The Factors Influencing the High Cost of Insurance for Consumers (U.S. House Committee on Financial Services, Subcommittee on Housing and Insurance)

Hearing	The Factors Influencing the High Cost of Insurance for Consumers
Committee	U.S. House Committee on Financial Services, Subcommittee on Housing and Insurance
Date	November 2, 2023

 

Hearing Takeaways:

• Current U.S. Insurance Affordability and Availability Challenges: Subcommittee Members and the hearing’s witnesses expressed concerns regarding the current trends within the U.S. insurance industry and their impacts on consumers and businesses. They discussed how U.S. consumers are facing record high insurance premiums across various lines of insurance and how insurer withdrawals from certain markets are exacerbating these challenges.
  • Financial Challenges for Insurers: Subcommittee Chairman Warren Davidson (R-OH) and Mr. Gordon raised concerns that insurance companies currently face significant financial challenges. They highlighted how insurers had paid $1.043 in claims and expenses for every $1 collected in premiums during the first half of 2023. Mr. Gordon also noted how several ratings agencies (including AM Best and S&P) have issued negative outlooks for the sector. Subcommittee Chairman Davidson and Mr. Gordon warned that this current situation threatens insurance access and affordability for U.S. customers.
  • Challenges for Low-Income Communities and Communities of Color: Subcommittee Democrats and Ms. Lewis expressed concerns that current insurance market price and availability issues are especially harming low-income communities and communities of color. Ms. Lewis stated that historical discrimination has forced low-income people and people of color to reside in areas that are more prone to natural disasters, which leads these communities to face greater access and affordability challenges. She also stated that insurance companies often engage in discriminatory underwriting practices that harm these communities. Subcommittee Vice Chairwoman Monica De La Cruz (R-TX), Commissioner Arnold, and Mr. Gordon disputed the assertion that insurance companies engage in discriminatory practices. They noted how state insurance regulators will monitor insurance companies to ensure that the companies do not engage in such practices.
  • Challenges for Prospective Homeowners and Renters: Rep. Brittany Pettersen (D-CO) and Ms. Lewis raised concerns that current insurance availability and affordability challenges are preventing renters and prospective homeowners from obtaining housing. They commented that these insurance challenges are exacerbating the U.S.’s housing supply problems.
  • Challenges for Non-Profit Organizations: Subcommittee Ranking Member Emanuel Cleaver (D-MO) expressed concerns that non-profit organizations are facing significant challenges obtaining insurance coverage. Mr. Gordon asserted that the insurance access challenges for non-profit organizations are less related to a lack of capacity and are more related to market rate freedom. He stated that setting appropriate rates for non-profit organization insurance will lead to expanded coverage. Commissioner Arnold mentioned how the National Association of Insurance Commissioners (NAIC) has a data call regarding the insurance access challenges that are facing non-profit organizations. She remarked that state insurance commissioners would look at the data received from this data call to inform potential policy reforms.
  • Florida and California Insurance Market Challenges: Subcommittee Members, Mr. Gordon, Mr. Nutter, and Mr. Weber highlighted how California and Florida are experiencing insurance affordability and availably challenges within their state insurance markets. Commissioner Arnold and Mr. Weber noted however that California and Florida are working to address these issues. They indicated that California is in the process of allowing insurers to consider catastrophe modeling and reinsurance costs when requesting rate increases. They also indicated that Florida had recently implemented changes to their claims litigation process.
• Factors Causing Insurance Unaffordability and Unavailability: Subcommittee Members and the hearing’s discussed how the U.S.’s current insurance affordability and availability challenges are attributable to several factors.
  • Climate Change and Growing Severity of Natural Disasters: Subcommittee Democrats, Commissioner Arnold, Mr. Gordon, Mr. Nutter, Mr. Weber, and Ms. Lewis remarked that climate change and the growing severity of natural disaster are largely responsible for rising insurance costs. They explained that more severe natural disasters (which climate change can contribute to) cause greater damage, which drives up the cost of insurance to cover the damages. Subcommittee Republicans, Mr. Gordon, and Ms. Nutter largely attributed these greater damages to population movements to regions with high climate change-related risks (including areas that are more prone to storms, flooding, and wildfires). 
  • Litigation Abuse: Subcommittee Republicans, Mr. Gordon, and Mr. Petrelli asserted that litigation abuse is driving up insurance costs for many Americans. They expressed concerns over the rise of technology-enabled claims instigation and third-party litigation financing as a driver of this abuse. They stated that law firms are setting up websites to encourage victims of natural disasters to file lawsuits against insurance companies rather than first inquire about whether they have valid claim. They contended that technology-enabled claims instigation is resulting in unnecessary lawsuits. Mr. Petrelli stated that technology-enabled claim instigation may be driving up insurance policy costs as much as 30 percent or 40 percent based on the frequency of the practice.
  • Inflation: Subcommittee Republicans, Commissioner Arnold, Mr. Gordon, Mr. Nutter, Mr. Petrelli, and Mr. Weber stated that inflation is driving up the cost of insurance because rising building material, automobile, and repair (which involves labor) costs are making it more expensive for insurance companies to pay out claims. Mr. Gordon mentioned how inflation has risen 22 percent over the previous five years. He indicated that insurance input costs have risen much faster and higher than inflation during this period. Mr. Weber stated however that inflation tends to be cyclical in nature and that the recent spike in inflation will likely not be repeated.
  • Crime: Rep. Mike Lawler (R-NY) and Mr. Gordon raised concerns that recent increases in crime rates are driving up automobile and property insurance costs. Mr. Gordon stated that automobile and catalytic converter theft are driving up automobile insurance costs. He also stated that increasing retail theft and crime is creating insurance coverage friction. He further noted how the risk of violence that accompanies retail theft can trigger more expensive liability lawsuits when people get injured. Rep. Lawler and Mr. Gordon expressed concerns that the impact of crime on insurance rates can harm investment and development in U.S. cities.
  • Slow Insurance Pricing Restrictions: Rep. Mike Flood (R-NE) and Mr. Gordon argued that state insurance policy pricing restrictions are harming insurance availability. Mr. Gordon expressed particular concerns over California’s slow approval process for insurance rate increases. He also remarked that rate suppression policies in California, Florida, and Louisiana make it unprofitable for insurance companies to continue operating in those states, which causes insurers to withdraw from those state markets.
  • Reinsurance: Mr. Nutter disputed the assertions that rising insurance costs are partially the product of the cost of reinsurance. He contended that reinsurance rates are a reflection (rather than the principal driver) of the changing risk landscape and stated that reinsurance costs do not translate directly to consumer insurance rates. He commented that reinsurance costs (even where significant) may be a small factor in consumer rates relative to other factors. He added insurers would still need to set their rates to reflect a true risk-based rate, even if the insurers did not possess reinsurance coverage.
  • Insurance Subsidies: Rep. Houchin (R-IN) and Mr. Gordon expressed concerns that current insurance subsidies can create “death spirals” within insurance markets through driving up the costs of insurance. They elaborated that these subsidies lead more people to require subsidies to afford insurance, which results in a self-perpetuating problem.
• Other Insurance Policy Concerns and Proposals: Subcommittee Members and the hearing’s witnesses used the hearing to raise insurance-related policy concerns and to discuss policy proposals to reform the U.S. insurance market. Subcommittee Members, Commissioner Arnold, Mr. Gordon, and Mr. Nutter remarked however that insurance should primarily remain regulated at the state level.
  • Alleged U.S. Federal Insurance Office (FIO) Overreach: Subcommittee Republicans and Mr. Gordon raised concerns that the FIO is overstepping its jurisdiction through its issuance of data calls to the insurance industry. They asserted that the FIO is attempting to bypass state insurance commissioners and impose “massive” new costs on policyholders through an “unprecedented” climate data call. They expressed support for the Insurance Data Protection Act, which would strip the FIO of its subpoena power. Subcommittee Democrats alleged that Republicans are seeking to eliminate the FIO. They stated that the FIO is key for identifying gaps in insurance regulation that pose systemic risks to the market and for monitoring the availability of affordable insurance for marginalized communities.
  • The National Flood Insurance Program (NFIP): Subcommittee Democrats, Rep. Mike Lawler (R-NY), Commissioner Arnold, Mr. Gordon, Mr. Nutter, Mr. Petrelli, and Ms. Lewis called on Congress to reauthorize the NFIP on a long-term basis. They stated that the NFIP is key to supporting flood insurance availability and affordability and that the Program’s previous short-term extensions have fostered “destabilizing uncertainty” within the U.S. flood insurance market. Rep. Nydia Velázquez (D-NY), Mr. Gordon, and Mr. Nutter also predicted that the NFIP’s new Risk Rating 2.0 methodology would make the flood insurance rating process more equitable. Mr. Gordon stated however federal government subsidies for the environment can mask true costs and environmental signals. He recommended that Congress consider pursuing a transparent means-tested program to help people living in environmentally vulnerable areas. He also recommended that Congress consider making flood mitigation investments. He commented that this approach would be superior to masking environmental risk signals.
  • Property Risk Mitigation Efforts: Rep. Steven Horsford (D-NV), Commissioner Arnold, Mr. Gordon, and Mr. Nutter expressed support for policies to promote property risk mitigation efforts as a means of reducing property damages stemming from natural disasters (which will in turn reduce post-disaster repair costs for insurers).  Commissioner Arnold and Mr. Nutter expressed support for the Disaster Mitigation and Tax Parity Act of 2023, which would provide fair tax treatment to state residential mitigation grants. Mr. Nutter also recommended that Congress increase funding for pre-disaster mitigation grant programs, such as the U.S. Federal Emergency Management Agency’s (FEMA) Building Resilient Infrastructure and Communities (BRIC) Program. 
  • Building Code Reforms: Mr. Gordon, Mr. Nutter, and Ms. Lewis also expressed support for improving current building codes to ensure that properties can better withstand natural disasters. Mr. Nutter recommended that Congress incentivize governments through federal disaster assistance to adopt statewide building codes and use forward looking risk assessments for land use.
  • Federal Government Purchases of Reinsurance: Rep. Blaine Luetkemeyer (R-MO) and Mr. Nutter expressed support for expanding the ability of the U.S. government and banks to purchase reinsurance to minimize U.S. taxpayer exposures to adverse events. Mr. Nutter added that this reinsurance could help support the future development of a private flood insurance market. Mr. Webel highlighted however that NFIP reinsurance purchases bring future losses to the present.
  • Use of Artificial Intelligence (AI) within the Insurance Space: Rep. Brittany Pettersen (D-CO), Commissioner Arnold, and Mr. Gordon expressed interest in how insurance companies can leverage AI to improve their operations and benefit policymakers. Commissioner Arnold mentioned how NAIC had released an AI principles document a couple of years ago that laid out frameworks for the use of AI in insurance. She also highlighted how NAIC had created its Big Data and Artificial Intelligence Working Group. Mr. Gordon also remarked that AI will be important for addressing some of the insurance industry’s workforce constraints. He discussed how drones could be deployed following a disaster to more efficiently and quickly identify where damages have occurred. He further mentioned how many insurance companies allow for policyholders to use their smartphones to take and submit pictures of their automobile accidents. He indicated that AI tools will then triage the claims to the appropriate staff.
  • Use of Credit Scores in the Insurance Underwriting Process: Rep. Rashida Tlaib (D-MI) and Ms. Lewis expressed concerns that insurance companies are using credit scores as part of their underwriting processes to set automobile insurance prices. They stated that credit scores are not indicative of a driver’s risk and that their use in the underwriting process is discriminatory. Mr. Gordon stated however that telematics data have shown a direct connection between credit scores and hard breaking and hard acceleration driving behavior. He asserted that credit scores are not a proxy for income or race. He remarked that state insurance regulators would bar the use of credit scores in the rate setting process if they found this practice to be discriminatory.
  • Use of Forward-Looking Risk Assessments: Mr. Gordon and Mr. Nutter argued that state insurance regulation should use forward-looking risk assessments in their rate approval processes to ensure that insurance rates adequately account for risk. Mr. Nutter recommended that Congress incentivize governments through federal disaster assistance to use forward looking risk assessments for land use.
  • Establishment of a Federal Reinsurance Backstop: Ms. Lewis also called on Congress to consider developing a federal insurance backstop to address current insurance affordability challenges. She highlighted how Congress had previously provided such an insurance backstop in the form of terrorism risk reinsurance following the 9/11 terrorist attacks. Rep. Erin Houchin (R-IN) and Mr. Nutter warned however that the establishment of a new federal property reinsurance program would lead Congress to regulate and manage property markets at the state level. Mr. Nutter stated that such a program would be counterproductive and concentrate risk. He added that this new program would force U.S. taxpayers located in low-risk areas to subsidize insurance for people located in high-risk areas.
  • The NAIC’s Proposal to Expand Authority Over Security Ratings: Subcommittee Chairman Warren Davidson (R-OH) and Mr. Gordon raised concerns over the NAIC’s recent proposal to provide its Securities Valuation Office with the power to overrule a rating agency’s determination. Chairman Davidson raised concerns that the NAIC’s proposal would result in less transparency, more ambiguity for insurance companies, and actual damage to market efficiencies. He warned that these outcomes would increase costs for consumers.
  • Prohibition of Direct Cash Transactions for Scrap Metal: Rep. Tlaib and Mr. Gordon expressed support for prohibiting direct cash transactions within the scrap metal industry and stated that this policy would help to combat catalytic converter thefts.
  • Vehicle and Highway Safety Standards: Mr. Gordon also expressed support for improved vehicle and highway safety standards, particularly in certain high-risk neighborhoods.
  • Insurance Coverage of Fossil Fuel Projects: Ms. Lewis criticized the insurance industry’s coverage of new fossil fuel projects and stated that these projects are contributing to climate change (which are in turn driving up overall insurance costs). She asserted that insurance company CEOs should be required to publicly explain their decisions to insure fossil fuel projects.
  • Climate Change Risk Disclosures: Commissioner Arnold mentioned how the NAIC’s Climate and Resiliency Task Force has facilitated the implementation of climate change-related risk disclosures by 85 percent of the insurance market. She noted how this Task Force has updated solvency formulas to reflect hurricane, earthquake, and wildfire risks, partnered with FEMA and the Institute for Business and Home Safety (IBHS) to create more resilient and sustainable communities, and established a Catastrophe Modeling Center of Excellence to provide modeling resources. She further highlighted how this Task Force is currently engaged in a property data call to help better understand insurance coverages and gaps.

