate change (rather than taxpayers) should be primarily responsible for paying these costs. He commented that having polluters pay for the costs of climate change would address externalities within the current market. He asked the witnesses to comment on his position.
  • Mr. Heller expressed general support for Sen. Van Hollen’s position. He highlighted however that insurance companies are underwriting fossil fuel production activity and are using collected premiums to invest in fossil fuel companies. He stated that insurance companies will then downstream the external costs of climate change to policyholders through charging higher insurance premiums and reducing insurance coverage. He expressed support for proposals to establish a private sector source to cover climate change-related costs.
  • Ms. Norris also expressed general support for Sen. Van Hollen’s position. She stated that climate change is a present issue and that the U.S. must take immediate action to address climate change.
  • Mr. Theodorou discussed how the largest fossil fuel companies do not operate in the traditional property and casualty insurance marketplace and explained that these companies maintain their own captive insurance companies. He noted that these captive insurance companies often fall outside the scope of traditional regulators. He commented that this dynamic might impact the effectiveness of Sen. Van Hollen’s policy proposal.

Sen. Katie Britt (R-AL):

• Sen. Britt called it important for the U.S. to preserve its state-based regulatory system for insurance. She raised concerns that recent Biden administration actions undermine this state-based regulatory system. She stated that the U.S. Department of the Treasury and FIO are acting unilaterally to advance a climate change policy agenda through requesting highly detailed climate change information from insurers. She asserted that the U.S. Department of the Treasury has been unclear as to how they will use this collected data and that this information collection would be duplicative. She elaborated that many states and the National Association of Insurance Commissioners (NAIC) already collect similar data to inform their understanding of the economic impact of natural disasters and weather events. She remarked that any efforts from the U.S. Department of the Treasury or FIO to circumvent state insurance regulators “blatantly” undermines Congressional intent. She contended that FIO should work with (rather than around) state insurance regulators. She then mentioned how the U.S. has experienced a significant number of hurricanes within recent years and stated that the frequency of these weather events has impacted the property insurance market. She discussed how insurance premiums serve as market signals to consumers and noted how higher insurance premiums serve as indicators of higher risks. She mentioned how she had lost her personal home and property in a storm and highlighted how her state of Alabama is prone to storms and hurricanes. She discussed how some states (such as California) have implemented “overly restrictive” insurance regulations (including price controls) in response to higher insurance premiums. She commented that these policies deprive homeowners of market signals that can steer them toward building in less dangerous locations and constructing more disaster-resistant homes. She asked Mr. Theodorou to respond to her previous remarks.
  • Mr. Theodorou expressed agreement with Sen. Britt’s assertion that the federal government attempts to collect more natural catastrophe data from insurance companies is superfluous. He noted how NOAA and reinsurance companies already maintain datasets related to natural catastrophe frequency and severity. He also testified that the R Street Institute is currently working on a publication regarding this topic that should be released within the next few months. He also stated that the FIO’s statutory obligation is to monitor the insurance industry rather than to direct or manage the insurance industry. He described the FIO as “an agency without a mission” and commented that the FIO’s creation had been based on the false premise that the insurance industry had been responsible for the 2008 Financial Crisis. He remarked that federal insurance and reinsurance programs (including the NFIP and the federal crop insurance program) have been failures and asserted that the U.S. should not seek to repeat these policy failures.
• Sen. Britt then praised Alabama for its effective insurance regulations and resiliency programs. She highlighted how Alabama maintains a state grant program that incentivizes homeowners to fortify their roofs to withstand severe weather. She stated that this program had been created to incentivize investments in more resilient homes and to encourage insurance companies to continue issuing policies in storm-prone communities. She commented that this program had proven successful in enabling homes to remain intact during Hurricane Sally in 2020, which had led to lower insurance claims and less debris. She also applauded the Alabama Resilience Council for recently holding its first meeting and explained that this Council will focus on public-private collaborations to build stronger, safer, and more resilient communities. She provided the witnesses with an opportunity to comment on Alabama’s efforts in this space.
  • Mr. Theodorou noted how Louisiana has copied Alabama’s insurance and resilience policies, which he described as a positive development. He also asserted that governments do not have to be the only entities pursuing resilience measures. He mentioned how he had personally received a credit from his insurance company for replacing his home’s roof.
  • Mr. Heller applauded Alabama’s roof fortification program and described it as a model program where governments can partner with communities on resilience measures. He also expressed agreement with Mr. Theodorou that insurance companies can drive the adoption of home resilience measures. He lamented however that not enough insurance companies are providing consumers with discounts or increased coverage when they pursue home resilience measures. He contended that the U.S. should encourage proactive resilience measures to reduce the need for cleanups following natural disasters.

