House Financial Services Subcommittee Issues Testimony From Reinsurance Association of America President Nutter
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Chairman Davidson, Ranking Member Cleaver, and members of the Subcommittee on Housing and Insurance, thank you for the opportunity to testify during today's hearing on "The Factors Influencing the High Cost of Insurance for Consumers," and thank you for your interest in the
I am
The RAA appreciates the Committee facilitating a discussion on what is driving up costs in the
Reinsurance
Reinsurance is essentially insurance for insurance companies. It is a successful, critical, and efficient risk management tool used by private sector companies and government programs to provide a crucial safety net for low frequency, high severity natural and man-made events that result in extreme insured losses. Figure 1 includes two
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[View chart in the link at bottom.]
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Reinsurance helps the private sector companies and government programs improve capacity and financial performance, enhance financial security, and reduce financial volatility. Insurers rely on reinsurers to assume losses for a single event or, in many cases, for an accumulation of losses from hurricanes, earthquakes, winter storms, wildfires, or terrorist attacks. Some historic events illustrate this. Hurricanes Katrina, Rita and Wilma in 2005 caused over
Reinsurance also is the primary mechanism for spreading risk globally, thereby accessing a greater pool of capital to pay for inevitable catastrophic losses. Reinsurance is extensively used by the private markets to diversify risk and protect against future losses. Reinsurance is purchased for...
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...essentially four reasons: (1) to limit liability on specific risks; (2) to stabilize loss experience; (3) to protect against catastrophes; and (4) to increase capacity. Depending on the purchaser's goals, different types of reinsurance contracts are available to bring about the desired result.
For federal programs, purchasing reinsurance can mitigate the financial impact of any large-scale future losses and help to prevent any future funding lags as it is pre-arranged financing for losses. Reinsurance also allows federal programs to gain financial flexibility and not be forced to rely on emergency federal funding in the event of defaults that could put programs in jeopardy. Reinsurance has been used by federal programs, including
Consistent with the intent of
Reinsurance is not mandated for private sector insurers, the NFIP, EXIM, and the GSEs. It is voluntarily purchased by insurers and government programs. Insurers and government programs have options, including purchasing reinsurance, which is a form of rental capital, or they raise other forms of capital, such as equity or debt.
4 https://www.aon.com/insights/reports/2023/reinsurance-market-dynamics
5 https://www.reinsurance.org/Fundamentals/Fundamentals_of_Property_and_Casualty_Reinsurance/
7 https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/federal-insurance-office/coveredagreements/us-eu-covered-agreement; https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/federalinsurance-office/covered-agreements/us-uk-covered-agreement; and https://content.naic.org/cmte_e_reinsurance_certified_reciprocal_reinsurers.htm
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Extreme Natural Disasters and Insured Losses
Extreme natural disasters have become more frequent and more severe. According to
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10 https://www.swissre.com/institute/research/sigma-research/sigma-202301.html#:~:text=A%20prevailing%20economic%20storm%20in,at%20USD%2050%2D65%20billion.
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According to the National Oceanic and
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[View chart in the link at bottom.]
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11 https://www.ncei.noaa.gov/access/billions/
12 https://www.ncei.noaa.gov/access/billions/
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In July, Gallagher Re reported that for the first six months of 2023, "...insured loss was 18% higher than the decadal average (
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[View chart in the link at bottom.]
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13 https://www.ajg.com/gallagherre/news-and-insights/2023/july/2023-natural-catastrophe-report/; https://www.nssl.noaa.gov/education/svrwx101/thunderstorms/types/
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According to
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14 https://www.aon.com/weather-climate-catastrophe/index.aspx
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Reinsurance Capital With record-breaking losses, reinsurance exposures have outpaced capital (Figure 5), and insurers have spent more in claims payments and expenses than they collected in premiums.15
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[View chart in the link at bottom.]
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15 https://www.swissre.com/institute/research/sigma-research/sigma-202301.html#:~:text=Global%20economic%20losses%20from%20natural,from%20natural%20catastrophes%20are%20standard.; and https://www.spglobal.com/marketintelligence/en/news-insights/research/us-pc-insurance-market-report-profitability-to-remain-elusive-in2023#:~:text=%E2%9E%A4%20The%20S%26P%20Global%20Market,even%20point%20for%20underwriting%20profitability.
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However, according to Fitch Ratings "...reinsurers [are] still offer[ing] ample cover against the most severe events...". Gallagher Re's half year 2023 report estimated that reinsurance dedicated capital (Figure 6) rebounded to
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[View chart in the link at bottom.]
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The reinsurance industry also has continued to support the National Flood Insurance Program. There are 18 reinsurance companies participating in the NFIP Reinsurance program in 2023.18 In the first year of the program, the benefit of the reinsurance program was evident when
Loss Costs
Several factors contribute to the cost of insurance and reinsurance.
According to the
16 https://www.ajg.com/gallagherre/news-and-insights/2023/september/1h-2023-reinsurance-market-report/
17 https://www.fitchratings.com/research/insurance/global-reinsurers-pull-back-from-natural-catastrophe-cover-24-08-2023; and https://www.fitchratings.com/research/insurance/global-reinsurance-sector-outlook-revised-to-improving-07-09-2023
18 https://www.fema.gov/flood-insurance/work-with-nfip/reinsurance
19 https://www.iii.org/sites/default/files/docs/pdf/state_of_the_risk_homeowners_02032022.pdf
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Social inflation is also a factor that contributes to the cost of insurance and reinsurance.20 For example, a proclamation issued by the Governor of
Increasingly, more and more people in the
The
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20 https://content.naic.org/cipr-topics/socialinflation#:~:text=Issue%3A%20Social%20inflation%20is%20a,monetary%20relief%20for%20their%20injuries.