Hearing Witnesses:

1. Mr. Robert Gordon, Senior Vice President, American Property and Casualty Insurance Association
2. Mr. Frank Nutter, President, Reinsurance Association of America
3. Ms. Grace Arnold, Commissioner, Minnesota Department of Commerce, on behalf of National Association of Insurance Commissioners
4. Mr. Joseph Petrelli, President and Co-Founder, Demotech, Inc.
5. Mr. Baird Webel, Specialist in Financial Economics, Congressional Research Service
6. Ms. Sharon Lewis, Executive Director, Connecticut Coalition for Economic and Environmental Justice

Member Opening Statements:

Subcommittee Chairman Warren Davidson (R-OH):

• He discussed how U.S. consumers are facing record high property and casualty insurance bills and stated that homeowners insurance costs are surging.
• He highlighted how Americans in many areas are paying between $1,500 and $2,500 annually for homeowners insurance.
  • He added that many communities outside of this range have seen their insurance premiums increase by multiples relative to previous years.
• He also mentioned how the price of commercial property insurance premiums in 2023 had experienced the largest single year increase in over 20 years.
• He remarked that these rising insurance costs are untenable for many Americans and are forcing homeowners to move to areas with less expensive insurance coverage.
  • He also commented that these rising insurance costs are exerting upward pressure on prices for rent and commercial properties at a time when housing costs are already at record highs.
• He discussed how insurance company losses are increasing and indicated that insurance companies are paying out 104 percent in claims for every premium dollar that they have received thus far in 2023.
• He also stated that widespread lawsuit abuse from trial attorneys is creating growing market risks and noted how these trial attorneys are spending hundreds of thousands of dollars each month on paid keyword search results.
  • He commented that these results are designed to target recent disaster victims and other insurance claimants and to trick these people into filing frivolous lawsuits.
• He remarked that the U.S. insurance industry is at a “tipping point” where the risks of providing insurance are making the cost of insurance unsustainable (even within the best regulatory environments).
  • He called it especially problematic that public officials are making bad and politically motivated decisions that increase insurance costs and decrease the availability of insurance.
• He discussed how the imposition of environmental, social, and governance (ESG) mandates have prevented insurers from charging actuarially sound rates or using modern modeling tools to manage wildfire risks in certain insurance markets (such as California).
• He then remarked that the Biden administration has abused the FIO to advance its social policy agenda.
  • He commented that the FIO is a federal non-regulatory entity that is supposed to monitor the insurance industry to help regulators make better choices.
• He asserted that the FIO is attempting to bypass state insurance commissioners and add “massive” new costs for policyholders through an “unprecedented” climate data call.
  • He noted how the FIO had recently indicated that it would move forward with this “misguided” effort, despite widespread opposition.
• He mentioned how he had sent a March 2023 letter to the FIO criticizing their proposed climate data call and raising concerns over the FIO’s continued “mission creep.”
  • He indicated that multiple bills have been introduced to address this “spiraling out of control” office.
• He remarked that insurance should remain a state-regulated product and that federal bureaucrats should not seek to intervene in the insurance market.
  • He asserted that the Committee should support the long-standing principles of the McCarran-Ferguson Act.

Subcommittee Ranking Member Emanuel Cleaver (D-MO):

• He remarked that access to affordable insurance is central to enabling Americans travel to work, build meaningful wealth, and provide for the safety and security of their families.
  • He noted how Americans use insurance to protect their homes, automobiles, businesses, and communities and to limit losses during catastrophic scenarios.
• He discussed how an increasing number of Americans are facing higher insurance costs and how insurance companies are completely leaving certain markets.
  • He mentioned how 31 states have experienced double digit insurance rate increase since January 2022.
• He remarked that rising insurance rates impose significant financial burdens on lower income homeowners and homeowners on fixed incomes, which can force these people to entirely drop their insurance coverage.
  • He commented that low- and moderate-income people may be most in need of insurance and may be least able to afford the increasing insurance premium costs.
• He stated that insurance premium increases especially impact affordable housing providers and residents and commented that people will often forgo insurance when it becomes unaffordable.
  • He recounted how 80 percent of homeowners that had experienced flooding during Hurricane Harvey in 2017 did not possess flood insurance coverage.
  • He also mentioned how insurance had covered only 60 percent of the $165 billion in total economic losses for climate change-related disasters in 2022.
• He expressed hope that the hearing would work toward developing a bipartisan solution for reducing the cost and increasing the availability of insurance.
  • He expressed opposition to the legislation under consideration at the hearing that would eliminate the FIO.
• He stated that several factors are contributing to the increasing costs and decreasing availability of insurance for consumers in certain areas.
  • He indicated that these factors include inflation-related costs, rising asset prices in hazardous areas, greater risk transfer costs, reinsurance costs, and litigation costs.
• He remarked that climate change is most responsible for the rising cost of property insurance.
• He mentioned how the U.S. had experienced a record number of disaster events in 2023 with 24 different $1 billion disaster events as of October.
  • He indicated that these disaster events have totaled $57.6 billion in damages.
  • He also noted how insurance losses attributable to climate change had never previously exceeded $50 billion in a year.
• He remarked that insurers are adapting their underwriting practices to respond to these climate change-related risks.
  • He commented that these practices can reduce the availability and affordability of insurance coverage in certain insurance markets.
• He expressed concerns that the U.S. lacks a national understanding regarding how climate change impacts the availability and affordability of insurance.
• He stated that while insurance is correctly regulated at the state level under the McCarran-Ferguson Act, he asserted that the federal government has a responsibility to understand, monitor, and supervise the response to problems within the insurance market.
  • He warned that insurance company withdrawals from markets and rising insurance premiums can lead to increases in uninsured losses and can shift risks to consumers, lenders, and taxpayers.
• He lastly called on Congress to advance a long-term reauthorization of the NFIP.

