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July 27
07:26 2021

Public Policy Analysis & Opinion

By Kevin P. Hennosy


Regulators’ association offered little insight into congressional inquiry

Housing policy is a high priority for the Biden Administration and for Democrats in the U.S. House of Representatives. The House agenda includes planning for financial losses suffered as the result of catastrophic weather, which revives congressional interest in the “business of insurance.”

When considering the machinations of the Congress and administration, keep in mind the Supreme Court decision in German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914), which established that the business of insurance is imbued with the public interest and subject to public oversight even in private sector transactions.

[L]eaders seem driven by the realization that losses from catastrophic weather events present a national loss, which should be spread across the nation consistent with the tenets of (private or public) insurance mechanisms.

The Court opinion reads, in part: The effect of insurance—indeed, it has been said to be its fundamental object—is to distribute the loss over as wide an area as possible. In other words, the loss is spread over the country, the disaster to an individual is shared by many, the disaster to a community shared by other communities; great catastrophes are thereby lessened, and, it may be, repaired.

Both congressional and administration leaders seem driven by the realization that losses from catastrophic weather events present a national loss, which should be spread across the nation consistent with the tenets of (private or public) insurance mechanisms.


An April 29, 2021, memorandum written by the majority (Democratic) staff of the House Financial Services Committee (HFSC) provided an overview of the matters under consideration by the committee. The memorandum’s overview section begins with the following observation: “America’s housing infrastructure is vulnerable to the growing costs of climate and weather disasters, which may accelerate the need for maintenance and repair, or render units of housing infrastructure uninhabitable.”

As most combatant nations learned during World War II, housing for wage-earning populations proved vital to the social infrastructure that supported national production. Bomber crews from both Allied and Axis air forces dropped high explosives and incendiaries on both factories and the neighborhoods where the industrial workers lived.

In a time of peace, wage-earners can lose access to housing through catastrophic weather events, which not only cause loss for the residents but also impair the community’s ability to recover and thrive.

The staff memorandum also cites the racial disparities incumbent in the housing infrastructure problems triggered by climate change and extreme weather events. “Due to historic and ongoing socioeconomic segregation, the current effects of climate change and weather events are concentrated among low-income communities and communities of color,” explains the memo.


On May 4, 2021, the HFSC’s Subcommittee on Housing, Community Development and Insurance (The Subcommittee) conducted a hearing entitled: “Built to Last: Examining Housing Resilience in the Face of Climate Change.” The Subcommittee invited testimony from several interested groups; representatives of those groups who testified include: Rodney Ellis, commissioner, Harris County, Texas; Ariadna M. Godreau-Aubert, executive director, Ayuda Legal Puerto Rico; Shelley Poticha, chief climate strategist, Natural Resources Defense Council (NRDC); Stephen Ellis, president, Taxpayers for Common Sense (TCS); and Andrew N. Mais, commissioner, Connecticut Department of Insurance, on behalf of the National Association of Insurance Commissioners (NAIC).

U.S. Representative Emanuel Cleaver (MO-5)chairs The Subcommittee. Missouri’s 5th Congressional District happens to provide a home to the NAIC’s Kansas City staff offices.


County Commissioner Ellis and Executive Director Godreau-Aubert reported on their local areas’ experience following catastrophic storms. These testimonies focused on the existing disaster recovery programs under the Federal Emergency Management Agency (FEMA) and the Department of Housing and Urban Development (HUD). Both witnesses explained how federal programs benefit localities, but that there is clear room for improvement.

From the local perspective, FEMA’s National Flood Insurance Program (NFIP) offers both promise and headaches. The NFIP flood zone maps received criticism for inaccuracy of risk assessment. Furthermore, the witnesses cited problems with securing pre-approval of properties and securing accurate and equitable payments.

Executive Director Godreau-Aubert’s testimony focused on shortcomings of several of HUD’s grant programs. These problems include but are not limited to: the lack of permanent authorization of applicable programs, imprecise guidelines for implementation, and inequitable expectations for access to recovery funds that do not reflect customary ownership tenets at the local level.

A review of this local experience proves that climate change exacerbates the problems noted with the NFIP and HUD recovery programs.


The NRDC testimony provided expert information on the worsening conditions collectively referred to as climate change. The testimony began with a declarative statement: “The impacts of climate change—extreme heat, powerful storms, and sea-level rise—are already impossible to ignore.”

This problem brings both national and local concerns: “We now—quite undeniably—live in a rapidly changing world that will profoundly impact our nation and our society.”

The NRDC testimony stressed the importance of including local input to implementing policy answerable to national tenets. The group recognized: The challenge that communities face with the increasing likelihood of severe climate impacts is matched by growing inequality. These two challenges go hand in hand.

Informed by the NRDC testimony and the best high school civics classes, one should understand that policy solutions should reflect both Federal and local action. Under the American system, national interests rest with Federal policymakers and local concerns with the states, territories, and localities.


The testimony from TCS provided not only rational policy recommendations, but also historical background. Therefore, the TCS testimony delivered informative perspective.

Like the other witnesses, the TCS provided an endorsement of the NFIP: “We need NFIP to provide low- and moderate-income people with affordable insurance coverage, expand access to flood mitigation and relocation assistance, and grant homeowners, home buyers, and renters a right to know the flood history and risks associated with their current or prospective home.”

