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Government and Private Government and Private Sector Solutions:Sector Solutions:Analysis of H.R. 219Analysis of H.R. 219

Gregory Vass, Casualty Policy Gregory Vass, Casualty Policy AnalystAnalystAmerican Academy of ActuariesAmerican Academy of Actuaries

CAS Seminar on Catastrophe IssuesCAS Seminar on Catastrophe IssuesNew Orleans, LANew Orleans, LA

October 23, 1998October 23, 1998

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The American Academy of The American Academy of Actuaries (AAA) and H.R. Actuaries (AAA) and H.R. 219219

AAA is the public policy organization for actuaries of all specialties within the United States

AAA acts as the public information organization for the profession

AAA is nonpartisan and does not advocate AAA presents clear, actuarial analysis

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Role of the Casualty Practice Council (CPC) in the Academy

CPC is composed of key Academy member volunteers in the P&C area

CAS and Actuarial Standards Board also represented on CPC

CPC ensures peer review and objectivity of Academy work

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History of H.R. 219 History of H.R. 219 (Homeowners’ Insurance (Homeowners’ Insurance Availability Act) Availability Act)

Bill was referred to the Subcommittee. on Bill was referred to the Subcommittee. on Housing on 2/14/97Housing on 2/14/97

At Congress’s request, AAA commented on At Congress’s request, AAA commented on subcommittee draft on 11/12/97subcommittee draft on 11/12/97

Passed out of subcommittee on 2/4/98, (16-6 Passed out of subcommittee on 2/4/98, (16-6 vote)vote)

Full committee (House Banking) held Full committee (House Banking) held hearings 4/23/98 (AAA testified), passed full hearings 4/23/98 (AAA testified), passed full committee (33-12 vote) on 7/15/98committee (33-12 vote) on 7/15/98

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Congressional Findings Congressional Findings in H.R. 219in H.R. 219

• Rising costs jeopardize ability of many Rising costs jeopardize ability of many consumers to adequately insure their homesconsumers to adequately insure their homes

• Lack of capacity threatens to increase Lack of capacity threatens to increase number of uninsured homes which could number of uninsured homes which could increase mortgage defaults and strain the increase mortgage defaults and strain the Federal banking systemFederal banking system

• Some states have intervened to ensure Some states have intervened to ensure continued availability of homeowners continued availability of homeowners insuranceinsurance

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Congressional Findings Congressional Findings in H.R. 219 (cont’d)in H.R. 219 (cont’d)

• It is appropriate that efforts to improve It is appropriate that efforts to improve insurance availability be implemented at insurance availability be implemented at state levelstate level

• State programs may be adequate to State programs may be adequate to insure most natural disasters, but a insure most natural disasters, but a small percentage of events could small percentage of events could exceed the capacity of these programs exceed the capacity of these programs

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Congressional Findings Congressional Findings in H.R. 219 (cont’d)in H.R. 219 (cont’d)

• A Federal reinsurance program will A Federal reinsurance program will improve the effectiveness of state improve the effectiveness of state initiatives and help ensure that initiatives and help ensure that homeowners claims will be paid in the homeowners claims will be paid in the event of a large natural catastropheevent of a large natural catastrophe

• Any Federal program must be founded Any Federal program must be founded upon upon sound actuarial principlessound actuarial principles and and priced in a manner that minimizes the priced in a manner that minimizes the potential impact on the Treasurypotential impact on the Treasury

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Features of H.R. 219Features of H.R. 219

Reinsurance for State Insurance Programs ,not the insurance industry

Homeowners coverage only Perils covered are limited to:

• Earthquakes (including resulting fires and tsunamis)

• Tropical cyclones (w/ winds of over 75 mph)

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Federal Reinsurance Program Design

A single annual limit of up to $25 Billion A single annual limit of up to $25 Billion Attachment point set at greater of :Attachment point set at greater of :

–$2 billion in covered losses;$2 billion in covered losses;

–Clams paying capacity of state Clams paying capacity of state program; or,program; or,

–Amount determined by a new Amount determined by a new National Commission (only applies to National Commission (only applies to newly formed state programs)newly formed state programs)

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Federal Reinsurance Program Design (cont’d)

““Payback” feature: State program Payback” feature: State program ultimately reimburses Federal government ultimately reimburses Federal government for any reinsurance protection providedfor any reinsurance protection provided

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H.R 219 - Other Features(commission)

H.R. 219 forms a commission to address H.R. 219 forms a commission to address catastrophe risks and loss costscatastrophe risks and loss costs

Membership in this10-person group would Membership in this10-person group would include at least four actuaries and a variety include at least four actuaries and a variety of other professionals knowledgeable in of other professionals knowledgeable in catastrophe issues and mitigationcatastrophe issues and mitigation

Commission only advises Treasury on Commission only advises Treasury on estimated loss costs with the new estimated loss costs with the new reinsurance contractsreinsurance contracts

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Academy Catastrophe Academy Catastrophe Working Group Working Group MembershipMembership

Paul O’Connell, FCAS, FCIA, MAAA, Paul O’Connell, FCAS, FCIA, MAAA, ChairChair

David Hays, FCAS, MAAADavid Hays, FCAS, MAAA

Ron Kozlowski, FCAS, MAAARon Kozlowski, FCAS, MAAA

Glenn Meyers, FCAS, MAAAGlenn Meyers, FCAS, MAAA

Patsy Webster, FCAS, MAAAPatsy Webster, FCAS, MAAA

Jim Wickwire, FCAS, MAAAJim Wickwire, FCAS, MAAA

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Testimony to House Testimony to House Banking Banking on H.R. 219on H.R. 219

Comments focused onComments focused on: : • Attachment point and limitAttachment point and limit• Cost of contract including risk loadCost of contract including risk load• Interference with private marketInterference with private market

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H.R. 219 and Interference H.R. 219 and Interference with the Private Marketwith the Private Market

Need to test need for program on a regular basis

Avoid codification of minimum risk load

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Attachment Point in H.R. 219

Needs to not encourage formation of new government programs

Issue of funding gaps between state program capacity and federal attachment point needs to be addressed

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Cost of Contract (including Cost of Contract (including Risk Load)Risk Load)

Computer modeling as a basis for pricing Risk load and repayment terms to Federal

government issues exist (is there any risk transfer?)

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Changes to H.R. 219 and Changes to H.R. 219 and prognosis for next prognosis for next CongressCongress

There have not been significant changes There have not been significant changes in the latest draft relating to previous AAA in the latest draft relating to previous AAA comments comments

H.R. 219 likely to be reintroduced early in H.R. 219 likely to be reintroduced early in session and still has some momentumsession and still has some momentum

The Academy will continue to work with The Academy will continue to work with Congress if a new bill progresses next Congress if a new bill progresses next yearyear