Witness Opening Statements:

Commissioner Grace Arnold (Minnesota Department of Commerce, on behalf of National Association of Insurance Commissioners):

• She indicated that she serves the Commissioner of the Minnesota Department of Commerce (which is the state’s insurance regulator).
  • She also mentioned how she serves as co-vice chair of the NAIC’s Property and Casualty Insurance Committee and as a member of NAIC’s Climate and Resiliency Task Force.
• She remarked that the U.S. insurance market is the single largest and most competitive insurance market in the world.
  • She noted how state insurance regulators supervise more than one-third of global premium and how property and casualty insurance companies had reported over $870 billion in direct written premium as of 2022.
  • She also highlighted how the U.S. property and casualty insurance industry’s cash and invested assets had surpassed $2.4 trillion at year-end of 2022.
• She remarked that state insurance regulators share a mission to ensure a stable, competitive, and fair insurance marketplace where U.S. consumers are well-informed and well-protected.
  • She commented that states work diligently to strike an appropriate balance between insurer solvency and product availability and affordability.
• She discussed how state insurance regulators are currently addressing several evolving dynamics within the insurance space and testified that state insurance regulators are monitoring the interplay between the impact of inflation on pricing and claims, rising interest rates, and falling investment returns.
  • She added that state insurance regulators are monitoring the impact of climate change-related risks.
• She noted how state insurance regulators have previously observed cyclical growth and contraction within property insurance markets and testified that state insurance regulators have acted to respond to these challenges.
  • She asserted that state regulators possess the capacity to respond swiftly and nimbly to market conditions within their insurance markets.
• She noted how the NAIC enables state insurance regulators to share ideas and coordinate effective responses.
  • She commented however that state insurance regulators remain free to pursue policies that they believe to are best suited for addressing their insurance markets.
• She mentioned how the NAIC’s Climate and Resiliency Task Force has facilitated the implementation of climate change-related risk disclosures by 85 percent of the insurance market.
  • She noted how this Task Force has updated solvency formulas to reflect hurricane, earthquake, and wildfire risks, partnered with FEMA and the IBHS to create more resilient and sustainable communities, and established a Catastrophe Modeling Center of Excellence to provide modeling resources.
  • She further highlighted how this Task Force is currently engaged in a property data call to help better understand insurance coverages and gaps.
• She also mentioned how Florida had recently implemented changes to their claims litigation process and how California is in the process of allowing insurers to consider catastrophe modeling and reinsurance costs when requesting rate increases.
• She further testified that her state of Minnesota had established a program to help homeowners improve the exteriors of their homes.
  • She indicated that this program is based on programs in Alabama and Louisiana and has been adapted to address Minnesota’s specific weather perils.
• She then called on Congress to reauthorize the NFIP on a long-term basis and to pass the bipartisan Disaster Mitigation and Tax Parity Act of 2023.
  • She explained that the Disaster Mitigation and Tax Parity Act of 2023 would provide fair tax treatment to state residential mitigation grants.
• She also discussed how state regulators are addressing the increased use of technology, big data, AI, and predictive analytics to reshape the insurance marketplace and how insurers approach risk and engage with consumers.
  • She asserted that these technological developments have the potential to improve how insurers do business and can benefit policyholders.

Mr. Robert Gordon (American Property and Casualty Insurance Association):

• He remarked that the U.S. insurance industry is currently not very strong, stable, or profitable.
  • He mentioned how ratings agency AM Best had recently downgraded the entire homeowners insurance industry from stable to negative.
  • He added that AM Best’s total number of downgrades for homeowners and car insurers had more than doubled during the first half of 2023.
• He noted how insurance capital had “plummeted” more than $73 billion in 2022 and indicated that the 2022 net underwriting losses of insurers had been the worst in over a decade.
  • He highlighted how insurers had paid $1.043 in claims and expenses for every $1 collected in premiums during the first half of 2023.
• He mentioned how S&P predicts that automobile insurers will experience an 8.7 percent net underwriting loss and homeowners insurers will experience a 12.1 percent loss in 2023.
• He remarked that the growth insurer costs and exposures is outpacing the rate increases that are being approved by regulators.
  • He commented that an industry that is losing money cannot attract new investment capital, which results in insufficient insurance capital supply to cover the increased coverage needs of consumers.
• He discussed how average global natural catastrophe insured losses have nearly doubled over the last decade and highlighted how the U.S. had experienced a record number of natural disasters in 2023.
• He remarked that the top driver of property losses had been the accumulation of asset values in high climate change risk regions.
  • He noted how there had occurred a rapid population growth in coastal areas and the wildland urban interface (WUI) and highlighted how this trend had accelerated during the COVID-19 pandemic.
• He stated that economic inflation is the other top loss cost driver and mentioned how inflation has risen 22 percent over the previous five years.
  • He indicated that insurance input costs have risen much faster and higher than inflation during this period.
• He highlighted how used cars and trucks (which serve as the basis for automobile insurance total loss settlements) have increased nearly 40 percent over the previous five years.
  • He also mentioned how building replacement values have increased 44 percent, which is more than double the cumulative inflation rate and far more than the increase in homeowners insurance.
• He then remarked that climate change and legal system abuse are driving up the cost of insurance and noted how Swiss Re had estimated that U.S. liability claim costs had risen 16 percent on average for the previous five years.
  • He commented that secretive third-party litigation financing is contributing to these increases.
• He discussed how insurance is fundamentally a risk pooling and spreading pass-through mechanism and warned that insurance markets would “rapidly deteriorate” if insurers are not permitted to pass costs through to consumers in a timely manner.
  • He asserted that this situation is currently occurring in several states.
• He testified that the member insurers of his organization, the American Property and Casualty Insurance Association (APCIA), have invested billions of dollars to develop insurance markets and relationships with their policyholders.
  • He stated that while these insurers do not want to withdraw from markets, he asserted that insurers cannot keep selling their products at a loss and remain solvent.
• He then discussed how the APCIA is supporting many policy solutions for addressing the high cost of insurance.
  • He expressed support for climate change mitigation resiliency programs and commented that these programs can help make insurance more affordable for consumers over time.
  • He also highlighted how IBHS has developed “extensive” building code improvements and wildfire safety standards and mentioned how APCIA has worked with the Biden administration’s Wildland Fire Mitigation and Management Commission.
  • He also expressed support for improved vehicle and highway safety standards, particularly in certain high-risk neighborhoods.
  • He further expressed hope that policymakers could address inflation, climate change, and legal system abuse.
• He remarked that the insurance market will only stabilize when the gap between rates and losses is addressed and when property and casualty insurers are permitted to earn a sufficient rate of return to attract the additional investment capital needed to cover escalating consumer exposures.

Mr. Frank Nutter (Reinsurance Association of America):

• He remarked that insurance fundamentally involves the assessment of risk and a means to transfer individual property risk to a larger pool of insurers and capital providers.
  • He asserted that insurance has proven to be the most efficient means for providing financial recovery for property owners experiencing losses from natural catastrophes.
• He stated that property insurance sits at the intersection between extreme weather and decisions made by individuals and their communities regarding the features of the properties at risk and the resilience of communities that are “creating disasters by design.”
• He attributed current trends regarding insured property losses from natural disasters to the number and value of properties at risk due to extreme weather, external economic factors (such as inflation and construction costs), and hazard intensification.
  • He mentioned how First Street has estimated that 25 percent of U.S. properties are exposed to high risk due to wildfire, wind, and flood.
  • He commented that people are increasingly living in “desirable, but dangerous places.”
• He discussed how the insurance business model and the state regulatory system for insurance are principally retrospective in nature and noted how these models and systems primarily use past loss data.
  • He asserted that retrospective models are in tension with the current growth in natural catastrophe risks and rising economic factors (such as inflation).
• He warned that failing to incorporate future risk assessment into insurance rates and loss mitigation strategies will doom communities into solutions that will quickly become inadequate, subject consumers to rate shocks, and undermine the ability of insurance to communicate risks to consumers via rates.
• He then noted how the rising cost of insurance has been partially attributed to the rising cost of reinsurance.
  • He explained that insurers will purchase reinsurance for a variety of reasons, including to increase capital to support their portfolios, to diversify their risk profiles, and to transfer the volatility of infrequent but severe loss events.
• He indicated that while insurers are not required to purchase reinsurance coverage, he stated that insurers will still purchase reinsurance because it serves as a cost-efficient way to manage catastrophe risk.
• He contended that reinsurance rates are a reflection (rather than the principal driver) of the changing risk landscape and stated that reinsurance costs do not translate directly to consumer insurance rates.
  • He explained that reinsurance contracts cover a portfolio of properties above an aggregate loss experience and are not pass-through costs directly to individual properties.
• He discussed how reinsurance contract terms vary by insurer and how rates charged to consumers by insurers incorporate many factors.
  • He commented that reinsurance costs (even where significant) may be a small factor in setting consumer rates relative to other factors.
  • He added that insurers would still need to set their rates to reflect a true risk-based rate, even if the insurers did not possess reinsurance coverage.
• He also noted how insurers, reinsurers, and the use of reinsurance is regulated for financial oversight purposes pursuant to state laws.
  • He called this dynamic understandable given how each state has a unique profile in terms of its economy, legal environment, exposure to natural perils, and philosophy of regulation.
• He asserted that “well-meaning but restrictive” insurance regulation is counterproductive for achieving solutions to property insurance market issues.
  • He commented that state insurance regulation should incorporate risk-based rates in a more efficient rate review process, include a factor for forward looking risk assessment, and provide incentives for homeowners and small businesses to mitigate risks.
• He highlighted four recommendations from his organization, the Reinsurance Association of America (RAA), for how Congress can better improve the insurance market.
  • He first recommended that Congress reform federal programs to incentivize people to live in resilient homes and communities.
  • He secondly recommended that Congress increase funding for pre-disaster mitigation grant programs, such as FEMA’s BRIC Program, and increase funding for the U.S. National Oceanic and Atmospheric Administration (NOAA) and the U.S. National Aeronautics and Space Administration (NASA) to improve weather and climate change-related risk assessments.
  • He thirdly recommended that Congress incentivize governments through federal disaster assistance to adopt statewide building codes and to use forward looking risk assessments for land use.
  • He lastly recommended that Congress enact tax credits for pre-disaster mitigation, exempt state and local mitigation grants from federal income taxation, and encourage the private sector to invest in obligations issued by all levels of government for resilience projects.

Mr. Joseph Petrelli (Demotech, Inc.):

• He remarked that the U.S.’s current insurance crisis is unique based on his over 50 years of professional experience in the insurance industry.
• He discussed how several factors are now directly impacting the material damage lines of insurance.
  • He indicated how these factors include inflationary costs on materials, inflationary costs on the salaries, benefits and training of people that effect repairs, the shortage of people that effect repairs, the cost of reinsurance, and the efficacy and calibration of catastrophe modeling and insurer simulations.
• He highlighted how opportunists are now leveraging the internet’s capabilities to initiate and generate contested claims against insurers, which he described as “tech-enabled claim instigation.”
  • He commented that these efforts involve a confluence of litigation financing, litigation marketing, litigation platforms, and search engine optimization (SEO) by opportunists seeking to secure contested claims.
• He stated that the use of technology to support insurance litigation acts as a “significant contributor” to the insurance availability and affordability crisis.
  • He highlighted several examples of law firms throughout the U.S. using technology to initiate and generate claims against insurers and indicated that these law firms have significant advertising expenditures.
  • He also mentioned how many opportunists will set up websites for consumers to report insurance claims prior to natural disaster events occurring.
• He concluded that the Subcommittee must work to address this use of technology to support insurance litigation.