The TCS provided interesting historical background on the NFIP. The testimony cited the 1966 report of The Presidential Task Force on Federal Flood Control Policy. That Johnson Administration report warned: A flood insurance program is a tool that should be used expertly or not at all. Correctly applied it could promote wise use of flood plains. Incorrectly applied, it could exacerbate the whole problem of flood losses. For the Federal Government to subsidize low premium disaster insurance or provide insurance in which premiums are not proportionate to risk would be to invite economic waste of great magnitude.

In its testimony, the TCS opined that the NFIP has not reached the expert execution that the presidential commission recommended. The testimony began its review of the NFIP with a discussion of rates. “NFIP has subsidized rates in the program virtually since its inception, regardless of need. FEMA estimates more than 25% of properties in the program pay subsidized or ‘grandfathered’ rates, where the flood zone designation has changed,” observed the TCS.

The TCS also commented on how the NFIP rate structure fails to deliver equitable risk transfer at equitable premium rates. “The Government Accountability Office (GAO) has documented large cross-subsidies, many of which benefit high-income homeowners,” noted the TCS testimony.

In less diplomatic terms than the TCS witness chose to put in writing, the GAO found that the NFIP suffered from handouts to the rich, rather than handouts to the poor. In other words, those less able to pay for insurance coverage carried the cost of risk produced by those more able to pay.

For example, the TCS testimony explained that the GAO “found that over 78% of subsidized properties in NFIP are located in counties with the highest home values (the top three deciles), while only five percent of subsidized properties are in counties with the lowest home values (the bottom five deciles).

In response to these GAO findings, the TCS opined: “This represents a real challenge to the program’s sustainability.”

The TCS argued for the federal government to place more emphasis on facilitating risk mitigation by individual property owners and local communities. “It’s not about artificial rate caps that hide the real risk to people, but about finding ways to fund mitigation either at the property level or at the community level.”

To foster a more equitable system, the TCS proposed risk-based rates augmented by means-tested supplemental recovery resources. “If a property owner is unable to afford the premium, means tested assistance outside the rate structure should be provided.”

NAIC testimony

A reader might expect a respected insurance publication to carry bold headlines: NAIC Informs Congress of Essential Truth! Well, the NAIC has not deserved that kind of treatment since the waning months of the Bush-Quayle Administration.

My old pals at the NAIC delivered testimony that described the insurance industry funded group’s wide-ranging resources that could have tremendous impact on policymaking related to The Subcommittee’s interests in housing resiliency, catastrophe recovery, and the damaging impact of climate change.

The NAIC testimony presented little more than its “capabilities.”

The bulk of the NAIC’s testimony recounts the “workstreams” of its Climate and Resiliency Task Force. The NAIC created the task force last year, just after several insurance firms published statements about the catastrophic impact of climate change.

Still, the NAIC testimony assured The Subcommittee that: “Insurance regulators across the country are working to find solutions to manage the catastrophic risk exposure in their respective states and, through the NAIC, we have been engaged in these efforts for decades.” (I suppose by that measure, since I began playing the board game Risk in the Seventies, I have been engaged in efforts for world domination for nearly half a century? And do not get me started on my Monopoly obsession!)

The NAIC testimony highlighted one real-world action that could mitigate the risk of loss from climate-driven causes: A workshop on building codes. “In March, the NAIC hosted a building code and mitigation workshop that included 19 state insurance departments, [FEMA], state emergency management agencies, insurance industry representatives, and consumer groups,” according to the written testimony filed by NAIC with The Subcommittee.

Yet, when one follows the link pro-vided in the notes of the testimony, it becomes clear that the NAIC had little or nothing to do with this building code “workstream.” The association could not even muster representatives from half of its member jurisdictions to attend the building code workshop.

Yes, the NAIC testimony wraps the association in the robes of frontline insurance regulators who answer phone calls after catastrophic events across the nation. However, the vast majority of the regulators who do that work will never draw a travel advance to attend an NAIC meeting.

Certainly, with regard to flood losses, and too often in other weather-related events, those individuals who answer calls at state insurance departments have only one “N-A-I-C” Guideline to communicate when talking to policyholders who suffer losses: No Applicable Insurance Coverage.


Now, some readers will ignore this commentary on the NAIC’s testimony because “Hennosy is an NAIC-Hater.” For decades, NAIC representatives have “cancelled” me as a “disgruntled former employee.”

I plead guilty to both charges, but not for the reason that critics level those allegations at me.

The NAIC could use those vaunted capabilities to improve insurance public policy in the public interest, and that tends to aggravate me.

The last time that the Delaware-chartered nonprofit corporation, which does not annually file a Form 990 financial disclosure form with the IRS (nor does it honor Freedom of Information Act requests under the statutes of any state as an instrumentality of the states should do), served the public interest, or seriously studied the disparate impact of race upon insurance markets, was under unrelenting pressure of the late “Powerful Chairman” John Dingell.

After Dingell lost the gavel in January 1993, the NAIC succumbed to an insurance carrier “filing fee boycott,” and agreed to end the “redlining” study and limit its attention to “insurer solvency.”

Since this is a commentary column, I will offer this invitation. If Chairman Cleaver wants to know more about the NAIC, he should just have his staff contact me. (Yes, in years past I have reached out to them.) The congressman’s staff can look me up on the voter rolls: I live in Kansas City Ward 9, Precinct 6.

Oh yes, there should be NAIC hearings taking testimony under oath in the future, in my humble opinion. Of course, lying to Congress is a federal crime without the oath, but why not go all the way?

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.

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