[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                    THE FACTORS INFLUENCING THE HIGH
                    COST OF INSURANCE FOR CONSUMERS

=======================================================================

                                HEARING

                               BEFORE THE

                        SUBCOMMITTEE ON HOUSING
                             AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                            NOVEMBER 2, 2023
                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-53
                           
                           
                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]    
                  
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE

55-022 PDF                WASHINGTON : 2024                     


                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                 Subcommittee on Housing and Insurance

                    WARREN DAVIDSON, Ohio, Chairman

BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri, Ranking 
BLAINE LUETKEMEYER, Missouri             Member
RALPH NORMAN, South Carolina         NYDIA M. VELAZQUEZ, New York
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
MIKE FLOOD, Nebraska                 AYANNA PRESSLEY, Massachusetts
MIKE LAWLER, New York                SYLVIA GARCIA, Texas
MONICA DE LA CRUZ, Texas, Vice       NIKEMA WILLIAMS, Georgia
    Chairwoman                       STEVEN HORSFORD, Nevada
ERIN HOUCHIN, Indiana                BRITTANY PETTERSEN, Colorado

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 2, 2023.............................................     1
Appendix:
    November 2, 2023.............................................    41

                               WITNESSES
                       Thursday, November 2, 2023

Arnold, Grace, Commissioner, Minnesota Department of Commerce, on 
  behalf of the National Association of Insurance Commissioners 
  (NAIC).........................................................     4
Gordon, Robert, Senior Vice President, American Property Casualty 
  Insurance Association (APCIA)..................................     6
Lewis, Sharon, Executive Director, Connecticut Coalition for 
  Economic and Environmental Justice.............................    12
Nutter, Franklin W., President, Reinsurance Association of 
  America (RAA)..................................................     7
Petrelli, Joseph, President and Co-Founder, Demotech, Inc........     9
Webel, Baird, Specialist in Financial Economics, Congressional 
  Research Service (CRS).........................................    10

                                APPENDIX

Prepared statements:
    Arnold, Grace................................................    42
    Gordon, Robert...............................................    50
    Lewis, Sharon................................................    78
    Nutter, Franklin W...........................................    83
    Petrelli, Joseph.............................................   104
    Webel, Baird.................................................   106

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written statement of the Affordable Housing Tax Credit 
      Coalition..................................................   114
    Written statement of the Consumer Federation of America......   117
    Written statement of Carolyn Kousky, Associate Vice 
      President, Economics and Policy, Environmental Defense Fund   137
    Written statement of Lincoln Avenue Communities..............   149
    Written statement of the National Multifamily Housing Council 
      and the National Apartment Association.....................   152
    June 2023 report of the National Multifamily Housing Council, 
      ``State of Multifamily Risk''..............................   167
    ndp analytics report, ``Increased Insurance Costs for 
      Affordable Housing Providers,'' dated October 2023.........   217
    Written statement of Ishita Sen, Assistant Professor of 
      Finance, Harvard Business School...........................   242
Arnold, Grace:
    Written responses to questions for the record from 
      Representative Donalds.....................................   256
Gordon, Robert:
    Written responses to questions for the record from 
      Representative Gonzalez....................................   260
Webel, Baird:
    Written responses to questions for the record from 
      Representative Gonzalez....................................   264

 
                    THE FACTORS INFLUENCING THE HIGH
                    COST OF INSURANCE FOR CONSUMERS

                              ----------                              


                       Thursday, November 2, 2023

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Warren Davidson 
[chairman of the subcommittee] presiding.
    Members present: Representatives Davidson, Posey, 
Luetkemeyer, Fitzgerald, Flood, Lawler, De La Cruz, Houchin; 
Cleaver, Velazquez, Tlaib, Garcia, Williams of Georgia, 
Horsford, and Pettersen.
    Ex officio present: Representative Waters.
    Also present: Representatives Kim and Gonzalez.
    Chairman Davidson. The Subcommittee on Housing and 
Insurance will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    This long-awaited, much-anticipated hearing is entitled, 
``The Factors Influencing the High Cost of Insurance for 
Consumers.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Today, the subcommittee will hold a hearing to discuss the 
factors influencing the high cost of insurance for consumers 
across the country. It is, unfortunately, a topic that both 
families and businesses are grappling with on top of the 
already-steep cost of inflation and interest rate increases.
    We welcome today the testimony of our distinguished panel 
of witnesses, each of whom can address the cost and 
availability of insurance from several different perspectives.
    Specifically, I would like to welcome Mr. Joseph Petrelli, 
who runs Demotech, Incorporated, which is an independent 
insurance rating agency out of Dublin, Ohio. Given his decades 
of experience in the insurance industry, Joe has a unique 
perspective on the challenges facing the insurance markets at 
this time.
    I look forward to hearing the insights of Joe and the rest 
of our witnesses. And this hearing comes at a critical time, as 
consumers are facing record-high property and casualty 
insurance bills. Homeowners' insurance costs are surging in 
many areas, with Americans paying between $1,500 and $2,500 a 
year on average, but many communities outside of this range 
have seen premiums increase by multiples of what they had paid 
in previous years. In addition, this year, the price of 
commercial property premiums experienced the largest single-
year increase in over 20 years. Such costs are untenable for 
many, forcing homeowners to move to areas with less-expensive 
coverage, pushing up prices for rent and commercial properties 
at a time when housing costs are at record highs.
    Meanwhile, losses for insurers are going up. Companies are 
paying out 104 percent in claims for every premium dollar they 
have taken in thus far in 2023, which would be 4 percent more 
than what they are bringing in. Add to that the growing market 
risk stemming from widespread lawsuit abuse from trial 
attorneys who are now spending hundreds of thousands of dollars 
each month on paid keyword search results. Those results are 
designed to target recent disaster victims and other insurance 
claimants and trick them into filing frivolous lawsuits.
    More and more, it seems that the insurance industry is at a 
tipping point where the risks of providing insurance are making 
the cost of insurance unsustainable even in the best regulatory 
environments, and shaping our development, which is why it is 
so problematic when you have officials who ought to know better 
making bad and politically-motivated decisions that add costs 
and decrease availability for insurance.
    We have seen that often in the California market, for 
example, as discussed in committee hearings in the last year, 
where 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 risk.
    We have also seen problems with the Federal Insurance 
Office (FIO), a Federal nonregulatory entity that is supposed 
to monitor the industry to help actual regulators make better 
choices. Instead, we have seen the Biden Administration abuse 
the FIO and turn it into a politically-charged advocate for the 
Biden Administration's social agenda. The FIO is attempting to 
bypass State insurance commissioners and add massive new costs 
onto policyholders' bills through an unprecedented mandatory 
climate data call.
    In fact, this week, the FIO has made clear that they are 
moving forward with this misguided effort. Despite widespread 
blowback, as I said in a March letter to FIO, that is not just 
wrong; it also raises real questions about FIO's continued 
mission creep, leading to multiple bills being introduced to 
rein in this spiraling-out-of-control office, all of which 
brings us to the fundamental point here. Insurance is, has 
been, and should remain a State-regulated product, free from 
the involvement and clutches of meddling Federal bureaucrats. 
Support for the longstanding principles of the McCarran-
Ferguson Act is something that every member of this committee 
should stand by and affirm as the best way to protect 
policyholders and create healthy functioning markets that 
represent the differences in our diverse States.
    I hope everyone here will show support for that ideal 
today. I yield back the balance of my time.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Missouri, Mr. Cleaver, for 5 
minutes for an opening statement.
    Mr. Cleaver. Thank you, Mr. Chairman. If I could ask the 
subcommittee's indulgence for a minute, I wanted to mention 
that Mr. Frank Nutter, who was been in front of this committee 
many, many times--I have been on the committee for almost 19 
years, and over that 19-year period, he has been here like, 
every other Thursday--is going to retire just because he wants 
to be happy and selfish. He just wants to enjoy himself, and I 
just wanted to use this opportunity to say thank you for all 
the times you appeared before this committee. Thank you very 
much.
    [applause]
    Mr. Cleaver. Like most Americans, the people in my 
congressional district want to go to work, build meaningful 
wealth, and provide for the safety and security of their 
families. Access to affordable insurance is central to that. 
Americans look to insurance to protect their homes, 
automobiles, businesses, and communities, and for the security 
of knowing that, if worst comes to worst, the losses will not 
be crippling. But more and more Americans are opening their 
mailboxes and checking their emails only to learn that this 
protection is being restricted, becoming significantly more 
costly, or that major insurance companies are leaving 
altogether.
    Since January 2022, an astounding 31 States have witnessed 
double-digit rate increases. For lower-income homeowners and 
those on fixed incomes, rising rates can just about wipe them 
out of their homes. It increases the rental costs or forces 
people to drop insurance altogether, which might otherwise be 
their sole source of funds to rebuild. And it is often the case 
that people in low- and moderate-income communities may both 
need insurance the most and have the least ability to pay the 
increasing cost of higher insurance premiums.
    Affordable housing providers and residents are among the 
hardest hit by insurance premium hikes, and those who cannot 
afford insurance sometimes go without. When Hurricane Harvey 
dumped approximately 4 feet of rain on Houston, Texas, in 2017, 
8 out of 10 homeowners whose properties flooded did not have 
flood insurance. And in 2022, insurance covered only 60 percent 
of $165 billion in total economic loss for climate-related 
disasters affecting millions of Americans.
    It is my hope that during this hearing, we can get an 
answer to how the people in this room are going to work 
together to bring down the cost and increase the availability, 
not the political legislation put forth for this hearing as to 
eliminate the Federal Government's insurance experts, but 
serious bipartisan solutions to the crisis.
    We know that there are several factors contributing to the 
increasing cost and decreasing availability of insurance for 
consumers in certain areas. This includes inflation-related 
costs, rising asset prices in hazardous areas, increased cost 
of risk transfer, reinsurance litigation costs, and others. The 
most significant cost increase for property insurance has been 
attributed to the rising threat of climate change. As of 
October, the U.S. set a record of 24 billion-dollar disaster 
events in 2023, totaling $57.6 billion in damages.
    Prior to 2025, insurance losses due to climate disaster 
never exceeded $50 billion. In response to climate-related 
risks, insurers can be expected to adapt their underwriting in 
various ways, some of which have adverse implications for the 
availability and affordability of insurance coverage in certain 
insurance markets. Concerning to me, there is not yet a 
systemic nationwide picture of what the climate crisis is doing 
to the availability and affordability of insurance.
    Let me be clear: Under McCarran-Ferguson, insurance is 
correctly regulated at the State level, but it is a national 
responsibility to understand, monitor, and supervise the 
response to the insurance crisis given the great national 
implications. You don't need to look much further than the 
National Flood Insurance Program (NFIP), which was created in 
1968 following widespread insurer withdrawals from offering 
coverage for flooding, to understand that insurers withdrawing 
from the markets or rising premiums leads to increased 
uninsured losses, and shifts risk to consumers, leading 
taxpayers or the government to pick the risks. Congress needs 
to advance the long-term reauthorization of the NFIP. Thank 
you, Mr. Chairman, for your indulgence.
    Chairman Davidson. Thank you. I thank the ranking member.
    Today, we welcome the testimony of: Grace Arnold, the 
Commissioner of the Minnesota Department of Commerce, here on 
behalf of the National Association of Insurance Commissioners; 
Robert Gordon, the senior vice president of policy for the 
American Property Casualty Insurance Association; Frank Nutter, 
the president of the Reinsurance Association of America; Joseph 
Petrelli, the president and co-founder of Demotech, Inc., in 
Dublin, Ohio; Baird Webel, a Specialist in Financial Economics 
at the Congressional Research Service; and Sharon Lewis, the 
executive director of the Connecticut Coalition for Economic 
and Environmental Justice.
    We thank each of you for taking the time to be here. You 
will each be recognized for 5 minutes for an oral presentation 
of your testimony, and without objection, your written 
statements will be made a part of the record.
    Commissioner Arnold, you are now recognized for 5 minutes 
to give your oral remarks.