22 https://www.iii.org/white-paper/flood-beyond-risk-transfer-042921
24 https://www.iii.org/white-paper/flood-beyond-risk-transfer-042921
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In addition to property owners and the insurance industry, the Federal government pays for uninsured losses that result from extreme natural disaster events. In
* "Presidential major disaster declarations, which trigger funding of emergency and recovery efforts led primarily by the
* "To put the high costs of federal disaster spending into perspective, 2017 spending exceeded the annual discretionary budget of every federal agency except the Pentagon that year. A federal agency funded at an amount equal to the 2017 disaster spending would have received more funding than the combined fiscal year appropriations for the Departments of
Ultimately, it is
Fully relying on the Federal government for insurance or disaster assistance supported by taxpayers is not a long-term solution. When the Federal government doesn't have sufficient funds to pay for the cost of extreme events, it borrows them. NFIP provides a good example.
25 https://www.taxpayer.net/climate/paying-the-price/
26 https://www.fema.gov/data-visualization/historical-flood-risk-and-costs
27 https://www.federalregister.gov/documents/2018/10/22/2018-22884/notice-of-maximum-amount-of-assistance-under-the-individuals-andhouseholds-program;
28 https://www.fema.gov/flood-insurance/work-with-nfip/watermark-financial-statements
29 https://www.gao.gov/products/gao-23-105977
30 https://www.fema.gov/flood-insurance/work-with-nfip/watermark-financial-statements; and https://www.washingtonpost.com/business/2023/10/20/interest-debt-payment-treasury/
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As a result, the NFIP is today on a path toward a stronger financial framework and resiliency to pay claims without additional borrowing from taxpayers. The RAA urges
Unlike the NFIP, insurers and reinsurers are required by states to have adequate capital to pay for losses, including catastrophic losses. The industry raises capital through premiums paid by consumers -- policyholders and cedents (insurers that purchase reinsurance) -- and investment returns insurers and reinsurers made with those premiums. The investors in turn expect some return on their investment. Consumers expect to be paid if a claim is filed and covered in a (re)insurance agreement. If insurance investors and consumers are not paid for their investment in and purchase of (re)insurance respectively, they will invest their money elsewhere or purchase (re)insurance from another company. Ultimately, insurers and reinsurers investing consumer premiums, allows premiums to stay lower than they would be otherwise, helps the (re)insurer remain solvent after claims are paid, and provides investors with a return on their investment.
Recommendations
What should
I. The Federal government should allow each state to manage its own insurance regulatory and legal environment, as each state has unique insurance market challenges. For example, functioning, competitive insurance markets benefit consumers and allow insurers to charge risk-adequate rates to cover losses, so
Also, each state faces different perils, and in recent years, record-breaking events.
We have distributed to each member of the Subcommittee, for their congressional district, data from the
31 https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408331
33 https://www.insurancejournal.com/news/southeast/2023/08/15/735429.htm
34 https://www.insurancejournal.com/news/national/2023/04/27/718083.htm; https://www.ajg.com/gallagherre/news-and-insights/2023/july/2023-natural-catastrophe-report/; and https://www.nssl.noaa.gov/education/svrwx101/thunderstorms/types/
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...which depicts the perils in their congressional district. In short, no congressional district's peril data looks the same.
II.
III. In
IV. In addition to increasing funding for pre-disaster mitigation grants for
35 https://www.nibs.org/projects/natural-hazard-mitigation-saves-2019-report
36 https://www.fema.gov/press-release/20230906/fema-designates-first-communities-receive-targeted-assistancehazards#:~:text=FEMA%20Designates%20First%20Communities%20to%20Receive%20Targeted%20Assistance%20for%20Hazards%20Resilience,-English&text=WASHINGTON%20%E2%80%93%20Today%2C%20FEMA%20is%20announcing,worsened%20by%20the%20climate%20crisi
s.
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"Strengthening Homes and Eliminating Liabilities Through Encouraging Readiness(SHELTER) Act" to provide a disaster mitigation tax credit of 25% of qualifying mitigation expenses of up to
What should
Conclusion
The RAA looks forward to continuing to work with you to address the very real, dangerous, and costly challenges caused by extreme natural disaster events that are increasingly impacting consumers, taxpayers, communities, and our industry and others. We must work together to increase the resiliency of our country. Thank you for your consideration of our views.
37 https://www.congress.gov/bill/118th-congress/house-bill/4070; https://www.congress.gov/bill/118th-congress/house-bill/4305
39 https://home.treasury.gov/system/files/311/December2019FACI_ProtectionGapPresentation.pdf; https://home.treasury.gov/system/files/311/December2019FACI_ProtectionGapProposedRecs.pdf; and https://www.airworldwide.com/Publications/Infographics/Who-Will-Pay-for-the-Next-Great-California-Earthquake-/
40 https://www.smartersafer.org/2023/09/13/smartersafer-coalition-raises-concerns-about-federal-reinsurance-program-to-senate-bankingcommittee-leaders/ 15 APPENDIX A 16 APPENDIX B 17 18 APPENDIX C 19 20 21
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View original text, plus charts here: https://docs.house.gov/meetings/BA/BA04/20231102/116528/HHRG-118-BA04-Wstate-NutterF-20231102.pdf
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