I would like to thank you for holding this hearing to further study the capacity of the reinsurance industry and to explore other reinsurance options other than a broad new government program.
While I understand that the private insurance and reinsurance industry currently would face tough challenges should a catastrophic disaster occur, I fear that this condition could be exacerbated following federal involvement in the insurance market. Additionally, I am concerned that government crowding-out of the private insurance market would be create a huge liability for American taxpayers.
My biggest concern is that, under H.R. 21, my constituents in Wisconsin would be cross-subsidizing the residents of Florida or North Carolina or California, who chose to build their homes in areas of higher risk to hurricane or earthquake loss. This already happens at the state level in disaster-prone states and is one of the greatest reasons for the shortage of affordable private insurance in these areas.
At the state level, where private insurance markets are regulated, several states and usually those most often cited for availability and affordability problems have mandated that all homeowners buy disaster insurance of some type and that all insurers provide it at a given premium. The homeowners, who choose to build or buy a home on a fault-line or in the path of violent ocean tides, should pay a much higher premium than homeowners who choose to build in safer areas if realistically allowed to build in the riskier area in the first place. But with government intervention such as price controls or mandated coverage, those with the highest risk no longer pay premiums that correlate with their loss should it occur, while the less-risky homeowners now pay more to help subsidize those who live in high risk areas in order to keep the insurance companies solvent.
As more state mandates are placed on private insurance companies, the insurance companies quit selling in these states, leaving only a few large companies to supply insurance to everybody. With such great exposure, it is no wonder that certain companies are clamoring for a federal backstop. Federal reinsurance would not fix these underlying problems. Before Congress considers a new federal program such as that laid out by H.R. 21, I believe we should look into why we need such a program in the first place.
Over-regulating the insurance market keeps new insurers out of the market that could increase the availability of coverage and take on a share of the catastrophic exposure. By reforming state insurance regulations to encourage greater competition between private insurers, homeowners would have more options in premiums and services and companies would have others selling in the state market sharing their liability.
Further, we should not underestimate the capacity of the private reinsurance market. Recent studies have shown that there is an overabundance of reinsurance capacity in the United States. According to such studies, there is approximately $20 billion of catastrophic insurance capacity available per region, per event, not including the reserves of the primary insurance companies.
For every well-intended manipulation of the private insurance market, there are many unintended consequences. I would like to see exploration of private industry solutions exhausted. I believe that solutions exist within the private reinsurance market, and we should encourage their development over government intervention. However, if a solution cannot be found, I would like to see state or regional options investigated before Congress creates a broad federal program. At the very least, I would like to see H.R. 21 incorporate higher triggers to activate a federal response.
I look forward to working with Chairman Leach and Mr. Lazio on this issue.