 STATEMENT OF GRACE ARNOLD, COMMISSIONER, MINNESOTA DEPARTMENT 
OF COMMERCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 
                      COMMISSIONERS (NAIC)

    Ms. Arnold. Chairman Davidson, Ranking Member Cleaver, and 
members of the subcommittee, thank you very much for the 
opportunity to testify today. My name is Grace Arnold and I am 
the Commissioner of the Minnesota Department of Commerce, which 
serves as the State's insurance regulator. And as such, I am a 
member of the National Association of Insurance Commissioners 
(NAIC), where I am the co-vice chair of the Property and 
Casualty Insurance Committee, and I serve on the Climate and 
Resiliency Task Force. I appreciate the opportunity to testify 
today.
    The United States' insurance market is the single-largest 
and most-competitive market in the world. State insurance 
regulators supervise more than one-third of global premiums. 
And as of 2022, property and casualty insurance companies 
reported over $874 billion in direct written premiums. The U.S. 
property and casualty insurance industry's cash and invested 
assets surpassed $2.4 trillion at the end of 2022. State 
regulators share a mission to ensure a stable, competitive, and 
fair insurance marketplace where U.S. consumers are well-
informed and well-protected. States work hard to strike an 
appropriate balance between insurers' solvency and product 
availability and affordability. We oversee risk financing that 
allows individuals and businesses to thrive, while preserving 
the ability of the sector to pay claims and otherwise meet 
obligations that result from financing risk.
    As we look ahead, State regulators are addressing several 
evolving dynamics. First, we are monitoring the interplay 
between the impact of inflation on pricing and claims, the rise 
of interest rates, and the fall of investment returns, and the 
impact of climate risk. These are a few of a host of other 
macroeconomic and real-world factors at play in our markets.
    This is not the first time State regulators have seen such 
cyclical growth and contraction in the property insurance 
markets, and we have taken action to address the particular 
challenges we see nationally and locally. State regulators have 
the capacity to respond swiftly and nimbly to market conditions 
in each of our markets. Through the NAIC, we are able to share 
ideas and coordinate effective responses, though our solutions 
do not have to look the same State to State. For example, the 
NAIC's Climate Risk and Resiliency Task Force has facilitated 
the implementation of climate-related risk disclosures by 85 
percent of the insurance market. They have updated solvency 
formulas to reflect hurricane, earthquake, and wildfire risks. 
They have partnered with FEMA and the Insurance Institute for 
Business & Home Safety to create more resilient and sustainable 
communities, and established a catastrophe modeling center of 
excellence to provide modeling resources. That group is in the 
process of a property data call to help better understand 
coverages and gaps.
    At the State level, recently, Florida implemented changes 
to their claims litigation process, while California is in the 
process of allowing insurers to consider catastrophe modeling 
and reinsurance costs when requesting rate increases. In 
Minnesota, we borrowed the idea for a program to help 
homeowners improve the exterior of their homes from colleagues 
in Alabama and Louisiana, and adapted it to the weather perils 
we see in Minnesota. All of these initiatives are responding to 
challenges in each State's property insurance market.
    We direct your attention to two ways that Congress can help 
to improve the resilience of our housing stock and drive down 
the cost of insurance: first by reauthorizing the National 
Flood Insurance Program (NFIP) on a long-term basis; and 
second, by passing the bicameral, bipartisan Disaster 
Mitigation and Tax Parity Act of 2023, which would provide fair 
tax treatment to State residential mitigation grants.
    Another evolving dynamic that State regulators are 
addressing is the increased use of technology, Big Data, 
artificial intelligence (AI), and predictive analytics to 
reshape the insurance marketplace, and the way insurers 
approach risk and engage with consumers. These technological 
developments have the potential to improve how an insurer does 
business and can benefit policyholders. Our written testimony 
provides context for these evolving dynamics and some of the 
longstanding and new initiatives State regulators are working 
on to address these challenges through the open and transparent 
NAIC process. I appreciate the subcommittee's leadership and 
look forward to answering your questions.
    [The prepared statement of Commissioner Arnold can be found 
on page 42 of the appendix.]
    Chairman Davidson. Thank you. Mr. Gordon, you are now 
recognized for 5 minutes to give your oral remarks.

  STATEMENT OF ROBERT GORDON, SENIOR VICE PRESIDENT, AMERICAN 
        PROPERTY CASUALTY INSURANCE ASSOCIATION (APCIA)

    Mr. Gordon. Chairman Davidson, Ranking Member Cleaver, and 
members of the subcommittee, I am Robert Gordon, senior vice 
president of the American Property Casualty Insurance 
Association (APCIA), the primary trade association for the 
property casualty insurance industry, and thank you for the 
opportunity to testify today.
    Insurers' core business is protecting people and helping 
them recover from catastrophic losses to their homes, cars, and 
businesses, and I would like to be here today to tell you that 
the insurance industry is extremely strong, stable, and 
profitable, but I can't. Ratings agency, AM Best, last month 
downgraded the entire homeowners insurance industry from stable 
to negative, with a total number of downgrades of homeowners 
and car insurers more than doubling in just the first half of 
this year.
    APCIA reports regular financial operating results for the 
industry. Last year, insurance capital plummeted more than $73 
billion. Our surplus contracted dramatically. Insurers' net 
underwriting losses last year were the worst in over a decade, 
and for the first half of this year, for every dollar collected 
in premiums, insurers paid $1.43 in claims and expenses. For 
this year, overall, S&P predicts that auto insurers are going 
to have an 8.7 percent net underwriting loss, and homeowners 
insurers a 12.1 percent loss, which will be the worst in over a 
decade.
    Our challenge is really simple: supply and demand 
economics. Insured costs and exposures are rapidly escalating 
much faster than regulators are allowing rate increases. An 
industry that is losing money is just not going to be able to 
attract new investment capital, and as a consequence, there is 
not enough of a supply of insurance capital to cover consumers' 
increased coverage needs.
    The average global natural catastrophe insured losses have 
nearly doubled over the last decade, and the United States this 
year has experienced a record number of recent disasters, and 
those numbers are increasing. The number-one driver of property 
losses has been the accumulation of asset values in high-
climate-risk regions that is particularly from a rapid 
population growth in coastal areas and the wildland urban 
interface, and that is a trend that accelerated with the 
pandemic.
    Economic inflation is the other top last cost driver. 
Inflation has risen 22 percent over the last 5 years, but our 
insurance input costs have risen much faster, much higher, and 
much worse than inflation. Used cars and trucks, which are the 
basis for auto insurance total loss settlements, increased 
nearly 40 percent over the last 5 years. Building replacement 
values increased 44 percent, more than double the cumulative 
inflation rate and far more than the increase in homeowners' 
insurance. So, a home in Florida or California that someone 
might have bought 5 years ago for $400,000, now costs nearly 
$600,000 to replace.
    Climate change is another cost driver as is legal system 
abuse. They significantly reduce insurance affordability over 
time. Swiss Re estimates that U.S. liability claims costs rose 
16 percent, on average, for the last 5 years, and that is 
fueled in part by some of the secretive third-party litigation 
financing.
    Insurance is fundamentally a risk pooling and spreading 
passthrough mechanism, and in times of high inflation, 
regulators want to protect consumers from price increases. But 
if insurers are not allowed to pass costs through in a timely 
manner, markets are going to rapidly deteriorate, and that is 
what is going on right now in several States, causing 
deteriorating markets and crises. Our member insurers have 
invested billions of dollars developing insurance markets and 
relationships with the policyholders, their load, the pullback 
from those markets, but you can't keep selling your product at 
a loss and remain solvent.
    Now, there are solutions that APCIA and our members have 
been supporting--dozens of climate mitigation resiliency 
programs that can help reduce losses. It can help make 
insurance more affordable for consumers over time. The 
Insurance Institute for Business & Home Safety (IBHS) has 
developed extensive building code improvements, and very 
exciting new wildfire safety standards, and we have worked 
extensively with the Administration's Wildland Fire Mitigation 
and Management Commission, that has recommended a number of 
great wildfire management and safety recommendations. And we 
are supporting improved vehicle and highway safety standards, 
particularly in some of the high-risk neighborhoods, and we 
hope policymakers can address inflation and climate change and 
legal system abuse.
    But ultimately, the markets are only going to stabilize 
when the gap between rates and losses is addressed and when 
property casualty insurers are allowed to earn a rate of return 
sufficient to attract the additional investment capital needed 
to cover escalating consumer exposures. Thank you, and I look 
forward to your questions.
    [The prepared statement of Mr. Gordon can be found on page 
50 of the appendix.]
    Chairman Davidson. Thank you. Mr. Nutter, you are now 
recognized for 5 minutes to give your oral remarks.

    STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                  ASSOCIATION OF AMERICA (RAA)

    Mr. Nutter. Chairman Davidson, Ranking Member Cleaver, and 
members of the subcommittee, thank you for the opportunity to 
testify today and, frankly, for the many times over the years 
that this committee has honored me with that opportunity.
    At its core, insurance is the assessment of risk and a 
means to transfer individual property risk to a larger pool of 
insurers and capital providers. It has proven to be the most-
efficient means to provide financial recovery for property 
owners experiencing losses from natural catastrophes. Property 
insurance is at the intersection of extreme weather and 
decisions made by individuals and by the communities in which 
they live about the features of properties at risk and the 
resilience of communities that are, in the words of one 
analyst, ``creating disasters by design.'' This is reflected in 
the trends in insured property losses from natural catastrophes 
reflected in our statement. These trends are due primarily to 
increases in the number and value of properties at risk due to 
extreme weather; external economic factors, such as inflation, 
affecting construction costs; and increased risk vulnerability 
and hazard intensification. R Street Analytics assesses that of 
the 144 million properties in the United States, fully 1 in 4 
are exposed to high risk due to wildfire, wind, and flood. 
People are increasingly living in desirable but dangerous 
places.
    Both the business model of insurance and the State 
regulatory system that oversees it are principally 
retrospective in nature, utilizing primarily past loss data. 
However, there is tension between both retrospective models in 
a world of dramatically-increasing natural catastrophe risk and 
rising economic factors such as inflation. The past is truly 
not prologue in this context. Failing to incorporate future 
risk assessment into insurance rates and loss mitigation 
strategies dooms communities to solutions that will quickly 
become inadequate, subjects consumers to rate shocks as risk-
based rates are implemented, and undermines one of the 
principal roles of insurance, which is to communicate risk via 
rates.
    The rising cost of consumer insurance has been attributed 
in part to the cost of reinsurance. And insurers purchase 
reinsurance for a variety of reasons: to increase capital to 
support its portfolio of insurance in force; to diversify its 
risk profile across global and reinsurance markets; and to 
transfer the volatility of infrequent, but severe, loss events. 
Insurers are not required to purchase reinsurance but do so 
because it is a cost-efficient way to manage catastrophe risk.
    Reinsurance rates are not the principal driver of the 
changing risk landscape; they are a reflection of it. 
Reinsurance costs do not translate directly to consumer rates. 
Reinsurance contracts cover a portfolio of properties above an 
aggregate loss experience and are not passed through cost 
directly to individual properties. Reinsurance contract terms 
vary by insurer, and rates charged to consumers by those 
insurers incorporate many factors. Reinsurance costs, even 
where significant, may be a small factor in consumer rates 
relative to other factors. Even if an insurer had no 
reinsurance, it would still need to set its rates to reflect a 
true risk-based rate.
    Insurers, reinsurers, and the utilization of reinsurance is 
regulated for financial oversight purposes pursuant to State 
law. That is understandable, as each State has a unique profile 
related to its economy, its legal environment, its exposure to 
natural perils, and its philosophy of regulation. Well-meaning 
but restrictive insurance regulation is counterproductive to 
achieving solutions to property insurance market issues. 
Insurance regulation by each State 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 
risk.
    We have identified a number of items in our written 
testimony about what Congress should do, but let me highlight 
four. The first is to reform Federal programs to incentivize 
people to live in resilient homes and communities. The second 
is increased funding for pre-disaster mitigation grant programs 
like FEMA'S Building Resilient Infrastructure and Communities 
(BRIC) Program, and for funding for NOAA and NASA to improve 
weather and climate risk assessment.
    The third is to incentivize governments through Federal 
disaster assistance to adopt Statewide building codes and use 
forward-looking risk assessment in land use. And the fourth is 
to 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 of 
government at all levels for resilience projects like those 
benefiting from the Community Disaster Resilience Zones Act.
    We look forward to working with the committee to enhance 
community resilience, recovery, and disaster preparedness. 
Thank you.
    [The prepared statement of Mr. Nutter can be found on page 
83 of the appendix.]
    Chairman Davidson. Thank you. Mr. Petrelli, you are now 
recognized for 5 minutes to give your oral remarks.

    STATEMENT OF JOSEPH PETRELLI, PRESIDENT AND CO-FOUNDER, 
                         DEMOTECH, INC.

    Mr. Petrelli. Thank you, Chairman Davidson, Ranking Member 
Cleaver, and members of the subcommittee. I have been employed 
in the insurance industry since 1969, when I entered The 
College of Insurance, so I have seen over 50 years of 
availability and affordability crises.
    The current one that the subcommittee is addressing is 
unique in several ways. While all lines of insurance are 
subject to fluctuations in price due to claims frequency and 
severity, the material damage lines--Farmowners, Homeowners, 
Automobile physical damage--are directly impacted by the 
inflationary costs on core materials--lumber, tiles, bumpers 
and grills, etc.,--the inflationary costs on the salaries, 
benefits, and training of the skilled professionals who effect 
repairs, and the shortage of the skilled professionals who 
effect repairs. The cost of reinsurance to spread the costs is 
certainly included in the premium, but then we also, in 
catastrophe-prone areas, look at the efficacy and calibration 
of catastrophe models and the simulations upon which insurers 
base their purchase for reinsurance.
    But in addition to these traditional drivers of cost, in 
this particular availability and affordability crisis, research 
pioneered by Demotech, initiated in March of 2022, and 
undertaken by Todd Kozikowski, a seasoned technologist with 25 
years of artificial intelligence, machine learning and data 
analytics expertise, discovered that opportunists have been 
using the capabilities of the internet to initiate and generate 
contested claims against insurers. Demotech calls this, ``tech-
enabled claims instigation.'' It is the confluence of 
litigation financing, litigation marketing, litigation 
platforms, and search engine optimization by opportunists 
seeking to secure contested claims. This is a significant 
contributor to the availability and affordability crisis that 
this subcommittee now faces.
    A few examples will give you a sense of the scope of this 
issue. In the Southeast, a single law firm targeting a single 
regional carrier purchased over 100 keywords in an effort to 
outrank that carrier for its own claims department phone 
number. For successful clicks, the law firm paid over $300,000 
per month. In Southern California, 19 law firms in 49 locations 
target insurers. Those 19 law firms spend nearly a million 
dollars a month in online advertising.
    In 2022, when Hurricane Ian approached Florida, and in 
2023, when Hurricane Idalia approached Florida, opportunists 
set up websites to enable insureds to report claims to them, 
not to insurers, 3 to 5 days before the storms were making 
landfall; they were still out in the Gulf. And as the Maui 
wildfires burned, opportunists were setting up websites for 
policyholders to report claims, not to the insurers, but to the 
opportunists.
    In closing, to paraphrase Allen Kerr, former Commissioner 
of Insurance for the State of Arkansas from 2015 to 2020, when 
he was informed about our discovery of tech-enabled claims 
instigation, ``The threat that has been unearthed has never 
been identified at the State or national level until now.'' 
This is a new determinant in the availability and affordability 
that this subcommittee seeks to address.
    Thank you for your time. And thank you for your kind 
attention.
    [The prepared statement of Mr. Petrelli can be found on 
page 104 of the appendix.]
    Chairman Davidson. Thank you. Mr. Webel, you are now 
recognized for 5 minutes to give your oral remarks.

