Congressional Research Service
http://opencrs.com/document/RL34749
[From summary] Two important issues before Congress are (1) securing the nation’s capacity to prepare for, respond to, and recover/rebuild from natural catastrophe events, and (2) determining whether and how the federal government should intervene in catastrophe insurance markets. Since the devastating Gulf Coast hurricanes of 2004 and 2005, and a sequence of tornadoes, wildfires, earthquakes, Hurricanes Ike and Gustav, and the Midwestern floods in 2008, public attention has focused on: (1) the potential high cost of recovery and financing of natural disaster losses; (2) the supply and relatively narrow scope of private sector disaster insurance; (3) the extent to which Americans living in disaster-prone areas may be uninsured or underinsured; and (4) potential increases in federal outlays for disaster assistance.
Many insurers responded to recent hurricanes by requesting rate increases or refusing to renew hundreds of thousands of policies sold in areas along the Atlantic and Gulf Coasts. Where insurance became either too expensive or unavailable, homeowners and small business owners who could not otherwise obtain property insurance in the private markets turned to state-operated “residual market facilities” that serve as insurers of last resort in these areas. As a result, many of these facilities have expanded. Nevertheless, there is evidence to suggest that stateoperated facilities may not be fully capable of resolving the problems of insurance availability or affordability. For example, Florida’s inability to issue debt (bonding capacity) during the global financial crisis in advance of the 2008 hurricane season threatened to unravel the state’s property insurance system.
In the wake of financial market turmoil in 2008, one point of view contained in this report stresses the importance of bringing more transparency to the markets for innovative new risk transfer financial products. Some of these risk transfer instruments, such as credit default swaps and other derivative products, are not regulated, and regulators have no valid data upon which to perform oversight of them in the credit markets. Some economists believe that more transparency and regulation are important components of credit market reform.
Several Members of Congress have debated mechanisms to ensure adequate
capacity and solvency of the insurance industry to meet customer demand. Many proposals have been introduced that would improve insurers’ access to capital in the reinsurance, banking, and securities markets. They include (1) study commissions — H.R. 537/S.292/S. 2286; (2) tax reform incentives — H.R. 164/H.R. 1787/S. 926/S.2327/S. 927; (3) flood insurance reform — H.R. 920/H.R. 3121/S. 2284; (4) risk retention group reform — H.R. 5792; and (5) risk securitization and federal reinsurance and loans — H.R. 91/H.R. 330/H.R. 3355/S. 928/S. 2310. Congress could also be called upon to decide whether transparency mechanisms are appropriate for resolving the broader issues presently disrupting all financial markets