Mr. Baird Webel (Congressional Research Service):

• He remarked that there are three “somewhat interrelated” factors that are driving the high prices of insurance: macroeconomic factors (including higher inflation and interest rates), increasing disaster losses, and certain state regulatory policies.
  • He emphasized that the increases in building costs and automobile replacement costs are outpacing general inflation.
  • He also noted how the increase in disaster losses is present in natural catastrophes and “secondary perils” (which include mid-level storms and wildfires).
  • He further highlighted how California and Florida have pursued policies that have resulted in insurance market disruptions and indicated that the large populations of these states lead them to have a disproportionate impact on national insurance statistics.
• He stated however that some of these factors are cyclical in nature and commented that the recent spike in inflation will likely not be repeated.
  • He mentioned how insurance carriers during the 1970s had adapted to inflation that was much higher than current inflation.
• He also remarked that some states (including California and Florida) have started to respond to their insurance market problems through policy changes.
  • He commented that the insurance markets in these states may stabilize in response to these policy changes.
• He stated however that addressing the increasing disaster losses is more challenging and that the federal government could partially address these issues through disaster mitigation measures.
  • He indicated that these measures include grant programs, hardening properties, and forest management.
• He also discussed how the federal government has previously addressed supply issues within the insurance market in several ways.
  • He noted how the U.S. has provided flood insurance through the NFIP in response to market failures, reinsurance backstops for terrorism insurance through the Terrorism Risk Insurance Act (TRIA), and deregulation to encourage private insurance supply through the Liability Risk Retention Act (LRRA).
• He stated however that the federal government generally does not involve itself in insurance issues.

Ms. Sharon Lewis (Connecticut Coalition for Economic and Environmental Justice):

• She mentioned how her organization, the Connecticut Coalition for Economic and Environmental Justice, works with low-income communities and communities of color that are facing health challenges stemming from disproportionate exposures to pollution.
• She called climate change an “undeniable reality” and stated that consumers are currently paying more money for less insurance coverage.
  • She added that consumers face uncertainty as to whether their insurance coverage will be reduced or canceled entirely moving forward.
• She discussed how many Americans are unable to financially recover from the damages stemming from climate change-related weather events.
  • She noted how inadequate or no insurance coverage often causes people to lose all of their accumulated wealth during these weather events.
• She stated that the inability for a community to obtain insurance coverage will render a community uninhabitable and commented that this has been a historic problem for low-income communities and communities of color.
  • She noted how the U.S.’s history of government-sanctioned racial policies (including redlining and restrictive covenants) had led to the abandonment of and underinvestment in these communities.
• She remarked that these communities now face disproportionate threats from climate change-related disasters and that the shortcomings of the insurance claims process can leave these communities “traumatized” from such disasters.
  • She noted that while insurance is supposed to protect the assets of policyholders, she asserted that discriminatory insurance underwriting and claims processes have often eroded the assets of policyholders in communities of color.
• She also stated that climate change is revealing an underinsurance crisis and that insurers are transferring risk to their policyholders through ever increasing deductibles, low property value assessments, and policies that only offer actual cash value (rather than replacement costs).
• She further discussed how insufficient insurance coverage can often force housing crises following natural disasters because people often lose all their assets during such disasters.
  • She added that insurance coverage is often a requirement for obtaining a mortgage and commented that insurance coverage challenges can thus result in a “mortgage crisis.”
• She also noted how insurance challenges impact renters and indicated that renters are often forced to pay higher rental insurance premiums or higher rental costs to cover the landlord’s insurance premiums.
• She then called on Congress to monitor the use of “concerning” insurance underwriting practices, such as the use of credit scores to determine insurance premiums.
  • She commented that this use of credit scores can force people of color to pay “far more” for insurance, regardless of whether they have an undesirable risk or have even filed claims.
• She contended that there exists a double standard regarding who pays the risks of climate change.
  • She noted that while insurers have dropped homeowners insurance policies, she highlighted how insurers are continuing to provide insurance coverage for new fossil fuel projects.
• She stated that fossil fuel projects will increase the threats to people’s homes and lives through contributing to climate change.
  • She asserted that insurance company CEOs should be required to publicly explain their decisions to insure fossil fuel projects.
• She remarked that the best way to protect homeowners from high insurance costs is to reduce climate change-related risks and called on Congress to reduce carbon emissions and invest in resiliency projects.
• She further called on Congress to work with impacted communities and consumer advocates to consider an insurance backstop.
  • She highlighted how Congress had previously provided such an insurance backstop in the form of terrorism risk reinsurance following the 9/11 terrorist attacks.

Congressional Question Period:

Subcommittee Chairman Warren Davidson (R-OH):

• Chairman Davidson discussed how Mr. Petrelli’s company, Demotech, independently reviews and rates 450 insurers operating throughout the U.S. He noted how Demotech had recently engaged in significant work regarding a “new and troubling” expense category: technology-enabled claim instigation. He commented that this category is driving up costs, especially in areas prone to natural disasters. He asked Mr. Petrelli to discuss how technology-enabled claim instigation is contributing to higher insurance premiums.
  • Mr. Petrelli remarked that the turmoil associated with natural disasters enables opportunists to use technology to secure contested claims when there might not have been a contested claim. He mentioned how a Louisiana law firm had recently represented almost 1,000 people who did not know that they were being represented. He stated that this situation results in a first notice of loss becoming a lawsuit rather than an inquiry from the insurer regarding a potential claim. He acknowledged that while litigation has always been a part of the insurance industry, he stated that technology-enabled claim instigation creates another layer of litigation.
• Chairman Davidson expressed hope that Congress and state insurance regulators will monitor technology-enabled claim instigation. He described technology-enabled claim instigation as a predatory practice that concentrates risks. He then mentioned how the NAIC had recently proposed expanding the reach of its Securities Valuation Office. He indicated that the NAIC’s proposal would provide the Office with the power to overrule a rating agency’s determination. He asserted that this proposal would make the NAIC an unregulated de facto nationally recognized statistical rating organization (NRSRO). He also stated that this proposal would create a conflict of interest between the NAIC’s role as a trade association representing state-based insurance regulators and the NAIC’s new role as an asset evaluator setting capital charge rules for insurance companies. He mentioned how he and seven Committee colleagues had sent a letter to the NAIC expressing serious concerns over this proposal. He raised concerns that the NAIC’s proposal would result in less transparency, more ambiguity for insurance companies, and actual damage to market efficiencies. He warned that these outcomes would increase costs for consumers. He asked Mr. Gordon to indicate whether the NAIC’s proposal could constitute a conflict of interest because it would render the NAIC both a trade association for state insurance regulators and an evaluator of investment decisions of its member insurance companies.
  • Mr. Gordon answered affirmatively. He stated that the NAIC’s Securities Valuation Office has continually attempted to assert more control over securities ratings. He highlighted how this Office had given itself discretion for a fee to evaluate some insurance products. He stated however that this proposal does not provide state insurance regulators with the ability to provide appropriate supervision, includes very limited transparency, does not provide insurance companies and rating agencies with a right to appeal to an independent third-party, and does not provide an opportunity for insurers and rating agencies to present their data. He expressed the APCIA’s opposition to the NAIC’s proposal and stated that the proposal requires more transparency and due process.
• Chairman Davidson then mentioned how he had sent a letter to the FIO in March 2023 regarding its “politically motivated” effort to collect climate change data. He asserted that the FIO’s climate change data collection effort improperly bypasses state insurance regulators and seeks to directly collect the data from insurance companies. He noted how Rep. Scott Fitzgerald (R-WI) had introduced the Insurance Data Protection Act, which would strip the FIO of its subpoena power. He asked the witnesses to indicate whether stripping the FIO of its subpoena power would compromise the FIO’s original intended power.
  • Mr. Gordon expressed APCIA’s support for stripping the FIO of its subpoena power. He described the FIO’s subpoena power as “incredibly unusual” and “unique” given how the FIO is a non-regulatory agency.
• Chairman Davidson lastly remarked that the ability to distribute risk is an underappreciated and essential component for ensuring the functioning of markets. He commented that the distribution of risk will preserve capital if done properly.

Rep. Nydia Velázquez (D-NY):

• Rep. Velázquez raised concerns over how multifamily housing properties serving low-income New Yorkers are facing rapidly increasing insurance costs. She noted how some affordable housing properties cannot obtain insurance quotes and how fewer insurance carriers are willing to bid on properties that serve rent subsidized tenants. She asked Commissioner Arnold to identify actions that Congress can take to ensure that affordable housing properties have access to property insurance at affordable and reasonable rates.
  • Commissioner Arnold discussed how insurance markets vary across states and commented that state insurance markets are generally competitive. She stated that the ability of consumers to shop for insurance supports better coverage and reduced costs. She remarked that state insurance commissioners use the regulatory process to ensure that consumers have access to insurance coverage.
• Rep. Velázquez then remarked that the NFIP had almost expired in September 2023 and blamed House Republicans for this near expiration of the Program. She mentioned how this near expiration had occurred on the same day that New York City had experienced a significant rainstorm and flooding. She asked the witnesses to indicate whether allowing the NFIP to expire would be a “terrible idea.” (Note: All the witnesses except for Mr. Webel answered affirmatively). She also asked the witnesses to indicate whether Congress should pass a long-term reform and reauthorization bill for the NFIP. (Note: All the witnesses except for Mr. Webel answered affirmatively). She then asked Mr. Nutter and Mr. Gordon to indicate whether the NFIP’s Risk Rating 2.0 methodology lowered flood insurance rates nationwide. She also asked Mr. Nutter and Mr. Gordon to address the impact of this methodology on low- and moderate-income communities and communities of color in high-risk areas.
  • Mr. Nutter predicted that the NFIP’s Risk Rating 2.0 methodology would make the flood insurance rating process more equitable. He noted how Congress had required this methodology to meet a certain rate adequacy level. He stated that Risk Rating 2.0 would ensure that people at a low risk of flood are not required to cross-subsidize the flood insurance rates of people that are at a high risk of flood. He indicated that this new methodology does include equity considerations. He testified that RAA’s analysis had found that the Risk Rating 2.0 methodology would lead many properties to receive lower flood insurance rates. He added that RAA’s analysis indicates that other properties would receive similar rates to those received under the Risk Rating 1.0 methodology. 
• Rep. Velázquez asked Mr. Nutter and Mr. Gordon to indicate whether the NFIP’s Risk Rating 2.0 methodology would have any positive impacts on underserved communities and communities of color.
  • Mr. Nutter answered affirmatively. He stated that the Risk Rating 2.0 methodology would bring more equitable rates to communities of color and communities that are socially and economically vulnerable.
  • Mr. Gordon expressed general agreement with Mr. Nutter’s response. He stated however that federal government subsidies can mask true costs and environmental signals. He recommended that Congress consider pursuing a transparent means-tested program to help people living in environmentally vulnerable areas. He also recommended that Congress consider making flood mitigation investments. He commented that this approach would be superior to masking environmental risk signals.