 STATEMENT OF BAIRD WEBEL, SPECIALIST IN FINANCIAL ECONOMICS, 
              CONGRESSIONAL RESEARCH SERVICE (CRS)

    Mr. Webel. Mr. Chairman, Ranking Member Cleaver, and 
members of the subcommittee, my name is Baird Webel. I am a 
Specialist in Financial Economics at the Congressional Research 
Service (CRS). And before I go into my testimony, I just want 
to make sure, especially for the people listening, that we know 
that CRS is a division of the Library of Congress. We are 
nonpartisan, and our job is basically to provide research and 
analysis to Members of Congress. We do not take positions on 
legislation or policy measures before Congress.
    To address the hearing topic today, basically, I see three 
somewhat interrelated factors that are driving the high prices 
of insurance, and many of these have already been addressed. 
You have two broad ones in the first. In the macroeconomic 
environment, higher inflation, higher interest rates feed 
through fairly directly into insurance prices, and even more so 
when you have the inflation hitting areas like building costs 
and automobile replacement costs that are driving higher than 
the top line inflation.
    The other broad factor is increasing disaster losses. This 
has been going on for several decades, that the level of 
catastrophe losses has been increasing across the country, and 
it hasn't been just the sort of headline, high-level hurricane 
losses that people tend to think about. The losses are also 
coming in mid-level storms, and wildfires, which in the 
insurance parlance are called, ``secondary perils.''
    The third, and more idiosyncratic factor, I would say, is 
in some particular States, especially California and Florida, 
you have seen factors in the insurance regulatory environment 
that have driven market issues and market disruptions, supply 
disruptions, which will feed through into prices in those 
States. And of course, especially given the size of California 
and Florida, if prices go up in those States, you will actually 
see an effect in national statistics because of the size of 
those markets.
    I think that when you look at these factors, though, of 
course, what people immediately ask is, what can we do about 
it, and for Congress, I think if there is any good news in the 
situation, it is that some of these factors are cyclical. 
Property casualty markets are prone to what is known as, ``hard 
markets,'' where supply contracts, prices go up, and then, the 
markets react.
    And so especially in terms of inflation, in terms of 
interest rates, we are not likely to see a situation where 
inflation basically goes from almost zero to 6 or 7 percent 
again, and that shock is one of the things that really drives 
the problem in an insurance market. Insurance carriers in the 
past, in the 1970s, adapted to inflation that was much higher 
than what we have today. But when you have a shock where you go 
from essentially zero to a higher amount, that drives 
disruption in the market.
    Equally, I think some of the States, both California and 
Florida, have at least started to address some of the problems 
in terms of changing some policies and changing some laws. And 
that works through the markets, then the markets in those 
States may stabilize to some degree, which leads to the third 
factor, which is driving higher catastrophe and disaster 
losses, and this, frankly, is a much harder thing to deal with.
    I think that at one level, what you can do is you need to 
do whatever one can to try to drive down those losses through 
mitigation, as was mentioned, through grant programs, through 
hardening properties, through trying to address the wildfire 
issues in terms of forest management, and really, a whole host 
of different things that the Federal Government might do.
    At the insurance side, in the past, the Federal Government 
has addressed sort of supply issues like this in the market in 
several different ways. In the National Flood Insurance Program 
(NFIP), you see direct Federal provision of insurance when the 
market failed. In the Terrorism Risk Insurance Act, you saw a 
Federal provision, basically reinsurance, to provide a backstop 
to the market as it started to fail. And also in the third, in 
the Liability Risk Retention Act in the 1980s, you saw what was 
essentially a deregulatory approach to try to increase private 
supply in the market.
    So, those are probably the only three times that you have 
seen fairly deep Federal involvement in these kinds of issues. 
It does not happen a lot, but it has happened, and I know that 
people are talking about using some models like that 
potentially in the future. With that, I will end my testimony, 
and I look forward to any questions.
    [The prepared statement of Mr. Webel can be found on page 
106 of the appendix.]
    Chairman Davidson. Thank you. Ms. Lewis, you are now 
recognized for 5 minutes to give your oral remarks.

