Last week, R Street’s Jerry Theodorou testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs at its hearing titled “Perspectives on Challenges in the Property Insurance Market and the Impact on Consumers.” The impetus behind the hearing was a concern held by many that, due to numerous challenges, the property insurance market has become unstable and is both unaffordable and unavailable to too many homeowners and renters. One witness stated that the industry is experiencing a “massive market failure” and that “the way forward is for the federal government to provide a catastrophe reinsurance backstop….”

Theodorou rejected both the premise and prescription offered, testifying that the property insurance and reinsurance markets are strong, stable and sophisticated in their ability to manage the varied and increasing risks they face. While he acknowledged that these challenges are real, he pushed back on the notion that the industry is “on its knees” or otherwise in need of drastic federal intervention.

The most prevalent but fixable challenges facing the industry are manmade, rooted in decades-old policy in California and Florida. In California, Proposition 103 has “straitjacketed insurers” by effectively placing price controls and other restrictions on insurance companies’ ability to effectively and accurately charge premiums that are commensurate with risk. As a result, some insurance companies have left the California market while others have chosen to stop expanding business there.

Theodorou testified that Florida’s property insurance market is “plagued by out-of-control meritless litigation” and that “the magnitude of the litigation abuse problem is starkly visible in the statistic that Florida accounts for 9 percent of the nation’s homeowners insurance policies, but is responsible for 79 percent of the entire country’s homeowner insurance litigation.” This overly litigious environment has driven the cost of property insurance far higher than it ought to be. Fortunately, Florida enacted tort reform earlier this year. Theodorou stated that, if policymakers stay the course, the state’s woes should improve significantly as the legal system works through the existing backlog of lawsuits.

There were several exchanges between Theodorou and senators on the panel. Here are a few, following the order in which they occurred:

• Sen. Tim Scott (R-S.C.), the committee’s ranking member, spent his five minutes of recognition engaged in a back-and-forth with Theodorou on a range of issues. Notably, Sen. Scott touched on the troubled history of the National Flood Insurance Program (NFIP), stating that “1 percent of losses that occur are repetitive losses, but they account for about 30 percent of the payouts of the National Flood Insurance Program. So if you keep building in the same area where there’s disaster after disaster after disaster, the chances are pretty good that [the program] is going to pay more out.”

Theodorou responded, “That’s right… There need to be incentives for better behavior for the National Flood Insurance Program….” He explained that “the federal government hasn’t had a good history of involvement in insurance. You mentioned the National Flood Insurance Program, which has bled billions—tens of billions—of red ink. The [federal] crop insurance program also has these subsidies that don’t encourage farming of the right crops in the right areas. The insurance industry, as you know… is tremendously complex. Simple in principle, but in the execution, there’s administration and policy issuance, distribution, actuarial and a dozen other functions. And the federal government has no business trying to create insurance companies. It’s simply not feasible.”

Sen. Scott replied, “Perhaps [it’s] one of the reasons why we should all thank the good Lord for the McCarran-Ferguson Act of 1945 that made our form of insurance a state-based system of insurance. This structure has produced highly competitive, fair markets all across this country and, frankly, sets the global standard. Is that an accurate statement?”

“That’s right. And efforts in the past that have followed strains in the insurance market to create a federal backstop or to provide government-subsidized reinsurance have not been successful,” Theodorou responded.

• Continuing discussion of the NFIP, Sen. Mike Rounds (R-S.D.) expressed concern that many homeowners who ought to carry flood insurance choose not to because of a misperception that, since they’re not in a federally designated flood-prone area, flood insurance is unnecessary. As a result, in many cases, only those in a federally designated flood zone end up acquiring flood insurance.

Theodorou responded, “That’s right. That leads to two problems: One of adverse selection, which means that the policies that are written are the ones with the perceived highest risk… and you have low penetration. There [are] 70 million homes in the United States. Only 5 million carry flood insurance [despite the fact] that over 80 percent of homes in the United States are exposed to flood.”

Switching gears a bit, Sen. Rounds ended his time by asking, “The vast majority of insurance carriers would love to write for a particular line of coverage if they thought they could make a profit. Fair enough?”

Theodorou responded, “That’s absolutely right. So the exodus from California is, as Ranking Member Scott said, [the] law of economics. If you’re losing money, there’s no reason to go on doing that.”

• Sen. Thom Tillis (R-N.C.) began his five minutes by asking Theodorou a simple question: “Would it be fair for anybody to say that the insurers who are paying out more than they are taking in in premiums are making money hand over fist and greedy, based on the data?”

“The data says they’re not,” replied Theodorou. “[In] 2022, there was a 4 percent margin—profit margin—because investment income kicked in about 600 basis points, and long-term, the insurance industry has got a return of 6.5 percent. Companies that are publicly traded have about 14 to 15 percent. So the insurance industry has a margin that is much smaller than other industries.”

Sen. Tillis later asked, “Do you actually think there are glaring gaps in additional regulatory measures that we should take to fix this problem?”

“No, I don’t. I think that the push to establish some sort of—or to introduce some sort of—federal backstop or support, however well-intentioned, would backfire because, contrary to popular opinion, the reinsurance market and the primary insurance industry is not on its knees; it’s not collapsing,” Theodorou continued. “It’s in the business of dealing with catastrophes. There are cycles in the business. Inflation and interest rates are factors beyond its control, but in the mutual insurance industry, there are companies that have been doing business for 200 years. You can’t be greedy for 200 years and not lose all your business. So they’re doing something right, and they’ve been through storms before.”

Toward the end of his line of questioning, Sen. Tillis asked, “Do you think that there are many corporate board rooms that have a strategy on shrinking their market size as a part of their growth strategy?”

“Only in states where they can’t make a dollar,” Theodorou replied.

• Sen. Chris Van Hollen (D-Md.) expressed an understanding of Theodorou’s point that the price caps placed in California have exacerbated the problem of insurers exiting certain markets and curbing certain coverage but suggested that, instead of asking taxpayers to foot the bill to subsidize insurers who are struggling under the increasing burden of natural disaster catastrophes—as others had suggested throughout the course of the hearing—he would rather see legislation that places a price on carbon. Asking for a response from each of the witnesses on that idea, Theodorou suggested that “the intention is noble, but it may miss the target.”

• Sen. Katie Britt (R-Ala.) was the final senator to engage with Theodorou, asking if he agreed with her concerns about the Federal Insurance Office’s (FIO) recent data call. Theodorou stated, “Yes, I do. 100 percent. I agree that the efforts to get more data from insurance companies on catastrophes and their exposure is superfluous. Data is there. There’s data at [National Oceanic and Atmospheric Administration] and from reinsurance companies that look at natural catastrophes, looking at frequency and severity… and also, the FIO… if we look at its remit, what is it statutorily supposed to do? To monitor the insurance industry—not to direct, or to manage, or to insert itself. In many ways, it’s an agency without a mission.”

Ultimately, there didn’t seem to be much consensus or momentum behind the idea of new federal intervention in the insurance marketplace. Whether a legislative package is introduced as a result of last week’s hearing remains to be seen, but there is reason to be optimistic that the panel—and ultimately, Congress—will heed Theodorou’s warnings against repeating past mistakes.