Rep. Bill Posey (R-FL):

• Rep. Posey noted how the McCarran-Ferguson Act makes states the primary regulators of insurance. He stated that the NAIC has successfully addressed interstate commerce concerns through facilitating coordination among states. He asked Commissioner Arnold and Mr. Gordon to indicate whether the federal government should have any role in overseeing the insurance space.
  • Commissioner Arnold remarked that state insurance regulators possess the authority to oversee the financial solvency of insurers, approve insurance policies that are sold, and collect data. She testified that state insurance regulators are in conversation with the FIO regarding the FIO’s activities. She remarked that state insurance regulators and the FIO have a shared interest in protecting consumers and ensuring the solvency of the insurance industry. She asserted however that state insurance regulators remain the regulators of insurance.
  • Mr. Gordon remarked that partnerships between state insurance regulators and the FIO can support the U.S. insurance space regarding international policy matters. He stated however that the FIO’s efforts to set “arbitrary” thresholds for domestic insurance affordability are problematic. He criticized the FIO for undermining state insurance regulators. He raised particular concerns regarding the FIO’s data calls. He called it “incredibly unusual” for a non-regulatory agency to possess “expansive” subpoena authority. He expressed hope that the FIO can work with state insurance commissioners. He stated that data calls should be conducted through existing state data reporting systems and statistical aggregators. He added that Congress could help to encourage this communication between the FIO and state insurance regulators. He asserted however that states should remain the primary regulators of insurance and that the FIO should not undermine this regulation.
• Rep. Posey then noted how Florida’s rising insurance costs have largely been attributed to litigation. He raised concerns that opportunists are interjecting themselves into insurance litigation. He asked Mr. Gordon to recommend reforms to the litigation process to help tame increases in insurance premiums and make insurance more affordable.
  • Mr. Gordon first applauded Florida for its recent adoption of legal system abuse reforms. He indicated that these reforms seek to address one-way attorney fees, phantom damages, and the assignment of benefits. He remarked however that the U.S. still needs to address third-party litigation financing. He noted how billions of dollars of unknown origin are being used to finance U.S. lawsuits. He indicated that unidentified foreign sovereign wealth funds are sometimes behind these lawsuits. He added that civil defendants and courts often do not know when third-party litigation financing is occurring. He also remarked that the U.S. should address third-party medical financing, which involves unknown third parties working with medical care providers to maximize medical services and costs. He noted that these third parties and medical care providers often attempt to get insurers to cover these services and costs. He commented that there exists no transparency and limited regulation for addressing these third-party financing schemes. He stated that any legislation, oversight, investigation, and transparency would be “very helpful” in this area.
• Rep. Posey then noted how the U.S. Government Accountability Office (GAO) has recommended on several occasions that the U.S. government should self-insure (rather than purchase insurance). He noted how the GAO has justified these recommendations on the basis that the U.S. government does not face the same level of risk adversity as private entities. He asked Mr. Webel to further explain the GAO’s persistent recommendations for the U.S. government to self-insure.
  • Mr. Webel noted that parties typically purchase insurance for risks that they cannot cover. He commented that parties should generally obtain as high of a deductible as possible when purchasing insurance to minimize the costs of the insurance. He noted that the federal government has vast resources and access to low-interest rate borrowing. He stated that the U.S. government should generally not choose to purchase insurance.
• Rep. Posey indicated that his question period time had expired.

Full Committee Ranking Member Maxine Waters (D-CA):

• Ranking Member Waters mentioned how several insurance companies have exited her state of California’s insurance market. She attributed these exits to the state’s wildfires and other natural catastrophes. She questioned the hearing’s purpose given how states are responsible for regulating insurance. She then asked the witnesses to recommend how policymakers should respond to insurance companies that believe that their collected premiums do not cover the costs of responding to natural catastrophes. She also asked the witnesses to address the role that climate change plays in the U.S.’s insurance market challenges.
  • Ms. Lewis remarked that climate change plays a main factor in influencing insurance companies to increase their prices and to exit certain states. She indicated that her written testimony further details the impact of climate change on the insurance market.
  • Mr. Gordon noted how the NAIC had recently reported that insurers in California had experienced a 6 percent net underwriting loss over the previous decade. He also mentioned how homeowners insurance claims in California were more than 13 percent higher than the state’s insurance premiums. He further indicated that California’s wildfires in 2017 and 2018 had wiped out more than 30 years of underwriting profits. He then remarked that insurance companies in California had experienced bad rate delays, which has impeded the ability of these companies to cover these losses. He noted how these insurance companies often must wait a year to have their rate filings approved. He stated however that California’s Governor and Insurance Commissioner have both committed to making “significant reforms” to the state’s insurance market. He indicated that these reforms include the allowance of forward-looking modeling to account for climate change’s impacts, improvements to the rate filing process, improvements to the intervenor process, and consideration of reinsurance costs. He asserted that California’s insurance market needs to be fixed. He noted how California’s Insurance Commissioner had stated that insurance companies would not write policies in the state unless they can ensure that they possess sufficient capital and reserves to meet claims, cover their expenses, and earn a fair rate of return.
• Ranking Member Waters interjected to ask Mr. Gordon to indicate whether he is recommending the charging of higher insurance premiums to cover the costs of California’s insurance losses.
  • Mr. Gordon answered affirmatively. He stated that insurers will need to receive enough premiums to cover their long-term losses.
• Ranking Member Waters expressed her dislike for Mr. Gordon’s answer.

Rep. Blaine Luetkemeyer (R-MO):

• Rep. Luetkemeyer stated that the business model of insurance involves taking in premiums to cover losses. He asked Mr. Gordon to confirm his understanding of this business model.
  • Mr. Gordon answered affirmatively.
• Rep. Luetkemeyer interjected to note how insurance companies are experiencing losses on many of their lines of business. He asked Mr. Gordon to indicate whether these current losses are more attributable to the increased frequency of adverse events or to rising inflation.
  • Mr. Gordon remarked that many factors are driving current insurance losses, including inflation and people moving into higher risk areas. He also noted that while there has been an uptick in severe convective storms, he indicated that climate change does not impact these types of storms. He noted however that climate change is driving the increase in droughts and wildfires. He concluded that inflation and demographic shifts are currently the top cost drivers of insurance.
• Rep. Luetkemeyer asked Mr. Gordon to confirm that more people are choosing to live in places that are more susceptible to sustaining a loss.
  • Mr. Gordon confirmed that more people are choosing to live in places that are more susceptible to sustaining a loss.
• Rep. Luetkemeyer then expressed support for the use of reinsurance to minimize U.S. taxpayer exposures on flood insurance. He asked Mr. Nutter to discuss the benefits of reinsurance for the NFIP.
  • Mr. Nutter stated that the NFIP’s reinsurance purchases have been a “valuable way” to insulate U.S. taxpayers through using private resources to pay for flood insurance claims. He mentioned how the federal government had collected over $1 billion in losses from the insurance industry in 2017. He stated that the NFIP’s reinsurance purchases have been effective and provide the insurance sector with a better understanding of flood risk. He added that this reinsurance could help support the future development of a private flood insurance market.
• Rep. Luetkemeyer asked Mr. Nutter to indicate whether Congress should consider having the federal government purchase reinsurance for other areas.
  • Mr. Nutter stated that the federal government already purchases reinsurance in certain contexts. He noted how the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Export-Import Bank of the U.S. (EXIM Bank) purchase risk transfer products from the private reinsurance sector. He then remarked that the U.S. banking sector could benefit from the purchase of reinsurance products. He discussed how European banks are encouraged to purchase reinsurance as part of their risk transfer under the Basel III Endgame proposal. He indicated that U.S. banks are not yet permitted to purchase reinsurance. He stated that U.S. banking regulators should permit U.S. banks to purchase reinsurance so that these banks can diversify their capital bases.
  • Mr. Webel stated that the NFIP’s purchase of reinsurance draws future losses to the present. He noted how a homeowner that had held a NFIP policy for several years without a claim and that later sold their home had effectively received a subsidized insurance rate. He explained that this policyholder had not paid the same look-forward that one would have paid within the normal insurance context. He stated that the NFIP’s purchase of reinsurance thus brings future losses to the present.
• Rep. Luetkemeyer then indicated that he had not been aware of technology-enabled claim instigation prior to Mr. Petrelli’s testimony. He asked Mr. Petrelli to elaborate on technology-enabled claim instigation.
  • Mr. Petrelli noted how technology-enabled claim instigation is a form of litigation financing.
• Rep. Luetkemeyer interjected to comment that his question period time is limited. He asked Mr. Petrelli to indicate how much technology-enabled claim instigation impacts the cost of an average insurance policy.
  • Mr. Petrelli stated that technology-enabled claim instigation may be driving up insurance policy costs as much as 30 percent or 40 percent based on the frequency of the practice.
• Rep. Luetkemeyer expressed astonishment with Mr. Petrelli’s response.

Subcommittee Ranking Member Emanuel Cleaver (D-MO):

• Ranking Member Cleaver discussed how many non-profit organizations are currently struggling to obtain insurance. He mentioned how his Congressional District contains over 60 non-profit organizations and indicated that these non-profit organizations receive liability insurance through the Nonprofits Insurance Alliance. He stated however that these non-profit organizations still report challenges obtaining insurance. He asked Commissioner Arnold and Mr. Gordon to indicate how Congress can address these insurance access challenges for non-profit organizations.
  • Mr. Gordon first indicated that the Nonprofits Insurance Alliance is a member of the APCIA. He then asserted that the insurance access challenges for non-profit organizations are less related to a lack of capacity and are more related to market rate freedom. He stated that setting appropriate rates for non-profit organization insurance will lead to expanded coverage. He acknowledged that some non-profit organizations may not be able to afford insurance. He suggested that policymakers consider means testing or targeting mitigation and resiliency measures to address these specific challenges. He commented that policymakers should work to limit loss exposures for these non-profit organizations.
  • Commissioner Arnold remarked that all state insurance commissioners are very interested in ensuring that non-profit organizations have access to insurance. She expressed general opposition to federal policy proposals that would override existing state solutions. She mentioned how the NAIC has a data call regarding the insurance access challenges that are facing non-profit organizations. She remarked that state insurance commissioners would look at the data received from this data call to inform potential policy changes.
• Ranking Member Cleaver remarked that the insurance needs of non-profit organizations tend to be commensurate with the scope of the problems that they seek to address. He provided the other witnesses with an opportunity to comment on the topic of access to insurance for non-profit organizations.
  • Mr. Petrelli stated that technology-enabled claim instigation has grown significantly. He mentioned how a National Law Journal article had found that the number of professionals using one litigation platform had grown from 800 to 45,000 over a 15-month span. He stated that technology-enabled claim instigation is targeting Americans.