  STATEMENT OF SHARON LEWIS, EXECUTIVE DIRECTOR, CONNECTICUT 
        COALITION FOR ECONOMIC AND ENVIRONMENTAL JUSTICE

    Ms. Lewis. Chairman Davidson, Ranking Member Cleaver, and 
members of the subcommittee, thank you for this opportunity to 
testify today. I have spent more than 2 decades in the 
insurance and reinsurance industry. Now, I am the executive 
director of the Connecticut Coalition for Economic and 
Environmental Justice, where I work with low-income communities 
and communities of color, who are facing health challenges due 
to disproportionate exposures to pollution where they live, 
work, recreate, and pray.
    Climate change is an undeniable reality, and consumers are 
paying more for less when it comes to insurance while worrying 
about their coverage, worrying about whether or not the 
coverage will be reduced or canceled entirely. With every 
climate-related weather event, I see the same people destroyed 
but not being able to recover from the devastating financial 
effects. I see people who have managed to accumulate a modicum 
of wealth but lose it in an instant as a result of a hurricane, 
flood, wildfire, heavy rain, et cetera, because they didn't 
have adequate coverage or had no coverage at all, yet they pay 
more for, ``insurance,'' than anyone else.
    For a community to become uninhabitable, it only needs to 
be uninsurable. This has been a historic problem for low-income 
communities and communities of color. Think about urban 
renewal. Due to a history of government-sanctioned racial 
policies such as redlining and restrictive covenants, which led 
to the abandonment and underinvestment in these communities, 
they now face disproportionate threats from climate disasters 
which can leave them traumatized by the devastating 
shortcomings of the insurance claims process.
    Insurance, by design, is supposed to protect one's assets, 
but in communities of color, it has too often eroded their 
assets through discriminatory underwriting and claims policies. 
Climate change is also revealing an under-insurance crisis as 
insurers transfer the risk to their policyholders through ever-
increasing deductibles, low property value assessments, or 
policies that only offer actual cash value rather than 
replacement costs.
    After disasters, insufficient coverage can often force a 
housing crisis as well as people tend to start from square one, 
creating a vicious cycle of displacement. No insurance means no 
mortgage, so it could also create a mortgage crisis. This is 
also true for renters who pay higher rental insurance premiums, 
if they can get it at all, or pay higher rental costs to cover 
the landlord's premiums.
    As climate change accelerates an insurance crisis, we need 
to pay close attention to the concerning underwriting 
practices, like the use of credit scores to determine premiums, 
which can force people of color to pay far more for insurance, 
regardless of whether they have an undesirable risk or have 
even filed claims. There is also a clear double standard in who 
pays the costs of climate change. While insurance have been 
dropping homeowners' policies, they continue to invest in and 
provide insurance for new fossil fuel projects, which will only 
increase the threats to people's homes and lives through 
climate change. The CEOs of these companies should have to 
publicly explain this contradiction to all of us.
    Ultimately, the best policy to protect consumers is to 
reduce the risk. Congress should work to reduce carbon 
emissions and invest in resiliency projects to prevent 
communities that contribute the least to climate change from 
paying the most.
    Finally, Congress should work with impacted communities and 
consumer advocates to consider a backstop that could serve as a 
reinsurance relief valve. In 2002, you provided relief for Wall 
Street for terrorism insurance after 9/11. This time, we need a 
safety net for those on Main Street who have been terrorized by 
higher premiums, higher deductibles, coverage restrictions, and 
market withdrawals. Thank you so much for this opportunity to 
speak today.
    [The prepared statement of Ms. Lewis can be found on page 
78 of the appendix.]
    Chairman Davidson. Thank you. I thank all of our witnesses 
for your oral remarks, and I look forward to the questions. We 
will now turn to Member questions, and I recognize myself for 5 
minutes of questions.
    Mr. Petrelli, the company you founded with your wife, 
Sharon, Demotech, Incorporated, independently reviews and rates 
450 insurers operating in every State. In addition to the 
traditional drivers of insurance costs, you have recently done 
a lot of work on a new and troubling expense category that you 
just highlighted in your remarks, tech-enabled claims 
instigation, which is exploding costs, particularly in places 
where we see more-frequent natural disasters. Could you tell us 
how they work together and how this phenomenon is contributing 
to higher premiums?
    Mr. Petrelli. Chairman Davidson, Ranking Member Cleaver, 
yes, thank you. What we have seen is the turmoil associated 
with a natural disaster, whether it is flood, hail, tornado, 
earthquake, hurricane, or whatever it may be, that turmoil 
serves as sort of ground cover and camouflage for the efforts. 
And it creates an opportunity for opportunists to utilize 
technology to secure contested claims when there might not have 
been a contested claim.
    We had a situation recently in Louisiana with McClenny 
Moseley & Associates, where there were almost 1,000 people who 
were represented by counsel, who did not know they were 
represented by counsel. And it winds up with what is called in 
the insurance industry, first notice of loss, becomes a lawsuit 
as opposed to an inquiry from your insured as to what the claim 
might be. And what we are seeing is we have always had 
litigation in the insurance business, but we now have another 
layer of litigation that is being imposed through tech-enabled 
claims instigation. If there is a follow-up question, I would 
be glad to take it.
    Chairman Davidson. No. I thank you for highlighting that, 
and I look forward to research, and I hope my colleagues will 
pay attention to that, and frankly, that our State-based 
regulators will pay attention to that, because it is just 
another predatory practice people are adapting to the times, 
and instead of just distributing risks, it is actually 
concentrating it. It kind of works at odds with the point of 
insurance.
    Shifting gears, earlier this year, the NAIC put forward a 
proposal to expand the reach of its own Securities Valuation 
Office (SVO). The proposal would give the SVO the power to 
overrule the rating agencies' determination when the SVO 
decides that it disagrees with the agency's ratings. This SVO 
expansion would essentially make the NAIC an unregulated, de 
facto nationally-recognized statistical rating organization, 
and create a conflict of interest between its role as a trade 
association representing State-based insurance regulators and 
an asset evaluator setting capital charge rules for insurance 
companies. That is why earlier this year, I and seven of my 
colleagues on the committee sent the NAIC a letter expressing 
serious concerns with their proposal. We are concerned that 
this SVO overreach would lead to less transparency and more 
ambiguity for insurance companies, and actual damage to market 
efficiencies, which would drive up costs for consumers.
    Mr. Gordon, do you see how this could be a conflict of 
interest, given the NAIC's dual role as a trade association for 
all State insurance regulators and an evaluator of investment 
decisions of its member insurance companies?
    Mr. Gordon. Yes, Mr. Chairman, we would agree with that. 
The Securities Valuation Office has continually tried to assert 
more control over securities ratings, including giving itself 
discretion, for a fee, to evaluate some of these products, but 
there is no provision for appropriate supervision by State 
regulators, as you know, very limited transparency, no right to 
appeal to an independent third party, and no opportunity for 
insurers and rating agencies to present their data. We have 
objected to the proposal, and I think it needs a lot more 
transparency and due process before it is further considered.
    Chairman Davidson. Thank you for your testimony. I just 
want to quickly turn to the Federal Insurance Office (FIO). 
Back in March, I sent a letter to the FIO regarding its 
politically-motivated effort to collect climate change data. It 
is expansive beyond its actual scope. Instead of working 
directly with State insurance regulators, it is going straight 
to the companies and basically trying to extract data. One of 
our colleagues, Mr. Fitzgerald, has a bill, H.R. 5535, the 
Insurance Data Protection Act, which would strip the FIO of 
subpoena power that it is actually abusing. Does anyone on this 
panel think getting rid of that power would compromise the 
original intended purpose of the FIO?
    Mr. Gordon. We would strongly support that, Mr. Chairman. 
It is an incredibly unusual, unique subpoena power for a 
nonregulatory agency.
    Chairman Davidson. Thank you. Anyone else?
    [No response.]
    Chairman Davidson. I think, as my time rapidly winds down, 
the ability to distribute risk is an underappreciated essential 
component of market function, and it frankly preserves capital 
if it is done properly, so I think it is great that you all 
could be here.
    My time has expired, and I now recognize the gentlewoman 
from New York, Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Commissioner 
Arnold, I am concerned about the rapidly-increasing insurance 
costs for multifamily housing properties serving low-income New 
Yorkers. Some affordable housing properties cannot get an 
insurance quote at all, with fewer carriers willing to bid on 
properties that serve rent-subsidized tenants, and some 
outright refusing. What can be done to ensure affordable 
housing properties have access to property insurance at 
affordable and reasonable rates?
    Ms. Arnold. Thank you for the question, Representative 
Velazquez. The market looks a little different in each State. 
For the most part, our insurance markets are competitive. There 
are a lot of carriers. We have seen that when folks shop 
around, that is a way to get better coverage or a reduced cost. 
I talked to a gentleman recently who saved $800 a year, which I 
was quite surprised at, so it is also something that we are 
looking at, and we are thinking about the ways that we can 
ensure that there is access to coverage, and we do that through 
our regulatory process.
    Ms. Velazquez. And this question is for the panel. In 
September, not only did Republican brinkmanship here in the 
House bring us to the verge of a government shutdown, but it 
also brought us precariously close to an expiration of the 
National Flood Insurance Program. This was on the same day we 
were experiencing a massive rainstorm and significant flooding 
in New York City. By a show of hands, how many of you think it 
will be a terrible idea to allow the NFIP to expire?
    [Hands raised.]
    Ms. Velazquez. Thank you. Similarly, by a show of hands, 
how many of you think we should stop lurching from deadline to 
deadline with the NFIP and instead pass a long-term reform and 
reauthorization bill?
    [Hands raised.]
    Ms. Velazquez. Thank you.
    Mr. Nutter and Mr. Gordon, both of your organizations have 
closely tracked the impact of Risk Rating 2.0. In each of your 
views, has Risk Rating 2.0 worked to lower rates nationwide? 
What about in low- and moderate-income (LMI) communities and 
communities of color in high-risk areas?
    Mr. Nutter?
    Mr. Nutter. Yes. Thank you for the question. We do believe 
that Risk Rating 2.0 will bring more equity into the rating for 
flood insurance policies. It needs to be understood that the 
former program, let's call it Risk Rating 1.0, and Risk Rating 
2.0 were both required by Congress to meet a certain rate 
adequacy level, so they are both on that track. What Risk 
Rating 2.0 does is it eliminates this cross-subsidy of people 
at low risk of flood, of people who are high risk of flood, and 
it does bring equity into that by looking at property specific. 
Our analysis would suggest that a significant portion of the 
properties that, in fact, are covered under the policy are 
going to receive lower rates, and many of them are going to 
receive basically the kind of rates that would have been 
happening under Risk Rating 1.0 anyway.
    Ms. Velazquez. Do you foresee any positive impact on 
underserved communities and communities of color?
    Mr. Nutter. Absolutely. I think what Risk Rating 2.0 is 
going to do, is to bring more equitable rates to communities of 
color and communities that are socially and economically 
vulnerable.
    Ms. Velazquez. Mr. Gordon?
    Mr. Gordon. I generally agree with my colleague, Mr. 
Nutter. I would note that when the Federal Government creates 
subsidies for the environment, it can mask not only what the 
true cost is, but it can also, in essence, mask the 
environmental signals that we are not recognizing those 
environmental risks, and that is what is going on.
    If Congress wants to address the very important concerns 
that you have raised, perhaps some sort of a very transparent 
means testing program to help those people, as well as the 
right kind of mitigation investments in those communities that 
can help them withstand the flood, is probably a much better 
alternative than trying to mask those very important 
environmental risk signals.
    Ms. Velazquez. Thank you. Mr. Chairman, I yield back.
    Chairman Davidson. The gentlelady yields back. The 
gentleman from Florida, Mr. Posey, is now recognized for 5 
minutes.
    Mr. Posey. Thank you, Mr. Chairman. Ms. Arnold, given the 
commitment to the State primacy for insurance regulation in the 
McCarran-Ferguson Act and the success of the NAIC in meeting 
the needs of interstate commerce through coordination among the 
States, what, if any, is the role of the Federal Government on 
insurance?
    Ms. Arnold. Thanks for the question. The State regulators, 
as you have noted, are the insurance regulators within the 
country. We have the authorities to oversee the financial 
solvency, to approve policies that are sold, and to do data 
collection. As you noted, we are the regulators of the 
industry. Certainly, we are in conversations with the Federal 
Insurance Office about the activities that they are working on, 
and I think we have, as everyone here does, a shared interest 
in consumer protection and the solvency and health of the 
industry. But at the end of the day, we are the State 
regulators. We are the regulators.
    Mr. Posey. Mr. Gordon, same question.
    Mr. Gordon. When the FIO and the State regulators are 
working together, particularly internationally, it can help 
support our international voice. But when we have the FIO 
starting to set arbitrary thresholds for domestic insurance 
affordability, it becomes more problematic when they second-
guess the regulators. We have particularly strong concerns 
about FIO's unnecessary data calls that we discussed earlier. 
It's incredibly unusual for a nonregulator to have that kind of 
expansive subpoena authority.
    We really hope that the FIO can work with the State 
insurance commissioners, who are the primary regulators, and 
both of them can coordinate with each other, and conduct any 
data calls through existing State reporting systems and the 
statistical aggregators. And hopefully, Congress can help 
encourage that communication, but we need the States as our 
primary regulators without being second-guessed.
    Mr. Posey. Mr. Gordon, one of the reasons given for the 
spiraling insurance costs in Florida has been the structure of 
litigation, for example, the assignment of benefits. I think 
that is what Mr. Petrelli was talking about, the leeches and 
parasites, bottom feeders or whatever didn't inject themselves 
into this process. What reforms and litigation processes would 
you recommend to help tame the increases in their premiums and 
make insurance more affordable?
    Mr. Gordon. Great question, Congressman, and Florida's 
leadership over the last year has adopted very historic, 
significant, legal system abuse reforms trying to rein in one 
way attorney fees, fan of damages, and assignment of benefits.
    One giant stone left unturned is third-party litigation 
financing. We have billions of dollars pouring into funding 
U.S. lawsuits from unidentified parties, oftentimes, even 
unidentified foreign sovereign wealth funds, and some of the 
civil defendants and courts don't even know when it is 
happening.
    A related challenge is third-party medical financing, where 
you have unknown third parties who are essentially in cahoots 
with the medical providers to maximize the medical services and 
costs, while trying to force insurance to pick up the bill. 
Fees charged are often far in excess of normal rates, and we 
have no transparency in this area. We have very little 
regulation to protect the consumers. We really need some more 
transparency in this third-party funding to stop the 
fraudulent, usurious activities. In any legislation, or 
oversight investigation, transparency can be very helpful.
    Mr. Posey. Thank you. Mr. Webel, the Government 
Accountability Office (GAO) has written many times over the 
years that the Federal Government should not purchase insurance 
but should self-insure. Some of this is apparently based on the 
fact that the Federal Government has little reason for the same 
risk adversity as private entities. Can you please explain and 
expand on GAO's persistent position on this matter?
    Mr. Webel. I would assume, essentially, when you look at it 
from an economic perspective, insurance is typically something 
you buy for a risk that you cannot cover. If you are purchasing 
insurance, I would typically recommend someone get as high a 