Sen. Catherine Cortez Masto (D-NV):

• Sen. Cortez Masto first remarked that states possess large amounts of insurance data that policymakers should be using. She then noted how Nevada regulators offer expedited review for insurance companies that submit filings to add discounts for homeowners that pursue mitigation measures. She asked Mr. Heller to provide recommendations for encouraging insurance companies to incorporate mitigation incentives when the insurance companies set their premiums.
  • Mr. Heller expressed support for policies that encourage insurance companies to incorporate mitigation incentives when the insurance companies set their premiums. He noted how the Insurance Institute for Business & Home Safety (IBHS) and United Policyholders have conducted research on effective natural disaster mitigation strategies, such as roof fortification and brush clearing. He lamented how many insurance companies are still not providing premium discounts to homeowners that undertake these mitigation strategies. He noted how California requires insurance companies to provide insurance premium discounts for natural disaster mitigation measures and how Nevada incentivizes insurance companies to provide premium discounts for these measures. She remarked that states should consider policies from California, Nevada, and Alabama to encourage homeowners to undertake natural disaster mitigation measures. He asserted that these measures will improve safety and reduce insurance costs. He stated that focusing on natural disaster mitigation measures would be a more effective strategy for addressing current insurance challenges than eliminating consumer protections.
• Sen. Cortez Masto mentioned how Nevada has recently experienced extreme weather events (including heavy rains and flooding), which have harmed many of the state’s structures. She stated that Nevada has worked to construct defensible spaces for its communities and noted how the USACE has supported the state in these efforts. She reiterated her call for more opportunities and incentives for reducing homeowners insurance premium costs. She then noted how people that reside in manufactured housing tend to pay more for lower quality homeowners insurance. She asked Mr. Heller to discuss how homeowners insurance policies often fail the 20 million Americans that reside in manufactured homes.
  • Mr. Heller stated that the manufactured home segment of the U.S. homeowners insurance market is facing greater challenges and commented that these challenges particularly impact lower-income Americans and older Americans. He noted how homeowners policies for manufactured homes are actual cash value policies, which means that they depreciate the value of the home when claims are filed. He commented that this dynamic means that manufactured homeowners insurance policyholders are not fully reimbursed for rebuilding expenses. He also stated that these manufactured homeowners insurance policies contain “weird” exclusions. He noted how heating, ventilation, and air conditioning (HVAC) systems in manufactured homes are considered to be contents, which subjects these systems to less coverage that the systems would receive under a normal homeowners insurance policy. He also highlighted how some manufactured homeowners cannot collect their full homeowners insurance claim if the homeowners do not rebuild their homes in the same pre-disaster locations. He noted however that a manufactured homeowner can be prohibited from rebuilding their home in the same location if their home park does not reopen post-disaster. He then stated that the manufactured homeowners insurance market is less competitive than the traditional homeowners insurance market. He further noted that manufactured homeowners insurance policies are more expensive than traditional homeowners insurance policies on a per-dollar basis.
• Sen. Cortez Masto asked Mr. Heller to confirm that modern manufactured homes are very different from traditional manufactured homes. She commented that more Americans should take advantage of manufactured housing options given their lower costs and quality.
  • Mr. Heller remarked that the U.S. insurance industry is failing to account for improvements in manufactured housing and called the current insurance products for manufactured housing “substandard.” He contended that the U.S. must improve insurance coverage for manufactured homes and called on insurance regulators to examine this space.
• Sen. Cortez Masto then discussed how the U.S. requires more affordable housing. She noted how Ms. Norris’s testimony had asserted that high homeowners insurance costs undermine the current and future availability of affordable housing. She asked Ms. Norris to elaborate on her assertion that affordable housing providers may be forced to exit the affordable housing market because insurance and operating costs outpace allowable or feasible rents.
  • Ms. Norris remarked that affordable housing is regulated and that affordable housing programs tend to operate based on several principles. She indicated that the first principle is that affordable housing residents meet certain income thresholds to ensure that the residents are deserving of the discounted housing. She indicated that the second principle is that affordable housing residents cannot be charged too much money to live in the communities. She stated that drastic increases in housing expenses make it impossible to adjust rents for affordable housing units in an economically sustainable way. She added that affordable housing providers do not want to dramatically increase their rents. She commented however that this situation results in expenses exceeding costs, which creates problems for affordable housing providers. She noted that while affordable housing providers can request rent increases from HUD, she indicated that these providers cannot ask for subsequent rent increases when mid-year insurance cost spikes occur. She further noted how HUD may take time to review and approve rent increase requests from affordable housing providers. She stated that the inability of affordable housing unit rents to meet unit expenses can force affordable housing providers to stop providing certain services, defer expenses, or leave markets altogether. She commented that many residents may lose their housing when affordable housing providers leave a market. She concluded that the impact of higher insurance costs on affordable housing providers is greater than the impact of higher insurance costs on the general housing market.
  • Mr. Heller highlighted how non-profit organizations have experienced significant challenges in the property insurance market. He expressed support for proposals to make risk retention groups available to non-profit organizations. He explained that risk retention groups are alternative mechanisms for insurance. He stated that risk retention groups would provide a private market solution that would reduce insurance affordability challenges for non-profit organizations.
• Note: Sen. Cortez Masto’s question period time expired here.