Rep. Scott Fitzgerald (R-WI):

• Rep. Fitzgerald discussed how states have a long history of regulating insurance and applauded the work of state insurance regulators. He criticized the FIO for its recent issuance of a revised data call regarding climate change-related financial risk. He stated that the FIO has been unclear regarding how they would use their requested data and asserted that the FIO is seeking to undermine Congressional intent. He mentioned how he had proposed the Insurance Data Protection Act to repeal the FIO’s subpoena power. He asked Mr. Gordon to discuss how the FIO is currently abusing its subpoena power.
  • Mr. Gordon expressed the APCIA’s appreciation for Rep. Fitzgerald’s work to address the FIO. He remarked that the FIO’s expansive subpoena authority is unique among non-regulatory agencies. He asserted that the FIO should not be conducting a climate change-related financial risk data call because most states are already collecting this information. He stated that analyzing weather data is already the primary competency of the insurance industry. He remarked that the FIO’s climate change-related financial risk data call is not related to insurance and contended that that data call is meant to undermine state insurance regulators. He stated that there already exists a significant amount of climate change-related financial risk data available. He testified that the insurance industry is working with state insurance regulators to ensure that there do not exist any gaps in this data.
• Rep. Fitzgerald raised concerns that the FIO might not be able to adequately protect the information it collects given the broad scope of their data calls. He asked Mr. Gordon to indicate the types of assurances that the FIO could provide regarding the security of their collected data.
  • Mr. Gordon remarked that providing more parties with access to information would increase the likelihood of problems arising. He mentioned how APCIA has encouraged the FIO to work with the NAIC to collect data through existing portals. He commented that this approach would help to protect against collected data being misused. He concluded that the FIO should work with state regulators on any data collection efforts.
• Rep. Fitzgerald asserted that the FIO’s data collection efforts constitute a federal overreach.

Rep. Sylvia Garcia (D-TX):

• Rep. Garcia recounted how her Congressional District had experienced significant flooding during Hurricane Harvey in 2019. She noted how many of her constituents have dropped their flood insurance coverage because the coverage has become unaffordable. She highlighted how Harris County, Texas (which is where Houston is located) is expected to experience a 75 percent increase in its average flood insurance premiums. She asked Ms. Lewis to discuss the importance of reauthorizing the NFIP given the increasing intensity of weather events resulting from climate change. She also asked Ms. Lewis to provide recommendations for how Congress can make flood insurance more affordable.
  • Ms. Lewis raised concerns that insurance companies are engaging in discriminatory practices and asserted that making flood insurance more affordable would make flood insurance fairer. She stated that the U.S. must ensure that flood insurance underwriting practices do not penalize people based on race or where they live. She remarked that the insurance underwriting process has been discriminatory since its inception and called it critical for the flood insurance underwriting to be made fair.
• Rep. Garcia asked Ms. Lewis to indicate whether Congress could take any actions to enable flood insurance customers to use payment plans and to receive flood insurance rates based on their incomes and home values.
  • Ms. Lewis raised concerns that insurance pricing lacks transparency and commented that this lack of transparency is unique to the insurance industry.
• Rep. Garcia stated that consumers do not know whether their insurance bills contain hidden fees.
  • Ms. Lewis expressed agreement with Rep. Garcia’s statement. She remarked that insurance underwriting has always been subjective. She called on the U.S. to eliminate the use of subjective criteria in the insurance underwriting process. She asserted that many insurance underwriters will set different prices for customers and properties with the same level of risk.
• Rep. Garcia then asked Commissioner Arnold to address the role of states in ensuring that insurance is affordable.
  • Commissioner Arnold remarked that state insurance regulators seek to ensure that insurance companies can pay claims. She commented that this entails ensuring that insurers possess sufficient capital and maintain adequate rates. She also remarked that state insurance regulators work to ensure that insurance policies comply with their state insurance laws.
• Rep. Garcia interjected to ask Commissioner Arnold to address how states ensure that insurance is affordable.
  • Commissioner Arnold remarked that state insurance commissioners seek to foster competitive insurance markets, which helps to provide insurance affordability. She also mentioned how state insurance commissioners work to support pre-disaster mitigation efforts.
• Note: Rep. Garcia’s question period time expired here.

Rep. Mike Flood (R-NE):

• Rep. Flood discussed how his state of Nebraska is one of the U.S.’s top states for insurance and highlighted how Berkshire Hathaway, Pacific Life, and Mutual of Omaha are domiciled within the state. He largely attributed the success of Nebraska insurance companies to the Nebraska Department of Insurance’s experience. He then remarked that some states have experienced higher insurance premiums, which he partially attributed to state restrictions imposed on pricing. He asked Mr. Gordon to discuss the challenges that can be associated with states that use pre-approval filing systems for insurance. He also asked Mr. Gordon to address how these systems impact property casualty insurance companies.
  • Mr. Gordon remarked that states vary in terms of the performance of their pre-approval filing systems for insurance. He noted however that pre-approval filing systems for insurance often can create significant delays. He mentioned how California had gone 30 months without approving a single private passenger automobile insurance rate increase. He emphasized that California’s 30-month approval delay had occurred during a period of record inflation. He also stated that California maintains an “antiquated” and “broken” 35-year-old pre-approval system and noted how California’s Governor and Insurance Commissioner are now trying to fix this system. He noted how California is the only state that does not permit forward-looking catastrophe modeling and rate filings, reinsurance costs to be included into rate filings, and consumers to choose to use telematics based on actual driving behavior. He asserted that California’s insurance policies constrain innovation and create long-delays, which result in market dysfunction. He also attributed the Florida insurance market’s deterioration to rate suppression. He commented that this suppression had led the number of national insurance carriers within the Florida market to plummet. He added that similar trends have occurred within Louisiana and California.
• Rep. Flood asked Mr. Gordon to discuss how restrictions on underwriting metrics and rate setting are currently impacting insurers. He asked Mr. Gordon to specifically address the impacts of restrictions related to credit ratings and location.
  • Mr. Gordon mentioned how the APCIA had published a study finding that the use of credit scores had expanded access to insurance to many drivers in state residual markets. He also mentioned how the APCIA had recently published studies that show a direct connection between credit scores and hard breaking and hard acceleration driving behavior. He further stated that there are other studies showing that the use of credit scores for setting insurance is not discriminatory, that credit scores are not a proxy for race, and that credit scores are “highly predictive” of insurance costs.
• Rep. Flood then asked the witnesses to discuss the important role that insurance technology and innovation can play in exerting downward pressure on insurance premiums moving forward.
  • Mr. Nutter remarked that the insurance industry’s adoption of more technology will improve the efficiency of rate setting for both insurance regulators and the insurance industry. He stated that this technology will make underwriting more precise and rating more equitable.
• Rep. Flood then mentioned how NAIC had released a draft bulletin on AI and predictive models in August 2023. He asked Commissioner Arnold to provide her initial reaction to this draft bulletin.
  • Commissioner Arnold testified that NAIC has taken several actions to look at how AI is being used within the insurance industry. She mentioned how NAIC had released an AI principles document a couple of years ago that laid out frameworks for the use of AI in insurance. She also highlighted how NAIC had created its Big Data and Artificial Intelligence Working Group.
• Rep. Flood interjected to indicate that his question period time had expired.

Rep. Nikema Williams (D-GA):

• Rep. Williams remarked that climate change is contributing to the rising cost of insurance and criticized Congressional Republicans for failing to acknowledge the role that humans play in causing climate change. She further criticized the hearing’s memorandum for not making any mentions of climate change. She asked Ms. Lewis to indicate whether it is constructive for the Subcommittee to have a conversation about increasing insurance costs without acknowledging climate change.
  • Ms. Lewis answered no.
• Rep. Williams remarked that marginalized communities do not have the luxury of not acknowledging climate change. She then mentioned how State Farm Insurance had recently decided to not renew her personal homeowners insurance policy after she had filed a claim regarding roof damage stemming from a hailstorm. She indicated that her property is now considered high risk and that she now has more difficulty finding affordable homeowners insurance. She added that her neighbors are experiencing similar challenges finding homeowners insurance. She stated that low-income Americans are more likely to suffer from the consequences of flooding, tropical storms, and other extreme weather due to inadequate infrastructure in their neighborhoods and a lack of proper insurance. She remarked that a long-term reauthorization of the NFIP and reforms to the NFIP would make the U.S. flood insurance market more stable and affordable. She asserted that the previous short-term extensions of the NFIP have fostered “destabilizing uncertainty” within the U.S. flood insurance market. She called on Congress and the Committee to reauthorize and strengthen the NFIP, especially given how climate change is causing more frequent and more damaging floods. She asked Mr. Webel to discuss the consumer benefits that would result from a long-term reauthorization of the NFIP.
  • Mr. Webel remarked that insurance markets generally work better when there exist long-term products. He added that homes also tend to be long-term products.
• Rep. Williams also asked Mr. Webel to discuss how a federal government shutdown would impact marginalized communities that rely upon the NFIP.
  • Mr. Webel stated that while the NFIP’s authorization is technically legally separate from a federal government shutdown, he noted that this authorization has been attached to appropriations bills. He remarked that Congress’s failure to reauthorize the NFIP by November 17, 2023 (either through an appropriations bill or another piece of legislation) would result in the elimination of the authority to issue new flood insurance policies under the Program. He further noted how the NFIP’s expiration would reduce the Program’s borrowing limit from over $30 billion to $1 billion. He stated that the NFIP’s expiration would prevent people from purchasing new flood insurance policies through the NFIP. He indicated that these people seeking to purchase new flood insurance policies would need to purchase such policies from the private market if the NFIP were to expire.
• Rep. Williams then criticized Congressional Republicans for seeking to eliminate the FIO. She noted how the FIO is tasked both with identifying gaps in insurance regulation that pose systemic risks to the market and with monitoring the availability of affordable insurance for marginalized communities. She mentioned how the recently proposed Financial Services and General Government Appropriations Bill would fully eliminate the FIO’s funding. She indicated that she had submitted an amendment to this appropriations bill to reinstate funding for the FIO. She asked Mr. Webel to discuss the impacts of eliminating the FIO. She acknowledged however that her question period time had expired and requested that Mr. Webel provide his response to this question for the hearing’s record.