deductible as possible to minimize the cost to themselves for 
what they are buying. If you look at the Federal Government and 
the Federal Government's resources to cover what insurance 
might cover, at least as we have been able to borrow, the kind 
of rates that Treasury has borrowed at and the like, it 
doesn't, from a purely financial perspective and most things, 
make much sense to purchase insurance.
    Mr. Posey. Okay. My time has expired, Mr. Chairman. Thank 
you. I yield back.
    Chairman Davidson. I thank the gentleman. The Chair now 
recognizes the ranking member of the full Financial Services 
Committee, the gentlewoman from California, Ms. Waters, for 5 
minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for this 
hearing. I have been listening to our witnesses here today and, 
of course, thinking a lot about my State of California, where 
we have had insurance companies exit the market or change in 
some way because of the powers and the catastrophes we have 
had. With the fact that the States basically are the regulators 
of insurance, why are we here today?
    To whom can I ask this question? Let's see, we have a lot 
of experts out here. What are you recommending as responses to 
the fact that insurance companies believe that the premiums 
that people pay do not cover the costs of the catastrophe when 
it takes place? And while you are answering this question, I 
would like to know, what role does climate change play in all 
of this, and if you have any recommendations, or you have some 
special information, what would that be? Who would like to 
start off with this? Ms. Lewis, can you help us out?
    Ms. Lewis. I will try to help you out a little bit. You 
don't need to be a climate scientist or a Congressperson to see 
how climate change is impacting people, including in my 
community in Hartford, Connecticut, and around the United 
States. Of course, climate change is a main factor in 
influencing recent insurance price increases. Of course, 
climate change is a main factor in influencing the exiting of 
insurance companies from entire States. Of course, climate 
change plays a major factor in the increase in premiums. I have 
provided written testimony which will further explain why I 
feel so strongly about this, and I would like for you to refer 
to that, if you don't mind?
    Ms. Waters. Thank you very much. We have some other 
witnesses here that I would like to hear from based on 
recommendations, based on what we know is happening in the 
industry. Let's see, Mr. Robert Gordon, you are the senior vice 
president of the American Property Casualty Insurance 
Association, so you must know a lot. What do you know about 
what the Federal Government should be doing and could be doing 
at this time?
    Mr. Gordon. I may know a lot, but my kids remind me every 
day, nowhere near as much as is they do. But one thing we do 
know is that according to the NAIC's most-recent report on 
profitability, insurers in California had a 6-percent net 
underwriting loss over the last decade. In California, 
homeowners' insurance claims were more than 13 percent higher 
than the premiums, and the wildfires in 2017 and 2018 wiped out 
more than 30 years of underwriting profit, so there have been 
enormous losses. There have been bad rate delays for insurers 
to try and catch rates up to these losses where, often, it 
takes a year to get filings approved.
    I will say, though, that to their credit, the California 
Governor and the California Insurance Commissioner both 
committed to making significant reforms in those markets, 
including allowing forward-looking modeling to take climate 
change into account, to improve the rate filing process, and to 
address the intervener process to allow reinsurance costs to be 
factored in. So, there is a recognition that the California 
market is rapidly deteriorating, and it needs to be fixed.
    And I think that is best summed up by the California 
Insurance Commissioner, who said that insurance companies will 
not write insurance, especially in high-risk areas, unless they 
are able to ensure they have the capital and reserves to meet 
all of the claims submitted by consumers, cover their expenses, 
and earn a fair rate of return. We are committed to work----
    Ms. Waters. If I may interrupt you for a moment? I want to 
know if anywhere in that testimony, you are recommending high 
premiums to cover the costs of these losses?
    Mr. Gordon. Yes. Ultimately, insurers will need to make 
enough in premiums to be able to pay losses long term.
    Ms. Waters. That is exactly what I do not want to hear. 
Thank you. I yield back.
    Chairman Davidson. I thank the gentlelady. The gentleman 
from Missouri, Mr. Luetkemeyer, who is also the Chair of our 
Subcommittee on National Security and Illicit Finance, is now 
recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. It was a 
breathtaking comment a minute ago about how you can pay your 
expenses without any income. I don't know how that works. 
Insurance companies, like any other business, as far as I 
understand, as far as I know your business model, you take in 
premiums to be able to pay the losses that you incur, and if 
you are taking in less premium, you have less ability to pay 
that. Would that not be the case, Mr. Gordon?
    Mr. Gordon. That is absolutely right.
    Mr. Luetkemeyer. And the losses that you are talking about 
here: autos, 8 percent; and homeowners, 12 percent. I guess the 
question I have is with regards to frequency or numbers of 
occurrences. Is the frequency roughly the same as it has been 
in inflation as additional cost of the loss here, or is it 
increasing frequency, increasing numbers of losses as well as 
inflation and a cost to be able to make people whole?
    Mr. Gordon. It is inflation. It is people moving into the 
higher-risk areas. There are things, for example, much more 
frequent, severe convective storms, thunderstorms, although 
that is generally understood by the industry not to be impacted 
by climate change. There are things like increasing droughts 
and wildfires that are more impactful. But inflation and the 
demographic shifts are the top cost drivers at the moment.
    Mr. Luetkemeyer. People like to live in certain places, but 
it also means that they are living in places where you actually 
have more losses or they are more susceptible to sustaining a 
loss. Would that be correct?
    Mr. Gordon. That is correct.
    Mr. Luetkemeyer. Very good. Mr. Nutter, thank you for your 
service and for many years of being able to appear in front of 
this committee. I am sure you have some stories to tell, but we 
will leave that for another day. I wish you well on your 
retirement. Quick question for you, a few years ago, I chaired 
this subcommittee, and we were working on flood insurance. I 
have been an advocate for a long, long time of reinsurance to 
be able to minimize the taxpayers' exposure on flood insurance. 
They now have some, but in my view, not nearly enough. Would 
you like to explain to us the benefits of reinsurance for the 
National Flood Insurance Program, so you can minimize the 
taxpayers' risk?
    Mr. Nutter. Thank you, Representative Luetkemeyer. The 
reinsurance that the National Flood Insurance Program purchases 
has, in fact, been a valuable way to insulate the taxpayer, 
largely through the borrowing from Treasury, by calling upon 
private-sector resources, reinsurance, if they aren't willing 
to pay claims. The first year of the Program, which I think was 
2017, the Federal Government collected from the industry over a 
billion dollars in losses just like an insurance company would 
for losses that it has. So, I do think it is an effective 
program, and, frankly, it is a way for the insurance sector to 
understand better the flood risk with a view toward developing 
more of a private flood insurance market.
    Mr. Luetkemeyer. Do you think it would be a good idea for 
us as legislators to look at doing this in other areas of 
government, where we could pass off some of the risk to the 
private sector versus having taxpayers take on all this risk?
    Mr. Nutter. There are some existing programs that do just 
exactly that. Fannie Mae and Freddie Mac purchase risk transfer 
products from the private reinsurance sector. The EXIM Bank 
does the same thing. The one area that is poised for that 
opportunity is the banking sector, and under the Basel III 
Endgame, the banks are permitted, in fact, encouraged to buy 
reinsurance as part of their risk transfer. That is not yet 
true in the United States, but given that the Federal Reserve, 
the OCC, and the FDIC are considering new bank capital 
standards, we have advanced a proposal that they should do as 
some of these other Federal agencies have done, that permit 
banks to get diversification for their capital base.
    Mr. Luetkemeyer. Mr. Webel, would you like to join in?
    Mr. Webel. Yes. I would just add one other thing, that I 
think, in the context of the NFIP, the reinsurance by 
purchasing it now basically has the effect of drawing future 
losses to the present. The way the NFIP was designed before 
this essentially was, if you had the same policyholders, it 
would be fine. But when you have a policyholder who has a house 
and then they sell it, and then to the next person, the first 
policyholder who held it for 10 years and didn't have a claim 
essentially was getting what amounted to a subsidized rate 
because they weren't paying the same look-forward that you 
would in a normal insurance context. And buying the reinsurance 
now essentially brings some of those future losses to the 
current.
    Mr. Luetkemeyer. Okay. Mr. Petrelli, very quickly--my time 
is running out here--you talked about the tech-enabled folks 
who are actually trying to rip off the insurance companies. I 
hadn't heard that there was an orchestrated effort out there. 
There seems to be a cottage industry of ambulance chasers out 
there, but you have taken it to a whole other level with what 
you were describing. Would you like to elaborate on this a 
little bit? We have groups of attorneys out there who use 
algorithms to go out and put together claims against companies?
    Mr. Petrelli. Yes, sir. It is Moneyball. It is litigation 
platforms, litigation funding. The money that comes into the 
litigation, financing area, Bloomberg in 2022----
    Mr. Luetkemeyer. My time is up. Really very quickly, what 
is the additional cost on an average insurance policy? Does it 
go up 2 percent, or 10 percent, as a result of this activity?
    Mr. Petrelli. I would guess, based on the frequency, it 
might be as much as 30 percent or 40 percent.
    Mr. Luetkemeyer. Oh, my gosh. Thank you very much.
    Chairman Davidson. The gentleman's time has expired. The 
ranking member of the subcommittee, the gentleman from 
Missouri, Mr. Cleaver, is now recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. I am not sure, I 
think Mr. Gordon mentioned means testing, and I want to connect 
the means testing user with some other issues. Primarily, we 
have had congressional hearings on the issue of nonprofit 
organizations and insurance. And there are a number of 
nonprofits which are struggling with this, most especially 
those who work with animals, and children, and senior citizens, 
and the disabled, as well as churches, synagogues, mosques, and 
temples, and they are now really struggling to get the 
insurance they need to survive.
    And when you think about the fact that there more than 60 
nonprofits in my congressional district, including the United 
Way of Greater Kansas City, the Veterans Community Project, and 
Goodwill of Western Missouri and Eastern Kansas, and the 
members receive liability insurance from the nonprofit 
insurance alliance, but they are saying that they are still 
challenged. Mr. Gordon, I am interested in what I can tell them 
about their struggles and what we can do to repair it?
    Mr. Gordon. Actually, a member of ours, and certainly 
Congress has looked at these issues in the past when there were 
hard markets and liability to find solutions. Now, we are 
seeing some hard markets on the property side, although it 
doesn't appear to be a capacity issue at this point; it is 
really more of a market rate freedom issue. So if we can get 
the right rates, we can provide the additional coverages. I 
think that there may be some groups where those coverages 
become less affordable. And that is where policymakers need to 
decide whether it is a transparent means testing or whether it 
is providing very targeted mitigation resiliency. Certainly, it 
is better to try and reduce the loss cost to which those groups 
would be exposed.
    Mr. Cleaver. Ms. Arnold?
    Ms. Arnold. Thank you for the question. I think making sure 
that there is insurance, particularly for the entities that are 
providing really critical services to our constituents, is 
something that all insurance commissioners take very seriously. 
There have been a number of solutions that have been proposed. 
Generally speaking, we are the regulators, and we generally 
oppose any time there is a Federal solution to a place where 
there is a State solution in place. And this is one of those 
cases.
    I will say that we have a data call that is going out to 
try to understand this challenge a little bit better. We 
certainly want to make sure that there is access for some of 
these critical services. We will be looking at the data that 
comes in, and we will perhaps be following up, but maybe we 
will get a better understanding of the particular challenges 
and where we need to be thinking as State regulators to see 
whether there are any policies that we need to be looking at, 
or any changes to the way that we do business.
    Mr. Cleaver. To all of you, the more difficult the problems 
they are trying to address, the greater their insurance needs. 
And people who are doing the Lord's work--I am not just talking 
about religious institutions, but dealing with tough situations 
with human beings, and that reward is you have to pay. The 
insurance is going to skyrocket on you, and I don't think this 
is a partisan issue. I think it is a serious issue that we 
really need some direction on. Would anyone else like to 
address this?
    Mr. Petrelli. If I may, on the issue of the tech-enabled 
claims instigation, to give you a sense of the growth of their 
problem, according to a National Law Journal article from 
November of 2021, there were 800 professionals using a 
particular litigation platform. Fifteen months later, there was 
a press release on that same litigation platform. It had 45,000 
professionals using it in 15 months, from 800 to 45,000. I 
would respectfully submit that your constituencies are being 
targeted, sir.
    Mr. Cleaver. Thank you very much, sir. I wasn't actually 
doing it either, but thank you very much. I appreciate the 
additional time, Mr. Chairman.
    Chairman Davidson. I thank the gentleman. The gentleman 
from Wisconsin, Mr. Fitzgerald, is now recognized for 5 
minutes.
    Mr. Fitzgerald. Thank you, Mr. Chairman. For about 150 
years, State insurance regulators and laws have regulated 
insurance companies. I know in my own State of Wisconsin, where 
I was a member of the Wisconsin Center for 25 years, we always 
had a great relationship with our insurance commissioner. The 
market and the corporations that operate and function, whether 
it is property and casualty, or health or life, whatever it 
might be, they do a fantastic job. But what we have here is, 
once again, something that most State legislators really 
bristle at, and that is a Federal overreach.
    The FIO has grown increasingly aggressive, as has been 
discussed by the chairman, and as a consequence of that, we are 
offering legislation. The collecting of data, and most 
recently, issuing a revised proposed data collection for 
climate-related financial risk just puts us in a position of 
once again trying to push back. So, not only has the FIO been 
unclear on what they are going to do with this information and 
the data that they have collected, but any effort by Treasury 
or the FIO to sidestep State insurance regulators just 
blatantly undermines the congressional intent in this area. As 
the chairman said, that is why we have introduced the Insurance 
Data Protection Act to repeal the FIO's subpoena power.
    Mr. Gordon, I know you have already commented on this, but 
could you maybe take it a step further in the way you view the 
subpoena power and how it is being abused right now?
    Mr. Gordon. Yes. We are very appreciative of your 
leadership on this issue, Congressman, and we have not found 
one single other example of a nonregulator having such 
expansive subpoena authority. And there is no reason for them 
to get into this, because majority of the States have already 
been conducting climate data calls.
    As Ms. Arnold noted in her testimony, for 85 percent of the 
marketplace, analyzing weather is already the primary 
competency of the insurance industry, which has been doing it 
for hundreds of years, investing money and analyzing and 
managing weather risks. So, this is something that is not 
related to insurance. It is second-guessing the regulators. We 
are working with the regulators very extensively on this. They 
are spending a lot of time. There is an enormous amount of 
climate-related insurance data already available to the public 
and we are working with our State regulators to make sure there 
are no gaps in that.
    Mr. Fitzgerald. I would further comment that I think some 
of the data calls are so broad that you start to worry about 
whether or not they are adequately protecting this information 
once it has been gathered. What kind of assurance do you think 
that FIO could give to anybody saying, don't worry about the 
State, it has all been guarded in and safely capped?
    Mr. Gordon. We are always nervous. The more parties that 
have information, the more potential problems there are. We 
have encouraged the FIO in past efforts to gather information, 
to work with the NAIC to have the data done through existing 
portals, to be aggregated, to protect against the kind of 
dangers that you are talking about. So, there are ways to do 
it, again, most importantly, involving cooperation with the 
State regulators.
    Mr. Fitzgerald. Thank you. Mr. Chairman, I would just say, 
this is once again a classic Federal overreach for data that is 
absolutely not needed. I yield back.
    Chairman Davidson. I thank the gentleman, and I appreciate 
his work on this bill in particular. The gentlewoman from 
Texas, Ms. Garcia, is now recognized for 5 minutes.
    Ms. Garcia. Thank you, Mr. Chairman, and thank you to all 
the witnesses who are with us here today. This is, again, a 
very important topic, especially to someone like me who is from 
Houston. I know that the ranking member has already mentioned 
some of the disasters and flooding that we have suffered. In 
fact, in 2019, Hurricane Harvey left much of my district 
underwater and created major, major damages throughout the 
Houston area. Now, years later, many households in Houston have 
dropped their flood insurance for the reasons that the ranking 
member mentioned, largely due to lack of affordability. Harris 
County, which is home to Houston, is projected to see a 75-
percent increase in the average flood insurance premium.
    Ms. Lewis, I want to start with you. Given the increasing 
intensity of weather events resulting from climate change, can 
you speak to the importance of not only reauthorizing the 
National Flood Insurance Program, which you all raised your 
hand and said you were in favor of, but what more could we do 
than just reauthorizing it to make it more affordable? You 
mentioned the safety net that we have to worry about. Someone 
mentioned the means test. What is it that we need to do to make 
sure that when we reauthorize it, it is also actually 
affordable, so that we can make sure it is accessible to 
everyone who needs it?
    Ms. Lewis. Thank you so much for that question. As you can 
probably glean from my testimony, I am very concerned about 
discriminatory practices by the insurance companies. And to me, 
making something affordable or more affordable is making 
something fair, making sure that the underwriting practices do 
not penalize people because of what their color is or where 
they live. It is very important to understand that the 
underwriting process, since the very beginning of insurance, 
has always been discriminatory. It has always been these people 
who live in this certain part of town are going to pay more. 
So, it is really critical that everything be fair across-the-
board, and that you and I should pay the same, if we live in 
the same area, for flood insurance.
    Ms. Garcia. Is there anything that we can do in terms of 
ensuring that people who sell the insurance can do it on 
payment plans or any kind of working with the individual based 
on their income and then based on the value of their home 
rather than just, this is what it costs, this is what you have 
to pay?
    Ms. Lewis. I agree, because one of my concerns is that 
there is no transparency when it comes to the rating structure 
of insurance. I don't know if anybody here can tell me how 
their insurance premium was promulgated? Can you tell me how 
they came up with $600 per month or $6,000 per year? I can't 
think of any other industry where they give you a bill, but you 
don't know how that bill was determined.
    Ms. Garcia. We don't even know if there are any hidden fees 
there.
    Ms. Lewis. Absolutely, because underwriting has always been 
subjective, and underwriters will determine whether or not you 
get debit or credit based upon what they perceive as a risk. 
And it is something that we should all consider nationally, to 
make insurance fair, and get rid of the subjectiveness. I used 
to sit next to underwriters, and we would have the same risk, 
but different prices. Why is that so?
    Ms. Garcia. Thank you. Ms. Arnold, I recognize that the 
National Flood Insurance Program we are talking about is a 
Federal program, but I have concerns similar to that of Ms. 
Waters from California. And Texas has an insurance board. It 
regulates a lot of what the insurance companies do in our 
State, much like I am sure in your State. What is the role of 
the State in making sure that insurance is affordable?
    Ms. Arnold. Thanks for the question. Our primary role as 
State regulators, our first consumer protection is to make sure 
that companies can pay claims when you make a claim, and that 
involves making sure that there is sufficient capital, and that 
rates are adequate and not excessive. We also look at policies 
to make sure that they comply with State law.
    Ms. Garcia. No, but my question was specifically to make it 
affordable. I know all of you have a lot of regulations.
    Ms. Arnold. Right, yes. And we are also looking to make 
sure that the markets are competitive, which helps with 
affordability because carriers are competing for your business, 
so that is sort of the base of what we do for affordability. 
The other things that we have been working on, particularly 
just some of the concerns that you have raised, are pre-
disaster mitigation. That is making sure that your home or, in 
some cases, your community, is more resilient to the particular 
perils that are in that community.
    Chairman Davidson. The gentlelady's time has expired.
    Ms. Garcia. Mr. Chairman, I also would like to, at the 
appropriate time--there is a report of some sort, but there is 
no explanation of where it came from. Did everybody get this?
    Chairman Davidson. We will get an answer for you on that.
    Ms. Garcia. It is basically a point of inquiry, if someone 
would explain what this is.
    Chairman Davidson. We will get you an answer on that. The 
gentleman from Nebraska, Mr. Flood, is now recognized for 5 
minutes.
    Mr. Flood. Thank you, Mr. Chairman. I would like to start 
by highlighting some of the work done by insurance regulators 
in the great State of Nebraska. Nebraska is one of the nation's 
top States for insurance, with domiciles like Berkshire 
Hathaway, Pacific Life, and Mutual of Omaha. They are a leader 
in this space, and a big part of that reputation is the 
experience of the Nebraska Department of Insurance. I know 
firsthand, from my time in the legislature, that we work hard 
to make policy that keeps premiums affordable in Nebraska. Some 
other States have seen higher premiums, at least in part 
because of the restrictions they have put on pricing.
    Mr. Gordon, can you speak to the challenges that can be 
associated with States that use preapproval filing systems for 
insurance? How does that affect things for property casualty 
insurers in that State?
    Mr. Gordon. Sometimes, it varies by State. You can have 
good States or bad States in either case, but when you have the 
preapprovals, it can often create great delays. For example, in 
California, the State went for over 30 months without approving 
a single private passenger auto rate increase, over 30 months 
in a time of record inflation. You can imagine the kind of 
devastating losses that causes in the marketplace. You also 
have, particularly in California, a very antiquated, broken, 
35-year-old system that the Governor and the Commissioner are 
now trying to address.
    Every State allows forward-looking catastrophe modeling and 
rate filings except California. Every State allows reinsurance 
costs to be included in rate filings except California. Every 
State allows consumers the choice to use telematics based on 
actual driving behavior, except California. When you have these 
factors that essentially constrain innovation, and create long 
delays, you are going to create a lot more market dysfunction. 
That is actually why the Florida market originally deteriorated 
so badly. It used to be filled with national carriers. After 
Hurricane Andrew, there was a horrible rate suppression, and 
the number of national carriers in the State plummeted 
dramatically. We have seen some of that in Louisiana, and very 
much now in California.
    Mr. Flood. Can you speak, Mr. Gordon, to the challenges 
presented for insurers that have their hands tied regarding 
what metrics they can use for underwriting and setting rates? 
Specifically, I would like you to touch on restrictions related 
to credit rating and location. We are starting to see State 
legislatures wade into this credit rating business, and I would 
like you to just comment on that.
    Mr. Gordon. Yes. We actually have a couple of studies that 
we published, one that shows there used to be an enormous 
number of drivers in the State residual markets who weren't 
able to get regular insurance. But with the advent of credit 
scores, suddenly there was an easy, very affordable tool to get 
that insurance and those residual market populations plummeted 
dramatically; people got insurance.
    We also have studies published recently that show a direct 
connection between credit scores and actual hard braking, hard 
acceleration driving behavior. And we have done recent studies, 
especially some of our partners at LexisNexis and elsewhere, 
looking at credit scores, showing that they are, in fact, not 
discriminatory, they are not a proxy for race, and they are 
highly predictive.
    Mr. Flood. I am going to switch gears for just a moment 
here. In October, really just a few days ago, we had Insurtech 
on the Silicon Prairie, a summit in my home State. The summit 
had a great turnout with over 400 attendees from 44 States, and 
3 foreign countries.
    Mr. Nutter, could you speak, and maybe others on the panel 
if so inclined, to the importance of insurance technology and 
innovation in terms of putting downward pressure on premiums 
going forward?
    Mr. Nutter. There is no question that the incorporation and 
assimilation by the insurance industry of more technology will 
advance the efficiency, if you will, of rate setting, for both 
insurance regulators and the industry. It is the broad trend, 
particularly with artificial intelligence, that will make the 
underwriting more precise, and then, the rating more equitable.
    Mr. Flood. Would any of the other panelists like to comment 
on that?
    [No response.]
    Mr. Flood. Seeing none, I guess I have one final question 
here. In August of this year, the NAIC released a draft 
bulletin on artificial intelligence and predictive models. Ms. 
Arnold, could you just comment on your initial reaction to that 
bulletin?
    Ms. Arnold. Thanks for the question. The NAIC has done a 
number of things to look at how AI is getting used within the 
insurance industry. We have an AI principles document that came 
out a couple of years ago that sort of laid out the frameworks. 
We have also created, which is a letter committee--if you are 
around the NAIC, we name things by letters--our Big Data, 
Artificial Intelligence, and Technology Committee. That 
Committee's entire umbrella is looking at the various issues 
that arise when there are huge kinds of technologies.
    Mr. Flood. Thank you.
    Ms. Arnold. So, we are looking at it, and----
    Mr. Flood. Unfortunately, I am out of time, so I will yield 
back.
    Ms. Arnold. We appreciate it.
    Mr. Flood. I appreciate you, and I yield back.
    Chairman Davidson. The gentleman's time has expired. In 
answer to the gentlewoman from Texas, Ms. Garcia's, inquiry, 
the slide that was referenced was part of the written testimony 
submitted by Mr. Nutter, and it is referenced in the top left 
corner with the appropriate agency, the reinsurance group that 
he is part of. So, that is the slide. It is customized for each 
Member's district.
    The gentlewoman from Georgia, Ms. Williams, is now 
recognized for 5 minutes.
    Ms. Williams of Georgia. Thank you, Chairman Davidson, and 
Ranking Member Cleaver, and thank you to our witnesses for 
joining us today.
    Yes, we are once again rapidly approaching a potential 
government shutdown, and it seems like every month in this 
Republican-controlled House, we are faced with yet another 
preventable crisis after another, putting our national security 
and our economy at risk. Keeping with the theme of my 
Republican colleagues avoiding problems and, too, they are 
actively harming our constituents, let's talk about climate 
change. Let's talk about how it is contributing to the rising 
cost of insurance today. Republicans can't even consistently 
agree that humans are impacting our climate, let alone say the 
words, ``climate change,'' but you all live in the real world, 
and I believe in science, and I know that climate change is 
real and has a real impact on our constituents and on our 
economy.
    Ms. Lewis, this hearing is entitled, ``The Factors 
Influencing the High Cost of Insurance for Consumers.'' And as 
you stated, of course, climate change is a major factor 
influencing recent insurance price increases that are burdening 
consumers, but unfortunately, the Republican memo for this 
hearing doesn't even use the phrase, ``climate change,'' 
anywhere. Ms. Lewis, do you think it is constructive to have a 
conversation about increasing insurance costs without even 
acknowledging climate change?
    Ms. Lewis. Absolutely not. You must acknowledge the reality 
of climate change.
    Ms. Williams of Georgia. These are policy decisions, and 
while my Republican colleagues can act like climate change is 
not real, people in marginalized communities, myself included, 
don't have that luxury. This past July, I shared with you all 
that State Farm decided not to renew my homeowners' insurance 
policy because I filed a claim after a hailstorm that damaged 
the roofs throughout my entire neighborhood in southwest 
Atlanta. That was just in March of this year. And even though I 
can't control the weather and you can't either, I am now 
considered a high risk and have a much more difficult time 
finding insurance that I can afford, and this is impacting all 
of my neighbors. Low-income Americans are more likely to suffer 
from the consequences of flooding, tropical storms, and other 
extreme weather due to inadequate infrastructure in our 
neighborhoods and lack of proper insurance.
    This summer when this committee decided to launch a full-
scale attack against ESG, I submitted questions for the record 
to several of our witnesses. Jerry Theodorou, from the R 
Institute, was kind enough to submit formal responses and let 
me know that a long-term reauthorization of the National Flood 
Insurance Program and some key reforms will contribute 
stability and affordability to the flood insurance market. The 
multiple short-term extensions of the Program have been a 
source of destabilizing uncertainty to the market. Now more 
than ever, with climate change causing more frequent and more 
damaging flooding, Congress and this committee should be 
working to reauthorize and strengthen the NFIP.
    Mr. Webel, can you speak to the consumer benefits of a 
long-term NFIP reauthorization?
    Mr. Webel. In general, the insurance markets work better 
when they are long-term products. People's houses are long-term 
products, so I don't think there is any question that markets 
work better.
    Ms. Williams of Georgia. Thank you. Can you also explain to 
us in detail what the impact of a government shutdown would be 
on marginalized communities that rely on the NFIP?
    Mr. Webel. The shutdown, basically, kind of does two things 
in the sense that what has happened is the authorization of the 
NFIP is technically legally separate from a shutdown, but the 
authorization has been riding on the appropriations bills. So, 
if an appropriations bill or some other bill that reauthorizes 
the NFIP is not passed by November 17th, what you have is the 
authority to issue new flood insurance would go away, and the 
borrowing limit would decrease from more than $30 billion to $1 
billion. What that largely means is that people who need to get 
new flood insurance contracts, who are buying new houses and 
the like, would not be able to get it from the NFIP. They would 
have to go to the private market.
    Ms. Williams of Georgia. Thank you, Mr. Webel. And as if a 
lapse in the NFIP brought on by a government shutdown wasn't 
enough, my Republican colleagues are also trying to eliminate 
the Federal Insurance Office, which, among other duties, is 
tasked with identifying gaps in insurance regulation that pose 
systemic risk to the market, and monitoring the availability of 
affordable insurance for marginalized communities. In fact, the 
Financial Services and General Government Appropriations bill 
that we are going to be considering on the House Floor just 
next week, zeros out funding for the FIO entirely. I have 
submitted an amendment to reinstate funding for the FIO 
because, personally, I believe we should be identifying the 
systemic risk to the insurance market posed by climate change 
and ensuring that marginalized communities have access to 
affordable insurance.
    Mr. Webel, can you explain some of the impacts of 
eliminating the FIO? I think I am out of time, but I would love 
to have answers to that in writing for the record.
    Chairman Davidson. The gentlewoman's time has, in fact, 
expired. The gentleman from New York, Mr. Lawler, is now 
recognized for 5 minutes.
    Mr. Lawler. Thank you, Mr. Chairman. I am glad my colleague 
got all of her talking points in. The only thing she forgot to 
mention was Trump guns, and abortion, and maybe some anti-
Israel bigotry for good measure.
    Historic storms outside of the 100- and 500-year timelines 
have rocked communities across the country. Earlier this year, 
my district experienced devastating floods in the Hudson 
Valley. Communities hit by natural disasters, like hurricanes, 
wildfires and floods, and climate change, are also confronted 
by the skyrocketing costs of repairs and rehabilitation for 