Rep. Mike Lawler (R-NY):

• Rep. Lawler discussed how historic storms have impacted communities across the U.S. and mentioned how his Congressional District had recently experienced “devastating” floods in the Hudson Valley. He stated that communities impacted by natural disasters are facing “skyrocketing” repair and rehabilitation costs for properties. He added that the current inflationary environment and the economic challenges caused by the COVID-19 pandemic have exacerbated these challenges. He asked the witnesses to describe the challenges that disaster prone communities face in rebuilding (such as the demand for materials and labor). He also asked the witnesses to address how these challenges are factored into consumer insurance premiums.
  • Mr. Gordon remarked that the insurance cost inflation inputs of repairs have escalated “very significantly.” He noted how construction material costs have increased by 35.5 percent and construction trade service costs have increased by 30 percent between the beginning of 2020 and the first half of 2023. He also noted how overall building replacement costs have increased by nearly 40 percent over the previous five years.
• Rep. Lawler asked Mr. Gordon to indicate whether inflation has a “tremendous” impact on insurance premiums.
  • Mr. Gordon answered affirmatively. He described inflation as a primary cost driver of insurance premiums.
• Rep. Lawler then discussed how the NFIP faces periodic reauthorization challenges. He noted how APCIA members participate in the NFIP’s Write Your Own (WYO) Program. He asked Mr. Gordon to discuss how the uncertainty surrounding the NFIP’s reauthorization impacts insurance companies. He commented that these companies must engage in work to halt and restart their lines of businesses.
  • Mr. Gordon called the uncertainty surrounding the NFIP’s reauthorization “very problematic.” He discussed how short-term lapses of the NFIP force insurance companies to start and stop their activities (as well as make retroactive fixes) and that this imposes additional costs and uncertainty for these companies. He expressed support for a long-term reauthorization of the NFIP.
• Rep. Lawler then discussed how many cities in the U.S. are facing spikes in crime driven by many factors. He stated that these factors include the COVID-19 pandemic, prolonged lockdowns associated with the pandemic, de-policing efforts, lax prosecutions of certain crimes, permissive drug use policies, increases in drug abuse, and less populated business districts resulting from employees not returning to in-office work. He mentioned how the Council on Criminal Justice had found 33.4 percent more motor vehicle thefts had increased during the first half of 2023 compared to the same period in 2022. He also noted how there had occurred a “marked” increase in property thefts in 2022 after property thefts had been declining for decades. He asked Mr. Gordon to indicate whether policies that encourage more crime in the U.S.’s cities make property insurance more or less expensive.
  • Mr. Gordon remarked that motor vehicle theft and a particular type of catalytic converter theft have been “skyrocketing.” He commented that this theft serves as a cost driver for automobile insurance. He then stated that increasing retail theft and crime is creating insurance coverage friction. He remarked that while there currently does not appear to exist a commercial insurance availability problem, he indicated that commercial insurance coverages have gotten tighter and more expensive. He further noted how the risk of violence that accompanies retail theft can trigger more expensive liability lawsuits when people get injured. He testified that the APCIA is concerned about these crime trends and is monitoring this area. He warned that the absence of adequate commercial insurance coverage will put businesses at risk and make it more challenging for businesses to obtain financing.
• Rep. Lawler asked Mr. Gordon to indicate whether he had observed a lack of willingness among insurance companies to insure commercial properties in high crime urban areas.
  • Mr. Gordon stated that while the APCIA has not observed commercial insurance availability concerns, he indicated that commercial insurance coverage is becoming tighter and more expensive.
• Rep. Lawler asked Mr. Gordon to discuss the impact of crime on investment and development in U.S. cities if properties were to become uninsurable.
  • Mr. Gordon remarked that commercial insurance access and affordability challenges would put many businesses at risk and would undermine the ability of these businesses to obtain financing.
• Note: Rep. Lawler’s question period time expired here.

Rep. Rashida Tlaib (D-MI):

• Rep. Tlaib asked Mr. Webel to indicate whether the insurance industry is increasingly using consumer credit scores to calculate insurance rates. She also asked Mr. Webel to indicate whether this use of credit scores is driving up insurance costs for working class Americans.
  • Mr. Webel stated that he did not know whether insurance companies are increasingly using consumer credit scores to calculate insurance rates. He commented that Mr. Gordon might know how insurance companies are using consumer credit scores to calculate insurance rates. He indicated that state regulators must approve the use of consumer credit scores as a factor for setting insurance rates.
• Rep. Tlaib stated that non-driving factors (such as marital status, education level, and credit scores) are often used to set automobile insurance rates. She mentioned how the University of Michigan had found a person with a driving under the influence (DUI) charge paid an automobile insurance rate that was three times less than a person with a lower credit score without a DUI charge. She asked Mr. Gordon to address this situation.
  • Mr. Gordon mentioned how the APCIA had conducted studies that have found that there exists a direct correlation between credit score and driving behavior.
• Rep. Tlaib interjected to ask Mr. Gordon to explain why a credit score should be used as a factor in setting automobile insurance rates.
  • Mr. Gordon indicated that the APCIA’s studies had used telematics to monitor direct individual driving behavior. He stated that there exists a very strong correlation between low credit scores and hard braking and hard acceleration, which telematics find causes more frequent automobile accidents. He also asserted that credit scores are not necessarily a proxy for income.
• Rep. Tlaib interjected to discuss the political power of the scrap metal industry. She asked Mr. Gordon to indicate why the U.S. is not moving to prohibiting direct cash transactions within the scrap metal industry.
  • Mr. Gordon noted how many states are taking actions to address the catalytic converter theft through reforms to the scrap metal industry.
• Rep. Tlaib interjected to mention how she is pushing her state of Michigan to pursue such reforms.
  • Mr. Gordon expressed support for these state actions to address catalytic converter theft.
• Rep. Tlaib then discussed how flooding is a major issue within her Congressional District and attributed this flooding to record levels of rainfall. She noted how many of the local mayors within her Congressional District (who come from different political backgrounds) are interested in protecting vulnerable communities from these flooding risks. She asked Ms. Lewis to discuss how climate risks are impacting communities.
  • Ms. Lewis testified that her own basement had flooded with sewage and untreated stormwater in December 2022 and indicated that rain had caused her basement flooding. She mentioned how her insurance company had declined to cover her property because she lacked sewage backup coverage. She stated that she was unaware that she had needed to obtain such coverage. She testified that this situation had left her “technically homeless” for seven months.
• Rep. Tlaib expressed her sympathy for Ms. Lewis. She then stated that the Subcommittee should have further discussions regarding the use of various factors (including marital status, education level, and credit scores) in calculating insurance rates.

Subcommittee Vice Chairwoman Monica De La Cruz (R-TX):

• Vice Chairwoman De La Cruz mentioned how she had spent over 20 years in the insurance industry and had owned an insurance agency. She asked Mr. Gordon to define insurance.
  • Mr. Gordon stated that insurance ultimately involves the provision of protection for individuals against risk.
• Vice Chairwoman De La Cruz asked Mr. Gordon to confirm that a party with higher risks will have higher insurance premiums.
  • Mr. Gordon confirmed that a party with higher risks will have higher insurance premiums. He discussed how every single state prohibits insurance from being unfairly discriminatory. He indicated that insurance companies are “closely examined” to ensure that they are not acting in an unfairly discriminatory manner. He stated that an insurance company would be acting in an unfairly discriminatory manner if the company were to charge a customer premiums that were not based on the customer’s level of risk.
• Vice Chairwoman De La Cruz asked Mr. Gordon to confirm that insurance companies do not set insurance rates based on a customer’s ethnicity and that these companies instead set their rates based on a customer’s level of risk.
  • Mr. Gordon remarked that insurance companies do not use as customer’s ethnicity as a factor for setting insurance rates. He commented that state insurance regulators would never allow insurance companies to use ethnicity as a factor for setting insurance rates. He mentioned how the APCIA has published extensive studies examining years of automobile insurance data. He testified that these studies have shown that there is no unfair discrimination in the setting of automobile insurance rates. He stated that location (rather than race) impacts automobile insurance rates. He elaborated that traffic accidents are more likely to occur in urban areas with higher traffic densities. He acknowledged that while historical racism may have caused minority groups to disproportionately live in these urban areas, he stated that controlling for vehicle density will find that location is the primary factor impacting automobile insurance rates. He reiterated that states heavily regulate insurance companies to ensure that discrimination is not occurring. He emphasized that insurance companies cannot use race as a factor for setting insurance rates.
• Vice Chairwoman De La Cruz emphasized that the automobile insurance rates charged to customers are based on the customer’s location (rather than based on the customer’s race). She asked Mr. Gordon to indicate whether a person that lives in an area with a higher number of uninsured vehicles will pay more for automobile insurance relative to a person that lives in an area with a lower number of uninsured vehicles.
  • Mr. Gordon answered affirmatively.
• Vice Chairwoman De La Cruz noted how Hidalgo County, Texas (which is in her Congressional District) has many automobile owners that come from Mexico. She indicated that these automobile owners often do not have automobile insurance coverage. She asserted that Hidalgo County’s high insurance rates are attributable to its high number of uninsured vehicles and not to the County’s high composition of Hispanic residents. She asked Mr. Gordon to indicate whether he agrees with this assertion.
  • Mr. Gordon expressed agreement with Vice Chairwoman De La Cruz’s assertion. He also stated that Texas’s insurance regulators are robust and vigilant against discriminatory practices.
• Vice Chairwoman De La Cruz asked Commissioner Arnold to indicate whether state regulators are thorough in their oversight of insurance.
  • Commissioner Arnold answered affirmatively.
• Vice Chairwoman De La Cruz asked Commissioner Arnold to indicate whether state regulators would ensure that insurance is based on risk (rather than ethnicity).
  • Commissioner Arnold answered affirmatively.
  • Mr. Gordon remarked that state insurance commissioners have been working “extensively” with the insurance industry to ensure that insurance is based on risk. He mentioned how the NAIC is working on guidance regarding the use of AI in insurance rate setting. He also testified that the insurance industry is engaged in conversations with state insurance regulators on testing methods.