properties. And this is only compounded by the day-to-day 
inflation spurred by the reckless spending policies of the 
Biden Administration and the hangover of the COVID economy. Can 
you describe the challenges that disaster-prone communities 
face in rebuilding such-I'm sorry, excuse me, it is my time. 
Thank you so much.
    Chairman Davidson. We will have order. It is the gentleman 
from New York's time. The gentleman is recognized.
    Mr. Lawler. Thank you. Can you describe the challenges that 
disaster-prone communities face in rebuilding, such as the 
demand for materials and labor as part of the construction 
supply chain, and how do you factor these into premiums paid by 
consumers? This is to the panel.
    Mr. Gordon. Congressman, I will just note that while there 
is some variation among States because of higher taxes, in some 
States, cost of living, but the insurance cost inflation inputs 
of repairing cars, buildings, and people have escalated very 
significantly. For example, from the beginning of 2020 through 
the first half of this year, construction materials have 
increased 35.5 percent, construction trade services have 
increased 30 percent, and the overall building replacement 
costs have increased nearly 45 percent over the last 5 years, 
so there have been very, very significant increases in 
rebuilding costs.
    Mr. Lawler. So, inflation has a tremendous impact on 
premiums?
    Mr. Gordon. That is correct. It is a primary cost driver.
    Mr. Lawler. Following up on that, as you know, the National 
Flood Insurance Program faces authorization hurdles at least 
once every year. Mr. Gordon, your members serve as Write-Your-
Owns with the National Flood Insurance Program. How does this 
uncertainty impact your business, given the prep work needed to 
halt and restart a business?
    Mr. Gordon. All of the starts and stops are very 
problematic and trying to retroactively fix everything. Every 
time there is a short-term lapse, it always creates additional 
costs, and additional uncertainty, so we would support the 
long-term reauthorization of the Program.
    Mr. Lawler. Mr. Gordon, many cities in America are facing 
spikes in crime driven by a number of factors, including the 
COVID-19 pandemic and prolonged lockdowns, deep policing 
efforts and the lax prosecution of certain crimes, permissive 
drug use policies and an increase in drug abuse, and the empty 
streets created by employees not returning to their offices. 
According to the Council on Criminal Justice, there were 33.4 
percent more motor vehicle thefts during the first half of 
2023, compared to the same period last year. Property thefts 
also saw a marked increase last year after declining for 
decades.
    Mr. Gordon, do new policies that encourage more crime in 
our nation's cities make property insurance more or less 
expensive?
    Mr. Gordon. Motor vehicle theft and, in particular, 
catalytic converter theft, have been skyrocketing, and that is 
very much another cost driver for auto insurance. On the 
commercial side, increasing retail theft and crime is creating 
coverage friction. We had a lot of discussions with our members 
earlier this year about some of the commercial insurance 
trends. We don't see an availability problem at this time, but 
the coverages have gotten tighter and more expensive.
    And there is concern not only about the theft losses, and 
there is a little disagreement over the intensity of that, but 
the accompanying risk of violence can trigger much more 
expensive liability lawsuits when people get injured. This is a 
potential trouble spot we are concerned about and are 
monitoring, and if there is not adequate insurance, not only 
are some of the businesses going to be put at risk, but some of 
them will have a hard time obtaining financing, which is 
already a problem for commercial real estate.
    Mr. Lawler. Have you seen a lack of willingness to insure 
commercial properties in high-crime urban areas?
    Mr. Gordon. Again, we haven't seen availability concerns, 
but there is some tightening of the coverage, and it is getting 
more expensive.
    Mr. Lawler. And what is the impact of crime on investment 
and development in our cities if properties become uninsurable?
    Mr. Gordon. It is going to put a lot of businesses at risk, 
and, again, it is going to undermine the ability of those 
businesses to get financing, so it is a critical need.
    Chairman Davidson. The gentleman's time has expired. The 
gentlewoman from Michigan, Ms. Tlaib, is now recognized for 5 
minutes.
    Ms. Tlaib. Thank you, Mr. Chairman. Just to be clear, we 
are talking about the cost of insurance going up. Is that auto, 
flood, property? I just want to clear up what this is?
    Chairman Davidson. The focus of the hearing is on property 
and casualty insurance, but to be fair, one of the underlying 
factors to that is flood. It has been referenced multiple 
times.
    Ms. Tlaib. Okay. Thank you, Mr. Chairman. And thank you all 
so much for being here. One of the things I was hoping to talk 
to Mr. Webel about specifically is the fact that some of the 
factors that the insurance industry uses, to me, are sometimes 
factors I am not sure what they are taking. Usually, it is the 
cost of the property, right? The value of it, maybe some of the 
other circumstances, it could be theft and things like that. 
And some of the factors, for instance, what my residents tell 
me about home insurance is, they ask things that people are 
confused about, like the use of credit scores to calculate 
insurance. Is that a practice that is increasing within the 
insurance industry, that is raising the cost of insurance on 
people who might be working class?
    Mr. Webel. I don't know that credit score use is 
increasing. Mr. Gordon might know whether the companies are 
using them more or less, but that is a factor that is used. 
That is a factor that generally is overseen by the State 
regulators that need to approve the factors that are being 
used.
    Ms. Tlaib. No, I see it in the auto industry a lot where 
non-driving factors, like marital status and education level 
and people's credit scores, are weighed on top of it, and I 
will give you an example. The University of Michigan did a 
study showing specifically that somebody with a DUI, driving 
under the influence, was paying 3 times less in auto insurance 
rate, his insurance rate, versus somebody who had no DUI but 
had a lower credit score and was paying 3 times more, even 
though the other person has a DUI. I am looking at Mr. Gordon. 
Do you have something to say about that?
    Mr. Gordon. Yes. Congresswoman, we have some studies we did 
recently that we would be happy to provide you, which show 
there is actually a very direct correlation between credit 
score and driving behavior.
    Ms. Tlaib. So, somebody who is poor is not a great driver?
    Mr. Gordon. No. People who are poor do not necessarily have 
lower credit scores.
    Ms. Tlaib. They don't have access to credit. They pay more.
    Mr. Gordon. No. There are lots of poor people who have good 
credit scores.
    Ms. Tlaib. So, what is the correlation between somebody 
with a lower credit score? And listen, this impacts all of our 
districts, somebody with a lower credit score, how is that a 
factor in how much their car is valued, how far they drive, and 
in what type of car? I am being serious here. Why does a credit 
score have to be weighed towards the cost of insurance?
    Mr. Gordon. Those are very good questions, and, again, we 
are happy to give you some of our recent studies showing that 
now that we have telematics, we are actually monitoring direct 
individual driving behavior, and there is a very high 
correlation between people who have lower credit scores, and 
there are lots of people who are wealthy with bad credit 
scores, and poor people with good ones.
    Ms. Tlaib. Yes, but the person with the higher credit score 
is paying 3 times less.
    Mr. Gordon. There's a very strong correlation between lower 
credit scores and hard braking and hard acceleration, which are 
shown by telematics to cause more-frequent accidents.
    Ms. Tlaib. Mr. Gordon, you talked about scrap. Let me tell 
you, we looked at the scrap metal industry, which a lot of my 
colleagues actually benefit from. They are a special interest 
group, very strong in each State. If we got rid of cash 
transactions with catalytic converters in the scrap industry, 
because it is really hard for our law enforcement and others to 
track them down, why aren't we moving towards getting rid of 
direct cash transactions in the scrap metal industry?
    Mr. Gordon. I don't know the details on that, but I will 
tell you this is an area for optimism, that a lot of the States 
are making changes on catalytic converters.
    Ms. Tlaib. I was trying to get my State to do it.
    Mr. Gordon. Yes. It is making a big difference, and we 
encourage the States to do more. We are finally seeing some 
light at the end of the tunnel in slowing down that catalytic 
converter theft.
    Ms. Tlaib. Yes. Ms. Lewis, it has been something of a huge 
issue in the State of Michigan, where I saw in my district 
alone, in Western Wayne, in particular, Dearborn and some other 
areas, where there are high amounts of flooding, there is 
sewage just coming out of people's basements, and it is because 
we had record rainfall. And my local mayors, these folks are 
different political backgrounds, are saying we should start 
looking at some of those risks and looking at how we support 
communities, especially working-class communities, that 
literally cannot subsidize for the climate risk that again, the 
climate crisis that we are living in. Can you talk about the 
fact that climate risk----
    Ms. Lewis. Definitely, I was a personal victim of that in 
December of 2022. My basement was flooded with 5 feet of sewage 
and untreated stormwater due to rain, not a flood, but rain. My 
insurance company declined the coverage because I didn't have 
sewage backup coverage, which I didn't know I needed. I was 
technically homeless for 7 months.
    Ms. Tlaib. I am so sorry you went through that, but this 
has a real-life impact. And Mr. Chairman, I would love to have 
more conversations about the use of various factors, like 
marital status, education level, and credit score, in the 
calculation of insurance rates in our country.
    Chairman Davidson. The gentlewoman from Texas, Ms. De La 
Cruz, is now recognized for 5 minutes.
    Ms. De La Cruz. Thank you, Mr. Chairman, for holding 
today's hearing. Insurance and financial services is something 
near and dear to my heart, as I have spent over 20 years in 
this industry. I actually understand, because I have worked in 
that industry and owned an insurance agency, how marital status 
and credit reporting do affect and can be a factor in what 
people pay for their insurance costs. That being said, in the 
county of Hidalgo, where it is 90-percent Hispanic, we see 
varied rates, insurance prices based on risk, and let's just go 
to the mere definition of, ``insurance.''
    Mr. Gordon, what is the definition of, ``insurance?''
    Mr. Gordon. Insurance is, again, ultimately providing 
protection for individuals, protecting them from risk.
    Ms. De La Cruz. So if there is a higher risk, that means 
there is a higher premium, correct?
    Mr. Gordon. That is correct, and, in fact, every single 
State prohibits insurance from being, ``unfairly 
discriminatory,'' and insurers are closely examined on that. 
And what, ``unfairly discriminatory,'' has always meant is when 
you don't charge based on the risk, so insurers are required 
to, based on individual risk.
    Ms. De La Cruz. So, it is not based on your ethnicity? It 
is based on your risk?
    Mr. Gordon. Correct.
    Ms. De La Cruz. Okay. What we keep hearing over and over 
again that has been alluded to was that it is based on 
ethnicity. If you are of a minority, in my case, 90 percent 
Hispanic, then you just have higher premiums. Would that be a 
correct statement?
    Mr. Gordon. No, and the regulators would never allow that. 
We have actually published very extensive studies that we have 
presented to the regulators on this, examining years of data on 
auto insurance, showing that there is no unfair discrimination. 
In fact, it really boils down to place, not race. When you have 
urban areas with high traffic density, you have more accidents.
    There may be some historical racism that has led to 
minority groups disproportionately living in those urban areas, 
but when you control for the vehicle density in the urban 
areas, most of that disappears. And again, we are heavily 
regulated by the States on this issue and we have reams of data 
showing that those neighborhoods are not being charged more for 
their risk. It is not a racial issue. We are not allowed to use 
race as a rating factor.
    Ms. De La Cruz. Wow. What I am hearing is that ethnicity 
has nothing to do with the rates, that it is about place, not 
race?
    Mr. Gordon. Correct.
    Ms. De La Cruz. And what I would like to know is, because 
it is about place, not race, that means if you live in an area 
where there are high uninsured vehicles, then you are probably 
going to pay more for your car insurance than in a place that 
is different?
    Mr. Gordon. Correct.
    Ms. De La Cruz. In Hidalgo County, we are, again, 90-
percent Hispanic, and we have a large population of automobile 
owners who come from Mexico and do not have insurance. Thus, it 
is not because we are Hispanic that we pay more. It is because 
there are a high number of vehicles on the roads that do not 
have insurance. Would that be a fair assessment?
    Mr. Gordon. Yes, that is fair. It is accurate. And also, I 
would note that Texas regulators are also very, very robust 
regulators, and keeping an eye on that.
    Ms. De La Cruz. State-level regulators, correct? And would 
you say that the State regulators take pride in their job and 
do a thorough job?
    Ms. Arnold. Yes.
    Ms. De La Cruz. So, they take pride in making sure that the 
State laws are being followed?
    Ms. Arnold. Yes.
    Ms. De La Cruz. And those same State regulators would make 
sure that insurance was based on risk and not ethnicity?
    Ms. Arnold. Correct.
    Ms. De La Cruz. Thank you. I yield back.
    Mr. Gordon. Congresswoman, if I may, this is something the 
State regulators are working on extensively with us. I think 
Commissioner Arnold noted they are working on guidance on AI. 
We have been having extensive conversations as an industry with 
the regulators on testing, so there is a lot of oversight and 
work in this area.
    Chairman Davidson. The gentlewoman's time has been yielded 
back. The gentlewoman from Colorado, Ms. Pettersen, is now 
recognized for 5 minutes.
    Ms. Pettersen. Thank you, Mr. Chairman, and thank you all 
for being here today. I really appreciate your time and 
expertise.
    Ms. Lewis, I wanted to know if you would like to add 
anything to the previous line of questioning? I know you have a 
lot of experience around underwriting and that process around 
race as a factor in premium costs.
    Ms. Lewis. Yes, I would like to add that I have never seen 
a situation nor have I had my friends who were underwriters not 
talk about race being a factor when it comes to insurance. And 
I am just very, very concerned with anyone who would think that 
race is not a factor, because we all know that race is a 
factor. In the insurance industry, you have underwriters, you 
have loss control people who are the inspectors, and these 
people go out and openly talk about those people and how they 
are not going to be insured or how they are going to pay more. 
The underwriter subjectively debits and increases the cost of 
their insurance just because of who they are.
    I am also very concerned about credit being used to 
determine insurance rates because that is not a factor. Credit 
doesn't determine whether or not I am going to get into an 
accident. Credit doesn't determine how I drive. What does 
determine a lot in urban areas is those people who live in the 
suburbs, who drive to the city every single day to come to 
work. Nobody thinks about those statistics. And I would like to 
have someone tell me, provide a study about all those cars that 
come into the urban areas, because even though people do drive 
cars in urban areas, most people in urban areas take public 
transit. Thank you.
    Ms. Pettersen. Thank you for highlighting that today. I had 
no idea that this was a factor in actually being insured, so I 
really appreciate that, and I look forward to following up on 
that.
    This is a very important hearing for my State, and a 
critical issue for Colorado. We don't even have a wildfire 
``season'' anymore; with the changing climate, we are 
constantly under threat of wildfires. In communities throughout 
my district, I have people who are reaching out that, 
unfortunately, are unable to buy homes because they can't prove 
that they are able to be insured. We have insurance companies 
pulling out of markets because the risk is so unpredictable. 
And I guess, more broadly, when I met with people representing 
insurance companies recently, they talked about how, right now, 
we are facing kind of a perfect storm.
    We went through the pandemic. We had the economic fallout 
because of the pandemic and because the supply chain was 
decimated. We had inflation, rising costs, and one of the 
biggest factors in that is our workforce and inability to hire, 
which of course, affects all of us, especially in the 
construction industry. Everywhere that I go, no matter who I am 
talking to, even if it is insurance representatives, we talk 
about legal pathways and how critical that is to addressing the 
workforce shortage for our current needs and the future needs 
of our country. We are also facing increased risk because of 
the climate crisis, and that absolutely affects Colorado. And I 
think not only about how complicated our current situation is, 
but what is going to be happening in the future if we don't 
work together to address and help support communities like 
mine.
    I just want to broadly talk about what we should be 
thinking about in Congress--and I am almost out of time 
already--about how to address this issue, how to use AI to 
build more sustainable, resilient communities and development 
recommendations, and how we work together to take what we have 
learned around flood insurance, to bring wildfire insurance to 
help support communities, but also learning from the lessons of 
things that have gone wrong there. I know I am almost out of 
time, but if anyone would like to comment?
    Mr. Gordon. Congresswoman, if I may, just because you 
touched on one of my favorite passions, which is how important 
AI is going to be to help us solve some of those workforce 
constraints you are talking about, with fewer and fewer people 
in the workforce trending over time, the only solution for our 
industry is to use AI, for example, drones after disaster hits, 
to more efficiently and quickly find out where the damages have 
occurred.
    Now, with a lot of companies, you can use your iPhone to 
take a picture of your auto accident and send that in, and the 
AI will quickly determine which group of humans needs to make a 
final decision, but it helps triage that. We are not going to 
have enough labor in the future for our insurance needs if we 
don't leverage AI, with appropriate regulator supervision, of 
course.
    Ms. Pettersen. Great. I look forward to a longer 
conversation soon.
    Chairman Davidson. The gentlewoman from Indiana, Mrs. 
Houchin, is now recognized for 5 minutes.
    Mrs. Houchin. Thank you, Chairman Davidson, and Ranking 
Member Cleaver. And thanks to the witnesses for your testimony.
    As you are all well aware, the insurance industry impacts 
all Americans regardless of income, location, or stage in life. 
From first-time homebuyers who want to feel secure in their 
purchase, to empty nesters saving for retirement, to retirees 
themselves, Americans want options that provide the protection 
they need while also being affordable and within their means.
    Under recent stresses in the rise of inflation, it has 
become significantly more difficult throughout the country, 
including in my district. Recent surveys have found that 
employers and workers have seen health insurance costs jump 7 
percent in the last year, car insurance costs jump an average 
of 17 percent nationwide, and homeowners insurance jump 21 
percent. With inflation taking a toll on Americans' pocketbooks 
in all sectors, increases in insurance costs have become 
particularly extreme. So, thank you for coming to talk to us 
today about this topic.
    We know the problem. I would like to focus my limited time 
on what Congress can do or specifically should not do in 
response to rising costs.
    Mr. Gordon, you have emphasized the importance of better 
land use planning as a way to reduce the risk and impact of 
natural disasters such as floods, wildfires, hurricanes, and 
earthquakes on the property and casualty insurance industry. I 
also understand the current land use planning practices in the 
United States are often inadequate, inconsistent, and 
ineffective, and have led my constituents in Indiana to 
effectively subsidize those who build dangerously on the coast. 
Could you expand on why land use planning is so crucial for the 
resilience and sustainability of the insurance sector and the 
communities it serves? And could you explain why we have gotten 
it so wrong up until this point?
    Mr. Gordon. What we have now seen is the number-one cost 
driver for the insurance rates has been people moving into 
high-climate-risk regions, and sometimes, some of the 
government policies not only subsidize that, but ultimately, 
they mask the true environmental costs. I think my colleague, 
Mr. Nutter, mentioned that we have seen roughly an annual 5 
percent to 7 percent annual increase in natural disaster 
losses, largely because of those movements.
    We are not taking into account when people buy a home, what 
is the long-term cost going to be of insurance living in a 
coastal area, or living in the wildland urban interface. And 
then, we are not doing the land use management, things like 
controlled burns, like we used to do as a society to make sure 
we don't have more and more wildfires. And we are just now 
developing--and this is really one of the most exciting parts 
of the industry--some very new fire safety standards, how you 
build defensive space around your house, and you need 
communities to do that to protect each other. There is a lot of 
work in this area, and there is a lot of opportunity for 
policymakers to get better building codes, get better land use 
management, and get better mitigation into society.
    Mrs. Houchin. Thank you. And I want to focus specifically 
on subsidies as a means to address the issue of rising 
insurance costs. You discussed in your written testimony the 
death spiral that subsidies can create in markets. Do subsidies 
cause rates to increase to rate payers? Could that, in turn, 
result in more individuals needing to access a subsidy until a 
private market is replaced almost entirely by a public or 
largely subsidized market at a higher and higher cost to other 
rate payers? Is this the death spiral that you discussed?
    Mr. Gordon. That is exactly the death spiral, and, in fact, 
we saw this in Florida after Hurricane Andrew. They tried rate 
suppression, and you went from the vast majority, 94 percent, 
of the homeowners' policies written by national insurers, to, 
after several years, only 18 percent. Think of how many 
national carriers abandoned Florida because of the rate 
suppression.
    That is what we are seeing in California. California also 
has a residual market that says all those people who aren't 
getting coverage in the admitted market, go to the residual 
market, but the excess losses have to get paid back by the 
insurers with no recourse. So, it is like musical chairs, where 
there are fewer and fewer insurers left holding a bigger and 
bigger bag of exposures.
    Mrs. Houchin. Thank you. And, Mr. Nutter, you talked about 
what Congress should not do. I appreciate that you clearly 
state Congress should not create a new Federal property 
reinsurance program to displace the role of States. I agree. 
Can you discuss why it is so important that Congress not create 
a new program?
    Mr. Nutter. Thank you for the question. Effectively, it 
would put Congress in the business of regulating or managing 
property markets at the State level where, in fact, you have 
such different State perils, legal environments, and regulatory 
philosophies, that it really is going to be counterproductive, 
if you will, and concentrates risk such that taxpayers across 
the country will subsidize high-risk people from low-risk 
areas.
    Mrs. Houchin. Thank you. I yield back.
    Chairman Davidson. Thank you. The gentleman from Nevada, 
Mr. Horsford, is now recognized for 5 minutes.
    Mr. Horsford. Thank you. Good afternoon, and thank you to 
the chairman and the ranking member. I am glad that we are 
finally getting back to work here in the House, and I 
appreciate our witnesses for taking the time to be here.
    We are here to discuss an issue that is undoubtedly 
important, and I certainly agree that we should take a serious 
look at solutions to mitigate the alarming increases recently 
in insurance costs. However, based on the legislation notice 
for this hearing, I believe that we should be focused on 
dealing with the concurrent and interconnected crises that face 
our Congress today instead of spending our time debating the 
existence of the Federal Insurance Office. My constituents 
deserve to have a Congress that works for them, and right now, 
they are desperate for solutions to the affordable housing 
crisis that is gripping our State and the nation.
    During a time of continued elevated housing costs, with the 
average household spending over 30 percent of their income on 
mortgage or rent, and a shortage of nearly 6.5 million homes, 
the ability to make ends meet and keep a roof over their heads 
is slipping away from countless families across the country. 
And yet, we cannot advance any meaningful housing policy 
because we still have had zero hearings on affordable housing 
in this committee this Congress. Now that the House Floor has 
finally been reopened for legislative business and we are 
finally able to get back to doing the people's work, I hope 
that this subcommittee, the Subcommittee on Housing, will adopt 
a renewed focus on how we can promote sustainable and 
affordable housing for everyone.
    All of this chaos must be considered within context, and, 
unfortunately, due to the complete paralysis that this House 
found itself in, we now have only 15 days to avert a needless 
government shutdown. Given what we face as a nation, a shutdown 
at this time should not even be an option, and we are quickly 
running out of time to avert yet another crisis.
    We have continued to see depressed home sales volume this 
year, and my colleagues' inability to provide long-term funding 
for our government agencies will only exacerbate this issue in 
the communities that cannot afford to lose financing or pay 
fees to push back their closing. If we want to examine factors 
in the high cost of insurance, then we must seriously consider 
that in the event of a shutdown, property owners could be 
subject to force-placed insurance policies by their mortgage 
servicers, which has historically been even more costly than 
insurance obtained in the marketplace.
    Ms. Lewis, unfortunately, we know that these impacts will 
not be borne equitably across socioeconomic lines and that 
communities of color will inevitably be hit the hardest. Could 
you explain briefly the longer-term impacts that even a short-
term shutdown could have on low- and moderate-income 
communities that depend on the National Flood Insurance 
Program?
    Ms. Lewis. I will try to explain. I am sorry for my 
hoarseness. Even a short-term delay would affect low-income 
communities and communities of color because they don't have 
the reserves to sustain them if they don't get immediate 
relief, and that is a serious problem that is pervasive 
throughout the entire community.
    Mr. Horsford. Thank you. Not only the impacts of a 
catastrophic lapse, but also the underlying cost will not fall 
on all of our communities equally. This, unfortunately, remains 
true for the challenges associated with the ever-present 
effects of climate change. While this may be difficult for some 
of my colleagues to admit, we can no longer ignore the 
increasing frequency and severity of natural disasters. As you 
may have heard, in a normal year, between 1980 to 2022, the 
United States was expected to face approximately 8 disasters 
with losses exceeding $1 billion. We have already been struck 
by 24 such disasters thus far in 2023 alone, totaling over $67 
billion of combined losses.
    Ms. Lewis, as we continue to see rising insurance rates in 
light of the increased risk of natural disaster events, Federal 
programs focused on mitigation are also important. Can you 
explain the impact to constituents in this regard?
    Ms. Lewis. Oh definitely, it is important. I think at the 
end of the day, the first thing we should do is eliminate the 
risk. Stop constructing houses and schools in flood zones. Make 
sure that building codes are up to the standards where they can 
withstand hurricanes and floods. We aren't doing that, and we 
need to do that.
    Chairman Davidson. The gentleman's time has expired.
    Mr. Horsford. Thank you for your response. I yield back.
    Chairman Davidson. The gentlewoman from California, Mrs. 
Kim, is now recognized for 5 minutes.
    Mrs. Kim. Thank you, Chairman Davidson, for letting me 
waive on to this very timely and important hearing, and I want 
to thank our witnesses for being with us today. I represent 
California, and unfortunately, in my home State of California, 
there are misguided policies from Sacramento and the State's 
insurance commissioners. Those policies have recently forced 
major insurers to exit the California insurance market. As a 
result, my office has received numerous phone calls and 
messages saying that the cost of insuring homes is simply 
unbearable and unaffordable. Less competition and less players 
in the insurance market is pushing premiums up and forcing 
people into California's FAIR Plan, which is more costly than 
private plans and does not provide comprehensive coverage.
    Mr. Gordon, I want to ask you about California Insurance 
Commissioner Lara. He said recently that he will continue to 
partner with all those who want to work toward real solutions. 
Can you update the committee on any new agreements made between 
the State of California and stakeholders since Mr. Lara's 
announcement regarding policy changes to State insurance 
policy?
    Mr. Gordon. There is a very strong effort by the California 
legislature to create some fixes, which fell apart at the last 
minute due to their effort to add more mandates and 
prohibitions on nonrenewals. A lot of the problems, frankly, 
are created at the regulatory levels. I mentioned going 30 
months without approving a single private passenger auto rate 
increase at a time of record inflation. So, I think the 
Governor and the Commissioner now recognize that there needs to 
be fixes. They have both committed to doing it, although some 
of those fixes are going to take a while. They are targeting 
the end of 2024 to get some of those new and improved 
regulations in place, meaning they would take effect in 2025. 
That is a long time in a deteriorating marketplace to get fixes 
in place.
    Mrs. Kim. Yes. You are talking about the 35-year-old 
regulatory framework, right? And obviously, we agree it needs 
to be acted upon and upgraded because my fear is that, since it 
is taking too long, even though Commissioner Lara is saying all 
these policy recommendations, the next insurance commissioner 
could rescind policy changes. So, we do agree that there needs 
to be a legislative fix.
    But another problem that we are seeing in the State of 
California is the broken FAIR Plan, which, as you mentioned in 
your testimony, already has a large deficit. Can you describe 
the FAIR Plan's assessment process and how it ultimately 
increases prices for households who buy insurance in the 
private market?
    Mr. Gordon. Yes. The FAIR Plan is horribly underfunded, as 
most government programs ultimately tend to be, particularly 
for insurance. And for any excess losses that the FAIR Plan 
has, there is a whole layer of assessments that go to private 
insurers and they are not allowed any mechanism to recoup that. 
That was something in the legislative process they knew needs 
to be fixed. So, if there is a big wildfire in California, most 
high-risk areas are areas with a disproportionate concentration 
of FAIR Plan policyholders, which means the private insurers 
who haven't withdrawn from the market are going to get left 
with a bigger and bigger tab.
    And that is spreading those costs because insurers have to 
make sure they are collecting enough money to cover all of 
those additional expected liabilities and exposures, so those 
who are staying in California have to collect more and more for 
that exposure. That is a ticking time bomb that I know the 
legislature and the commissioner are hoping to fix.
    Mrs. Kim. Thank you for mentioning that because again, I 
represent a community that is very wildfire-prone, and we need 
to do something about it. Obviously, California needs to do 
something more to mitigate those wildfires with the active 
management tools, so thank you for mentioning that.
    Mr. Nutter, you said something very interesting in your 
oral statement, that insurers are not required to buy 
reinsurance, yet they do it. So why do they do it, and how is 
California's Prop 103 impacting the reinsurance market that we 
talked about?
    Mr. Nutter. Yes. Thank you for the question. They buy 
reinsurance largely to manage where they have a significant 
concentration of upheaval, in your case wildfires, or where the 
capital support for the company is enhanced by the role that 
reinsurance plays. The issue that I would highlight for Prop 
103 that you are referring to is largely that it has caused the 
Insurance Department not to take into consideration the future 
risk associated with that and to look at solutions, perhaps 
community-based solutions, that would find both mitigation and 
financial recovery as part of that.
    Mrs. Kim. Thank you. My time is up.
    Chairman Davidson. The time has expired. Since it is 
probably his last appearance before our committee, I did want 
to take a moment to acknowledge that Frank Nutter will be 
retiring from RAA on December 31st, after 32 years as 
president. During his tenure, RAA has grown into the leading 
voice for the reinsurance industry in the United States, and 
that is quite an accomplishment for anyone, particularly for 
someone from his humble beginnings in West Virginia. But it is 
not even his most important contribution. Before he came to 
RAA, Frank was also an officer in the United States Navy, and 
served in Vietnam. Thank you, sir. We applaud you for your 
service to our country and for your leadership at RAA. We wish 
you well in your well-earned retirement.
    Mr. Nutter. Mr. Chairman, thank you so much for that. It 
has always been an honor to appear before the committee today 
and so many other times, and an honor to represent this 
industry. Thank you.
    Chairman Davidson. Thank you. I would like to thank all of 
our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 4:11 p.m., the hearing was adjourned.]

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                            November 2, 2023

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