Rep. Brittany Pettersen (D-CO):

• Rep. Pettersen asked Ms. Lewis to discuss the extent to which race is a factor in the setting of insurance premium costs.
  • Ms. Lewis remarked that race is widely considered a factor in insurance underwriting. She stated that insurance underwriters and inspectors will openly consider the use of race in their coverage and pricing decisions. She asserted that insurance underwriters will subjectively change insurance coverage and pricing based on the prospective customer. She also raised concerns over the use of credit scores as a factor for determining insurance rates. She stated that credit scores do not determine whether a person will be more likely to get into an automobile accident or their general driving patterns. She noted however many drivers that live in suburban areas will commute into urban areas for work and commented that these suburban drivers likely impact the driving risk profiles of urban areas. She highlighted how most people that reside in urban areas tend to use public transit as their means for commuting.
• Rep. Pettersen thanked Ms. Lewis for highlighting how race serves as a factor in the setting of insurance premium costs. She stated that she had previously not known that insurers were using race as a factor. She then discussed how her state of Colorado now constantly faces the threat of wildfires and attributed this prevalence of wildfires to climate change. She mentioned how many Coloradans cannot purchase homes because they cannot prove that their homes will be insurable. She also mentioned how insurance companies are withdrawing from Colorado markets due to unpredictable risks. She stated that insurance company representatives have told her that the U.S. insurance market is facing a “perfect storm” due to the COVID-19 pandemic, the ensuing economic fallout from the Pandemic, supply chain problems, inflation, and workforce shortages. She commented that legal pathways for workers will be key to addressing the U.S.’s current and future workforce needs. She further stated that climate change poses increasing risks to the U.S. insurance market. She asked the witnesses to provide recommendations for how Congress can address these insurance challenges. She specifically expressed interest in understanding ways that AI could be leveraged to build more sustainable and resilient communities. She further asked the witnesses to discuss lessons learned from flood insurance that could be applied to the wildfire insurance space.
  • Mr. Gordon remarked that AI will be important for addressing some of the insurance industry’s workforce constraints. He discussed how drones could be deployed following a disaster to more efficiently and quickly identify where damages have occurred. He also mentioned how many insurance companies allow for policyholders to use their smartphones to take and submit pictures of their automobile accidents. He indicated that AI tools will triage these claims to the appropriate staff. He asserted that the insurance industry will not have sufficient workers in the future if it does not leverage AI. He stated however that the insurance industry’s use of AI will require appropriate regulator supervision for regulators.

Rep. Erin Houchin (R-IN):

• Rep. Houchin remarked that the insurance industry impacts all Americans, regardless of income, location, and stage in life. She stated that Americans desire insurance options that provide appropriate and affordable protection. She noted however that recent market stresses and the rise of inflation have made it significantly more difficult to obtain such insurance coverage. She mentioned how recent surveys have found that employers and workers have experienced health insurance cost increases of 7 percent, car insurance cost increases of 17 percent, and homeowners insurance cost increases of 21 percent. She indicated that these increases had occurred over the previous year. She commented these insurance cost increases have been especially painful given the U.S.’s recent inflation challenges. She then noted how Mr. Gordon had argued that better land use planning would reduce the risk of impact of natural disasters on the property and casualty insurance industry. She stated that the U.S.’s current land use planning practices are often inadequate, inconsistent, and ineffective. She commented that these practices have caused her constituents to effectively subsidize parties that build dangerous properties in coastal areas. She asked Mr. Gordon to discuss why land use planning is so crucial for the resilience and sustainability of the insurance sector and the communities that it serves. She also asked Mr. Gordon to explain why the U.S.’s land use planning policies have been incorrect.
  • Mr. Gordon remarked that the top cost driver for insurance rates has been people moving into regions with high climate change-related risks. He stated that government policies often subsidize these moves and mask the true environmental costs of such moves. He mentioned how the U.S. had experienced an annual increase in natural disaster losses ranging between 5 percent and 7 percent. He largely attributed these increases to these movements to regions with high climate change-related risks. He stated that the U.S. is failing to account for long-term insurance costs for homes that are located in coastal or WUI areas. He further lamented how the U.S. is not engaging in prudent land use management activities (such as controlled burns to reduce wildfire risks). He mentioned how the insurance industry is now developing new wildfire safety standards (including defensive space standards). He remarked that policymakers can improve building codes, land use management, and mitigation to address the aforementioned insurance risks.
• Rep. Houchin then discussed how insurance subsidies can create a “death spiral” in insurance markets. She asked Mr. Gordon to indicate whether insurance subsidies cause insurance rate increases that in turn lead more individuals to require subsidies to afford insurance. She expressed concerns that this dynamic can result in public insurance markets replacing private insurance markets and that these public insurance markets will be more expensive.
  • Mr. Gordon expressed agreement with Rep. Houchin’s description of the “death spiral” within the U.S. insurance market. He remarked that this dynamic had occurred in Florida following Hurricane Andrew. He discussed how Florida had pursued insurance rate suppression, which led national insurance carriers to withdraw from that market. He commented that a similar dynamic is currently occurring within California. He also mentioned how California requires that excess losses within the state’s residual market be paid back by the insurers with no recourse. He commented that this dynamic had led to increasingly fewer insurers operating within California that are liable for growing exposures.
• Rep. Houchin then expressed agreement with Mr. Nutter’s assertion that Congress should not create a new federal property reinsurance program to displace the role of states. She asked Mr. Nutter to explain why Congress should not create such a program.
  • Mr. Nutter warned that the establishment of a new federal property reinsurance program would lead Congress to regulate and manage property markets at the state level. He noted how states tend to have very diverse perils, legal environments, and regulatory philosophies. He stated that such a program would be counterproductive and concentrate risk. He also stated that this new program would force U.S. taxpayers located in low risk areas to subsidize insurance for people located in high risk areas.

Rep. Steven Horsford (D-NV):

• Rep. Horsford stated that while the Subcommittee should consider policies to address recent increases in insurance costs, he criticized the Subcommittee for its focus on legislation to eliminate the FIO. He discussed how the average U.S. household spends over 30 percent of their income on mortgage or rent payments and how the U.S. has a shortage of nearly 6.5 million homes. He stated that Americans are struggling to remain financially solvent and obtain housing. He criticized the Committee for having no hearings on affordable housing during the 118th Congress. He expressed hope that the Subcommittee would seek to promote sustainable and affordable housing for all Americans. He lamented how the recent leadership vacancy in the U.S. House of Representatives now provides Congress just 15 days to avert a “needless” federal government shutdown. He noted how the U.S. is experiencing depressed home sale volume and raised concerns that Congress’s inability to provide long-term funding for federal agencies will exacerbate this issue in vulnerable communities. He warned that a federal government shutdown could subject property owners to force-placed insurance policies by their mortgage services. He commented that these insurance policies have historically been more expensive than insurance obtained in the marketplace. He also lamented how these impacts will not be borne equitably across socio-economic lines and will disproportionately harm communities of color. He asked Ms. Lewis to discuss the long-term impacts that a short-term federal government shutdown could have on low- and medium-income communities that depend on the NFIP.
  • Ms. Lewis remarked that a short-term federal government shutdown would harm low-income communities and communities of color. She noted how these communities lack reserves and cannot sustain themselves if they do not receive immediate relief.
• Rep. Horsford then remarked that the U.S. can no longer ignore the increasing frequency and severity of natural disasters. He noted how the U.S. had experienced an average of eight annual natural disasters with losses exceeding $1 billion between the years of 1980 and 2022. He mentioned how the U.S. had already experienced 24 such natural disasters in 2023 thus far and indicated that these natural disasters had over $67 billion in combined losses. He stated that federal programs focused on mitigation are important for addressing the rising insurance rates stemming from these natural disaster events. He asked Ms. Lewis to discuss how these federal mitigation programs impact Americans.
  • Ms. Lewis called these federal mitigation programs important and asserted that the U.S. should prioritize efforts to eliminate natural disaster risks. She stated that the U.S. should stop constructing houses and schools in flood zones and adopt building codes that would ensure that properties can withstand hurricanes and floods.
• Note: Rep. Horford’s question period time expired here.

Rep. Young Kim (R-CA):

• Rep. Kim lamented how her state of California’s “misguided” policies are causing major insurers to exit the state’s insurance market. She mentioned how her office had received numerous phone calls and messages complaining about the high cost of homeowners insurance. She stated that the decrease in competition within California’s insurance market is further driving up the state’s insurance premium costs and forcing people into California’s FAIR Plan. She indicated that California’s FAIR Plan is more costly than private insurance plans and does not provide comprehensive coverage. She noted how California Insurance Commissioner Ricardo Lara had recently stated that he would continue to partner with insurance stakeholders on developing solutions to the state’s insurance challenges. She asked Mr. Gordon to provide updates to the Subcommittee on any new agreements between the state of California and insurance stakeholders since Commissioner Lara’s recently announced insurance policy changes.
  • Mr. Gordon noted how the California legislature had sought to develop state insurance reforms and indicated that these efforts were ultimately unsuccessful. He attributed much of California’s insurance problems to state regulatory actions. He criticized the California Department of Insurance for going 30 months without approving a single private passenger automobile insurance rate increase during a period of record inflation. He stated that both California’s Governor and Insurance Commissioner now recognize that they must pursue reforms to California’s insurance market. He noted however that some of these reforms would take time to be implemented. He indicated that California is seeking to develop regulatory reforms by the end of 2024, which means that these potential reforms would go into effect in 2025. He commented that this timeframe is very long considering how California’s insurance market is currently deteriorating.
• Rep. Kim remarked that California must update its 35-year-old regulatory framework for insurance. She also raised concerns that a future California Insurance Commissioner could rescind any regulatory reforms currently under development. She commented that this dynamic underscores the need for the California Legislature to make legislative reforms to the state’s insurance market. She then discussed how California is experiencing problems with its FAIR Plan and noted how California’s FAIR Plan already has a large deficit. She asked Mr. Gordon to discuss the FAIR Plan’s assessment process and to address how this process ultimately increases insurance prices for households who purchase insurance in the private insurance market.
  • Mr. Gordon described California’s FAIR Plan as “horribly underfunded.” He noted how the FAIR Plan’s excess losses fall to private insurers and indicated that private insurers cannot recoup these losses. He stated that this situation leaves the state’s remaining private insurers financially liable for the state’s natural disasters. He commented that California insurers must therefore increase their rates charged to customers so that they can absorb these potential liabilities and exposures. He described this situation as a “ticking time bomb” that California is seeking to fix.
• Rep. Kim mentioned how her Congressional District is very prone to wildfires and stated that California must take actions to mitigate wildfire risks. She then noted that insurance companies purchase reinsurance coverage, despite not being required to purchase such coverage. She asked Mr. Nutter to explain why insurance companies voluntarily purchase reinsurance coverage. She also asked Mr. Nutter to discuss how California’s Proposition 103 is impacting the reinsurance market.
  • Mr. Nutter stated that insurance companies will generally purchase reinsurance to manage a significant concentration of a peril or to enhance their capital support. He raised concerns that California’s Proposition 103 has caused the California Department of Insurance to not consider future risks and community-based solutions involving mitigation and financial recovery.